What are Exchange Traded Notes (ETNs) in Crypto?

Exchange-traded notes (ETNs) are unsecured debt securities that track an underlying asset or index and trade on a major exchange, similar to stocks.

Exchange-traded notes (ETNs) have been around since 1993, and they are undeniably popular among investors. However, these ETNs have recently picked up traction in the cryptocurrency market since the London Stock Exchange announced the launch of a marketplace for Bitcoin (BTC) and Ethereum (ETH) exchange-traded notes (ETN).

But what exactly are Crypto ETNs, and how do they differ from existing Crypto ETFs? Let’s look into it more completely.

What are Exchange Traded Notes (ETNs)?

An exchange-traded note (ETN) is a debt instrument issued by a financial institution, such as a bank. It has a specified maturity span, which typically ranges from 10 to 30 years. These ETNs are primarily listed on stock exchanges like the New York Stock Exchange, the London Stock Exchange, and the National Stock Exchange, which can be traded according to demand and supply.

Unlike other debt securities, an exchange-traded note (ETN) does not generate any interest income for the investor. The investor does not receive any regular payouts. The investor’s gains or losses are determined by the performance of the asset, asset class, index, or crypto it tracks. To get returns, the investor might sell the ETN before maturity or wait on it until maturity.

Let’s use an example to explain what an exchange-traded note (ETN) is. Assume you have a specific belief about the worth of Bitcoin in the coming decades. You invest ₹1,00,000 in a Bitcoin ETN that monitors the price of Bitcoin on the cryptocurrency market. The ETN has a maturity period of 20 years. After those 20 years, the ETN’s value has increased by 30%. 

In this manner, you will receive your principal payment of ₹1,00,000 + a 30% increase of ₹30,000 minus the management fee. However, if the value of the Bitcoin ETN falls by 30%, it will be taken out of your principal amount, together with the management charge, when you sell your units or reach maturity.

How Exchange-Traded Notes Works in Crypto?

An exchange-traded note (ETN) is frequently issued by financial institutions, which base their returns on a market index or asset like crypto. Understand it as a sort of bond. At its due date, the exchange-traded note will dish out the return of the index or cryptocurrency that it tracks. Unlike bonds, ETNs do not make interest payments.

Exchange Traded Notes (ETNs)

When the ETN matures, the financial institution deducts costs and then pays the investor funds based on the performance of the underlying asset. In addition, the ETNs trade on major exchanges like stocks that allow investors to buy and sell them and take profit from the difference in purchase and selling prices, minus expenses.

Meanwhile, ETNs do not provide investors with ownership of the securities; instead, they are paid the asset’s return. As a result, ETNs are comparable to debt securities. Investors must believe that the issuer will deliver the expected return based on the underlying index.

Benefits of a Crypto ETN

▪️ Easy to Use: ETNs let you invest in cryptocurrency without having to buy it directly. So, you don’t need to worry about setting up a digital wallet, keeping your private keys safe, or protecting your digital money.

▪️ Simple to Get: ETNs are traded publicly, just like stocks, so you can easily buy and sell them using a brokerage account. You don’t have to understand all the details about cryptocurrencies or be a tech expert to invest in them.

▪️ Spread Your Risks: ETNs give you exposure to different indexes by promising to pay back the index’s return. This helps you spread your investments and try out new kinds of assets.

▪️ Less Mistakes: The return on an ETN follows the return of the cryptocurrency it’s linked to, so it matches up well with a specific cryptocurrency index. This is unlike ETFs, where you might need to adjust your investments often to match the index, which could lead to errors.

▪️ Tax Perks: Normally, when you make money from cryptocurrencies, you have to pay taxes on them as if they were property. But ETNs are treated differently; you pay taxes on them as capital gains, which can mean lower taxes. And in some places, you might pay even less tax if you hold onto your investment for a while before selling it.

What’s the Difference Between a Crypto ETF or ETN?

ETNs and ETFs (Exchange-Traded Funds) have a tight association because they are similar to mutual funds but may also be traded. However, one thing distinguishes them.

ETNs solely reflect the issuer’s tax responsibility, whereas ETFs own the underlying cryptocurrencies and the firms involved in their development. As a result, an ETN gives exposure to the return of the underlying cryptocurrency, whereas an ETF provides exposure to the underlying cryptocurrency’s performance.

A New Era of Bitcoin & Ethereum ETNs

The London Stock Exchange plans to create an online place where people can trade Bitcoin (BTC) and Ether (ETH) notes. These notes work like stocks. They’ll start accepting applications for trading these crypto notes on April 8. But first, they need approval from the UK regulator, the Financial Conduct Authority.

Earlier in March, the FCA said it’s okay for Recognised Investment Exchanges (RIEs) to set up a part of the market just for these notes. But these notes will only be for professional investors. London Stock Exchange said before that they’ll start taking applications for Bitcoin and Ether notes by the second quarter of this year.

Conclusion

ETNs offer a one-of-a-kind option to trade in cryptocurrency by combining a relatively new decentralized finance technology and an ancient financial market concept. However, before investing in cryptocurrency ETNs, you should thoroughly analyze the risks involved. Before making large investments, do your own research or consult with a financial expert.

To learn more about Crypto Exchange Traded Notes (ETNs), go check out SunCrypto Academy.

 

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. All content provided is for informational purposes only, and shall not be relied upon as financial/investment advice. Opinions shared, if any, are only shared for information and education purposes. Although the best efforts have been made to ensure all information is accurate and up to date, occasionally unintended errors or misprints may occur. We recommend you do your own research or consult an expert before making any investment decision. You may write to us at [email protected].

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