FTX crypto ETPs suffer precipitous falls
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Investors in three digital currency funds face the risk of being wiped out as the FTX crypto exchange teeters on the brink of collapse.
The trio of exchange traded products are invested purely in FTT, the digital token of the FTX platform, which has plunged more than 80 per cent this week as a run on FTX has cast doubt over its survival.
The VanEck FTX Token exchange traded note (VFTX), the 21Shares FTX Token ETP (AFTT) and the CoinShares FTX Physical FTX Token ETP (CFTT) had combined assets of €27.7mn as of October 31, according to data from Morningstar Direct, having launched between February and April of this year.
The products are listed on several continental European exchanges and registered for sale in the EU and Switzerland, although not in the UK or US.
The fallout from the meltdown at FTX is also taking its toll on a series of other cryptocurrency ETPs, particularly those invested in Solana, which has tumbled 47 per cent since Monday amid speculation that FTX will need to sell its large holding in the token in order to raise vital funds.
Bitcoin has fallen 18 per cent over the same time period. The ProShares Bitcoin Strategy ETF (BITO), the world’s largest crypto ETP, experienced record trading volume on Tuesday amid the chaos, with 49.3mn shares traded, worth $576mn, 64 per cent higher than the previous record.
The volume spike for BITI, the ProShares Short Bitcoin Strategy ETF, a bet on a falling price, was 366 per cent above any other day since launch, with 7.2mn shares worth $288mn changing hands, according to ProShares.
Some are likely to be critical of ETP providers, regulators and stock exchanges that were happy to facilitate products that made it easier for retail investors to access FTT, a digital coin maintained by a single, unlisted company.
“A lot of these vehicles [crypto ETPs in general] have been created entirely to legitimise cryptocurrencies and bring them into the mainstream financial system,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar.
“We have always warned against it. Just because something is in a wrapper and you can buy on a platform doesn’t mean it meets all the requirements you would expect from other financial instruments,” he added.
ETP providers defended their decisions to offer these products, however.
“At the time we looked at it, FTX had a sterling reputation. In hindsight it’s an unfortunate reality that FTX is struggling,” said Townsend Lansing, head of product at CoinShares.
“Our products are designed to track one-to-one with the price of the coin, so if the coin is declining that’s what they are going to do,” he added.
Lansing rejected any suggestions that CoinShares should not have offered an FTX product due to the inherent level of risk involved for investors, arguing that “that’s not a standard mainstream financial services are held to”.
“We believe in building transparent, well-regulated products and allowing investors to make the choices they want to make,” he said. “We do expect [investors] to have a level of understanding and appreciation of the risks.”
Eliézer Ndinga, director of research at 21Shares, said AFTT “is supposed to follow the daily returns of the underlying token. It has operated tremendously well despite the fact that we have seen large drawdowns over the last 48 hours.”
More broadly, Ndinga said the crypto industry “has been impacted by the global economy. It’s been a tough year for many risk assets, not just crypto”.
Lamont said the episode, allied to the broader crash in the crypto market, could be seen as vindicating the actions of the UK’s Financial Conduct Authority, which has consistently opposed the introduction of crypto-based ETPs.
“I’m sure there has been a huge amount of pressure on the regulator. London’s position as a global financial centre has been questioned and the thing that has made [London] so successful over the last 30-40 years has been deregulation and the embrace of new products,” Lamont said.
“To some degree they may be vindicated for standing on the sidelines and waiting.”