Exchange-Traded Notes (ETNs) are unsecured debt securities traded on an exchange like a stock. Similar to bonds, but do not pay interest payments. Also, they do not own the underlying asset.
For example, a Bitcoin ETN is a debt security that reflects the price of Bitcoin. Investors can trade the ETN, making money from gains or losses in the market. Otherwise, they can hold until maturity to get a return equal to the performance of the underlying asset minus fees.
As a hedge, an ETN gives investors the ability to buy a cryptocurrency position for far less than making the actual trade. Meaning you can protect current holdings by using the opposite direction ETN.
Since exchange traded like a stock, ETNs are suitable for most investors.
The protection of a single ETN is unidirectional. If the market shifts, so does the coverage.
Costs of ETNs are low when compared to making actual crypto purchases.
An investor has a few Bitcoins (BTC) worth $30,000. Concerned with market fluctuation, they want to protect their position but do not want to sell. Instead of shorting BTC, they decide to short Crypto ETNs.
At $45 per security, the cost is far less than a BTC trade. However, there are a few issues. The price is based upon the average USD exchange rate of bitcoin from the exchanges: Bitfinex, Bitstamp, and GDAX. Then it is converted into SEK. Therefore, it might not match precisely with the asset you want to protect.
© 2020 Todd Moses
The strategies discussed are for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any currency or to adopt any investment strategy. There is no guarantee that any strategies discussed will be useful. Todd Moses is not a licensed securities dealer, broker, or US investment adviser or investment bank.