ETFWorld asked some questions about Digital Asset ETF Diversification to Dr. Steve Berryman, CBO of Bitwise Onchain Solutions
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Dr. Steve Berryman, CBO, Bitwise Onchain Solutions
20 March 2025 ETFWorld – All rights reserved
Dr. Steve Berryman : ETFs are financial investments that all follow the same basic rules and as such the cryptoasset ETFs should align with the tax requirements of any other financial investments. Thus, for any investor operating in multiple jurisdictions they should be able to add cryptoasset ETFs in their portfolio with ease.
Dr. Steve Berryman : In a multi-asset portfolio construction process the fund manager’s goal is to create a well diversified portfolio that has exposure to many asset classes and sectors to maximise the Sharpe ratio (risk reward ratio). The fund manager will review the portfolio as a whole to see the correlations between all asset pairs in the portfolio and their individual contributions to the parametric Value at Risk of the portfolio. This is where having a cryptoasset ETF holding could add diversity to the portfolio as the correlations of this cryptoasset class to other traditional asset classes in the portfolio are likely to be very different.
Dr. Steve Berryman : As with any investment the investor should review the ETF documentation carefully as it will outline the most relevant risks to the fund. This will include unexpected changes in the underlying blockchain, but this is no different than the risk of using derivatives in a fund which can also suffer unexpected losses due to the failure of a counterparty as the financial crisis in 2008 demonstrated.
Dr. Steve Berryman : A traditional investor will typically already be investing in ETFs directly or indirectly through their pensions. Thus, traditional investors will likely both trust and have an understanding of how this fund wrapper performs. The ETF is fundamentally a regulated wrapper for any underlying assets that it holds and as such this ETF wrapper will have a standardised set of regulatory requirements regardless of the underlying holdings. This is perhaps the most compelling reason why a traditional investor will trust a staked ETF vs staking themselves and having to trust entities they have not interacted with previously such as a custodian or with the technology itself if staking directly.
A staked ETF will generally follow best practices in security for both asset custody and staking, which most individual investors may lack the technical expertise or scale to implement themselves. Additionally, ETH providers will have custody and staking insurance, and will need to manage liquidity between the blockchain’s entry and exit delays, as well as fund flows. All of these factors simplify the process of purchasing a staked ETF, making it much easier than staking and storing assets on your own. While ETP providers typically stake only around 60% of the ETH to manage liquidity, this does reduce the product’s rewards. However, if ETH can be placed in a tax wrapper, the additional costs may be offset by the potential tax savings of the product.
Dr. Steve Berryman : ETFs are typically standardised instruments in the financial industry and thus there should be reduced opportunity to gain any real advantage from one region to another, although clearly if a region adds significant barriers to investments in cryptoassets that would cause investors to look to a more favourable region and their ETF offerings to reduce any friction in the transactions.
Dr. Steve Berryman : The world is constantly changing and if the last 20-30 years has taught us anything it is that disrupters come to each industry at some stage and often unexpectedly for many. Significant examples include Amazon that changed the retail landscape, Tesla changed the direction of the vehicle market and Apple changed the mobile market with Nokia essentially non-existent today. The financial markets have not changed significantly over the last 30 years in fact many are still using an aged IT infrastructure in one way or another from the last 30 to 50 years, which is one of the strongest reasons to consider cryptocurrencies coupled with the ability to move funds directly without any financial intermediaries, which was the defining premise of crypto.
Crypto is highly volatile, but when you take a long-term perspective, BTC and ETH have been among the best performing investments over the past decade. While past performance doesn’t guarantee future results, allocating a small percentage of a portfolio to alternative investments, like crypto, can enhance potential returns while minimising the impact if these higher risk assets don’t perform as expected.
Dr. Steve Berryman : Attestant does not create ETFs, so I can’t comment on the lessons learned firsthand. However, as an ETF investor, I see their biggest advantage as being simple, low-cost tools for gaining market exposure. More importantly, they can be held in tax-efficient wrappers such as SIPP pensions or Shares ISAs.
For higher-rate taxpayers, placing alternative investments in tax wrappers provides an added incentive to take on risk in this space. Unfortunately, the UK is one of the few countries where regulators (FCA) do not permit secure, regulated, and tax-efficient crypto investment products. As a result, retail investors seeking crypto exposure are forced to use unregulated routes, which carry significantly higher risks and cannot benefit from tax-efficient structures.
Source: ETFWorld.co.uk
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