Examining cryptocurrencies

The structured product universe has a vast range of underlying assets to which products are linked. Just as with funds and ETFs, when new trends develop or certain asset classes get more popular an increase in issuance tends to occur in the market. Cryptocurrencies represent a fast growing alternative asset class which is barely ever out of the news in terms of market activity, liquidity and fraud, or regulatory concern. This level of interest suggests that there is plenty of opportunity for growth within structured products, even if it will likely remain rather niche.

Cryptocurrencies and structured products

The most common structured product payoff types for products linked to cryptocurrencies are “Leverage short with stop loss” and “Leverage long with stop loss” (source: www.structuredretailproducts.com (SRP), September 2021). These payoff types are also among the most common for traditional FX linked products. Leverage short or Leverage long payoffs with or without stop loss are traded like mini futures contracts on the underlying asset. The stop loss will limit losses in the case of a decline or rise exceeding the barrier level depending on whether the investor is long or short the underlying.

These kind of trades are relatively low risk for the issuer as they involved very little hedging (apart from timing the unwind on hitting the barrier) and will expire if the barrier is breached. They tend to be very short term, for example a recent example of this kind of trade issued by Vontobel struck on 15 June 2021 and expired on 16 June 2021 and was linked to a bitcoin futures contract.

Issuers and markets

Vontobel is the most active distributor in this area, with products also issued by BNP Paribas. Products are linked to both cryptocurrencies directly and cryptocurrency futures. The only other payoff type with a cryptocurrency underlying listed on SRP currently is a tracker investment although there have been instances of autocall and reverse convertible structures in the past. Europe is the main region for cryptocurrency linked products with Germany and Austria being by far the biggest countries for issuance, reflecting general structured product activity.

Links to FX products

FX investments and in turn FX linked structured products would usually attract investors looking to hedge a FX position or benefit from a particular short term view on a currency pair. Equity in contrast is generally suited to longer term investments on the basis that Equity markets are expected to generally increase over the long term. Cryptocurrency linked products have much more in common with FX and appeal to investors looking to invest over the short term to generate returns based on a market view. The one year historic volatility of bitcoin is currently approximately 72% which show that is an asset class requiring careful timing and constant monitoring.

In addition to structured products linked to bitcoin itself there have been a handful of products linked to bitcoin indices. One example was a tracker product issued by Seba Bank linked to the SEBA Crypto Asset Select Index. This index is made up of a basket of cryptocurrencies including Bitcoin and Ethereum. The product was a simple delta one structure linked to the index.

Popularity and transparency

Unlike some alternative assets, cryptocurrencies are well known and easily accessible to retail investors. They are an asset class with a lot of visibility and attention although whether they are truly understood is a different question. There are people holding cryptocurrencies that may not consider themselves investors and certainly will not have a portfolio of assets like traditional investors. Structured products offer features to change the risk profile of exposure to cryptocurrencies.

For investors looking to add cryptocurrencies to their portfolio in a more traditional way the current types of offering of products may be an attractive method of including this asset class. If cryptocurrency indices or ETFs become more mainstream and more liquid we may start seeing an increase in more equity style structured products to put exposure to this asset class in their portfolio on a medium to long term view.