How does a physically backed crypto ETP work?

How does a physically backed crypto ETP work?

A physically backed crypto ETP connects a security traded at a broker with crypto-assets held by a custodian. Each ETP represents a calculated amount of the underlying asset. That amount, multiplied by the asset's reference price, determines the product's value before the price differences that can arise in exchange trading. Virtune holds the underlying assets as collateral for the securities.

For example, Virtune Bitcoin Prime ETP provides Bitcoin price exposure through a holding in a brokerage account. Its backing is Bitcoin held by Coinbase Custody Trust Company LLC. The investor trades the security, without having to arrange a wallet or transfer Bitcoin personally.

In European markets, a product described in a search as a crypto ETF may instead be an ETN, a listed note within the ETP category. Virtune's products have this note structure.

How are ETPs created and redeemed?

The primary market is where new securities are issued and existing securities are redeemed. An authorized participant, or AP, is a financial firm with an agreement allowing it to initiate those transactions with Virtune.

Virtune issues additional ETPs through this process, with the corresponding underlying crypto-assets held in custody as backing. Redemption reverses the process by removing ETPs from circulation. Except in limited circumstances, creation and redemption take place at an AP's initiative. A retail investor selling through a broker is normally selling an existing security on the exchange, not requesting a redemption from Virtune.

This separates the jobs of the issuer, AP and custodian: Virtune issues the security and manages its backing, the AP initiates creation or redemption, and the custodian holds the underlying assets.

What happens when an investor buys at a broker?

The broker sends the order to a trading venue, where it can meet a quote from a market maker or an order from another investor. The purchase changes who holds the security. It does not mean a new ETP has to be created for every trade.

A market maker posts a bid, the price at which it buys, and an ask, the price at which it sells. The difference is the spread. Under normal market conditions, its commitments include quoting within the venue's maximum-spread limits. Market making supports exchange trading, but a quote is not a promise that every order can be filled at a particular price. When the market maker is absent, an order may meet another investor's price instead (exchange trading terms).

How does the ETP track the crypto price?

The amount of crypto represented by one ETP is its asset entitlement. For a hypothetical Bitcoin ETP representing 0.001 BTC, the starting calculation is 0.001 multiplied by the reference price of Bitcoin. The fraction in this example is illustrative, not the entitlement of Virtune Bitcoin Prime ETP.

Virtune publishes a daily net asset value, or NAV: the calculated value per security based on the underlying holdings and the product's fee. Reference prices come from the index administrator or another source specified for the product. The daily management fee gradually reduces the amount of the underlying asset represented by each ETP.

NAV is a valuation, while the broker's bid and ask are prices at which the security can trade. Spreads and exchange opening hours can make those prices differ from the calculated value. Crypto markets also keep moving when the exchange is closed. The crypto ETP costs guide explains how those differences affect a purchase or sale.

Where are the underlying assets kept?

Virtune holds at least 100% of the corresponding underlying crypto-assets with its custodians. Coinbase Custody Trust Company LLC provides custody across the range, with BitGo Europe GmbH also used for selected products. Physical backing refers to these actual digital assets being held as collateral; it does not mean that the investor receives assets to send to a personal wallet.

For staked series, staking takes place from cold storage at the custodian. Cold storage keeps the signing keys offline. Rewards allocated to the product are added to the asset entitlement, while the management fee reduces it. Rewards are variable and each product's allocation and deductions apply. Staking through an ETP explains how that differs from arranging staking personally.

Virtune's ETPs do not accrue interest. Staking rewards and movements in the underlying crypto price are different from interest on a savings account.

What changes with an index ETP?

An index ETP tracks a selection of crypto-assets rather than one asset. The index rules determine the selection and weights; Virtune manages the underlying holdings to follow those rules. MarketVector Indexes GmbH acts as an index calculation agent for the programme. The crypto index ETP guide shows what changes when weights are rebalanced.

The holder still owns a security. What happens if Virtune cannot pay, and how investors can recover value from the backing, is explained in issuer risk and collateral.