Model Portfolio Masterclass Series

Industry Overview and Market Trends

Over the past three years, multi-asset portfolios have increasingly incorporated cryptocurrency exposure through exchange-traded products (ETPs). In 2021, crypto ETPs experienced remarkable growth, coinciding with a broad crypto market rally, as shown by the trading volumes on the SIX Swiss Exchange which soared to CHF 8.6 billion, marking a staggering 673% increase from CHF 1.1 billion in 2020. The Swiss market played a pioneering role in launching regulated crypto investment vehicles, including the launch of a crypto index ETP in 2018 and the launch of a physically backed Bitcoin ETP in 2019. The introduction of actively managed crypto ETPs in 2020 further underscored the growing sophistication of these financial instruments, leading the way for the next generation of multi-asset investing.

Despite the 2022 downturn in the crypto market, investor interest persisted, and by 2023, trading volumes and assets under management (AUM) rebounded, driven by increased institutional adoption and speculation surrounding US spot Bitcoin ETFs. Many wealth managers who had experimented with small crypto allocations in 2021 retained their positions through the downturn and consequently began rebuilding their exposure as market conditions improved in late 2023.

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Initially, only high-risk-tolerant investors and innovative wealth managers incorporated crypto into their portfolios, typically as a satellite allocation ranging from 1% to 5%. However, as regulatory frameworks became more robust, along with the listing of more structured products, perhaps not surprisingly crypto found its way into diversified multi-asset ETF portfolios. Studies by many researchers demonstrated that adding a 2% - 7% crypto allocation to traditional portfolios improved risk-adjusted returns, albeit with increased volatility. Consequently, many institutions have adopted a more conservative approach, capping crypto exposure at approximately 1%-2% to optimize diversification benefits while maintaining manageable risk levels.

Switzerland’s Role as a Crypto ETP Hub

Switzerland has emerged as a global leader in the crypto ETP landscape, with the SIX Swiss Exchange consistently recognized as the premier European venue for listing cryptocurrency ETPs. By the end of 2024, SIX hosted 169 crypto ETPs covering 24 different digital assets, including both single-asset and index-based products. The number of trades in crypto ETPs on SIX surged more than sixfold in 2021, and although volumes dipped in 2022, as with listings on other exchanges, they rebounded in 2023 alongside rising crypto prices. With increased adoption of crypto ETPs in many European countries, listings and liquidity can be found on several exchanges in Europe.

Liquidity remains reliable for flagship products such as Bitcoin and Ethereum ETPs, though it’s worth noting that niche altcoin ETPs do exhibit lower trading volumes. Swiss and European investors, both retail and institutional, are the primary participants in the market, leveraging Switzerland’s regulatory framework to access crypto-based financial instruments. Furthermore, innovative product offerings, such as staking ETPs that distribute staking rewards, continue to drive market growth and investor engagement.

In the context of cryptocurrency exchange-traded funds (ETFs), staking refers to the process where an ETF locks up a portion of its cryptocurrency holdings, such as Ether (ETH), to participate in maintaining and securing a blockchain network. This process, inherent to Proof-of-Stake (PoS) blockchains, involves validating transactions and, in return, earning additional cryptocurrency as rewards.

For ETFs holding assets like Ether, staking can enhance returns by generating extra income from the staked assets. However, as of now, many Ether ETFs do not engage in staking due to regulatory uncertainties surrounding the practice. The approval of staking within Ether ETFs could potentially open up advanced trading strategies, such as basis trading, where investors exploit price differences between spot and futures markets to maximize yields.

It's important to note that while staking can offer additional returns, it also introduces risks, including potential loss of staked assets if network validation requirements are not met, as well as liquidity constraints due to lock-up periods.

Global Trends in Crypto ETPs

The global adoption of crypto ETPs has accelerated, with Europe and Canada historically leading the market. However, the United States has rapidly gained ground following the approval of spot Bitcoin ETFs, which has triggered increased institutional participation. Between 2021 and 2023, monthly global crypto ETP trading volumes averaged $6.8 billion, but in 2024, this figure skyrocketed to $72 billion per month - more than a tenfold increase. By October 2024, global crypto ETP trading volumes had reached $57.2 billion monthly, reflecting a 790% year-over-year growth.

This surge is largely attributed to heightened optimism surrounding regulatory approvals in the US and a broader crypto market rally, with Bitcoin reaching record highs. The increasing participation of institutional investors, who prefer regulated financial products over direct cryptocurrency ownership, has quite noticeably contributed to deeper liquidity and greater market stability. Furthermore, traditional asset managers are increasingly entering the crypto ETP space, further legitimizing digital assets as a component of investment portfolios.

Investor Adoption and Market Outlook

Investor demand for crypto ETPs continues to rise, with total AUM in Europe’s crypto ETP market reaching nearly $12 billion by late 2024. As hinted above, in Switzerland and more broadly across Europe, investors have diversified beyond Bitcoin and Ethereum, with altcoin ETPs - such as Solana and XRP - gaining traction, underscoring shifting investor preferences towards high-growth blockchain ecosystems.

The broadening adoption of crypto ETPs is evident across multiple investor demographics. Younger, tech-savvy investors are increasingly expecting crypto exposure in their portfolios, prompting wealth managers to integrate digital assets into their offerings. Simultaneously, cautious institutional players have shown a growing inclination toward regulated investment vehicles, with Bitcoin ETFs serving as an entry point for exposure to the crypto market.

Despite the expanding adoption, however, certain barriers remain, including volatility concerns and regulatory uncertainty in some jurisdictions. Nonetheless, the long-term trajectory of crypto ETPs suggests continued integration into mainstream investment strategies, driven by increasing investor confidence, regulatory advancements, and growing institutional participation.

Navigating Crypto ETPs: A Wealth Manager’s Perspective

There is no denying the rise of cryptocurrency investment products has been one of the most significant developments in modern portfolio management and given the comprehensive range of crypto products now available, let’s look at the Exchange Traded Products (ETPs) linked for to major digital assets. These instruments provide institutional-grade access to cryptocurrencies while mitigating some of the risks associated with direct ownership.

Below, we explore five crypto ETPs, their investment theses, and how they fit within diversified portfolios.

Bitcoin ETPs: The Foundation of Crypto Allocations

Bitcoin (BTC), often referred to as digital gold, remains the most dominant crypto asset. SIX & Xetra offer multiple Bitcoin ETPs, with the standout options including: the Bitwise Physical Bitcoin ETP (BTCE), the CoinShares Physical Bitcoin (BITC) and the WisdomTree Physical Bitcoin ETP (WBIT), all with AUM above $1bn. All products are physically backed, ensuring investors gain exposure to Bitcoin's price movements without needing to manage private keys or custodial risks.

Bitcoin’s market performance has continued to attract institutional and retail investors. As BTC surpassed $100,000 in late 2024, CoinShares’ BITC emerged as the largest Bitcoin ETP in Europe, holding over $1 billion in assets. Given Bitcoin's strong liquidity and its role as a macroeconomic hedge, these ETPs often serve as the foundation for crypto allocations within multi-asset portfolios.

Ethereum ETPs: A Play on Smart Contracts & Decentralized Applications

Ether (ETH), the second-largest cryptocurrency, underpins the decentralized finance (DeFi) and smart contract ecosystem. Good examples include, CoinShares XBT Provider Ethereum Tracker Euro ETP (XBTE), 21Shares Ethereum Staking ETP (AETH) and WisdomTree Physical Ethereum (ETHW), providing seamless exposure to ETH’s price movements without direct ownership hurdles.

While Ethereum remains a stronghold of blockchain infrastructure, its AUM in ETPs (exceeding $1 billion in late 2024) has faced competition from emerging alternatives. Nonetheless, ETH ETPs remain essential for investors seeking exposure to blockchain’s wider application landscape, particularly in finance, gaming, and enterprise solutions.

Binance Coin ETP: An Exchange Ecosystem Play

Binance Coin (BNB), the native token of the Binance ecosystem, has secured its place among the top cryptocurrencies by market cap. SIX lists the 21Shares Binance Coin ETP (ABNB), a physically backed product tracking BNB’s price performance.

Unlike Bitcoin and Ethereum, BNB’s value is largely tied to Binance’s trading volume, exchange-related incentives, and broader ecosystem expansion. Institutional adoption remains limited due to its dependence on a single entity; however, for investors looking to capture the growth of centralized crypto platforms, BNB ETPs offer a structured way to gain exposure within a regulated framework.

XRP ETPs: The Cross-Border Payments Solution

Ripple’s XRP has long been recognized for its focus on cross-border payments and settlement solutions. The 21Shares XRP ETP (AXRP) and Bitwise Physical XRP ETP (GXRP) provide a vehicle for investors to gain exposure to XRP’s price action.

Following a pivotal US court ruling in 2023 that clarified XRP’s legal status, institutional interest in XRP surged. As a result, these ETPs saw a significant increase in trading volume, with millions of dollars in turnover each month. For wealth managers, XRP exposure can serve as a hedge against traditional payment networks and an alternative settlement mechanism in global finance.

Solana ETP: A High-Performance Smart Contract Contender

Solana (SOL) has emerged as a leading blockchain for high-speed smart contracts and decentralized applications. The 21Shares Solana Staking ETP (ASOL) not only tracks SOL’s price but also integrates staking, allowing investors to earn yield.

Solana’s rapid adoption and impressive price gains in 2023 led to its ETP’s AUM surpassing even Ethereum’s by late 2024. The growing appeal of Solana among institutional investors underscores the diversification trend within crypto portfolios. Wealth managers incorporating SOL exposure can benefit from its potential upside and its role in the evolving Web3 infrastructure.

Strategic Portfolio Considerations For wealth managers evaluating crypto allocations, these five crypto currencies represent the core of digital asset exposure:

• Bitcoin (BTC): Store-of-value, digital gold equivalent.
• Ethereum (ETH): Smart contract infrastructure, DeFi backbone.
• Binance Coin (BNB): Exchange ecosystem token with strong trading volume ties.
• XRP: Payments and settlement-focused digital asset.
• Solana (SOL): High-performance blockchain with staking incentives.

Each asset serves a unique role in a well-balanced crypto portfolio. Depending on risk tolerance, regulatory considerations, and macroeconomic outlooks, wealth managers can tailor their allocations to include a mix of these instruments. While Bitcoin and Ethereum continue to dominate market share, altcoins like Solana and XRP provide differentiated exposure, catering to specific investment theses within the digital asset ecosystem.

As cryptocurrency investment products mature, leveraging well-regulated ETPs offers an optimal route for institutional and retail investors seeking reliable access to the evolving digital asset landscape. The future of wealth management will undoubtedly involve an increasing blend of traditional and digital asset allocations, making strategic positioning in crypto ETPs an essential part of a forward-thinking portfolio strategy.

Diversification Properties The most practical reason for including Crypto exposures in a multi-asset is based on their diversification properties. It would be easy to be misled and hold the view that all crypto exposures are highly correlated and always go up and down in unison.

The table below shows that is not entirely true. We have taken the returns of BTC, ETH, BNB & XRP and calculated the correlation with the daily returns measured in USD with those of the iShares MSCI World ETF (ticker: URTH) and the Vanguard Total International Bond ETF (ticker: BNDX).

The data under consideration covers the period from 1st Dec 2017 to 31st Dec 2024 and reveals quite a significant range of correlations between the asset pairs.

Taking a classic balanced portfolio comprising of a 60% allocation to the iShares MSCI World ETF and a 40% allocation to the Vanguard Total International Bond ETF, over that period with monthly re-balancing, would have delivered a pre-trading cost return of 66.5%, with an annual risk level of 11.1%.  The question is what would the impact be if either a 5% or 10% allocation to Bitcoin had been swapped out from the equity allocation, with a similar fixed weight re-balancing strategy?

Although several aspects of such a backtest is overlooked, such as Bitcoin ETFs not being first listed until 2019, and no transaction cost or managing fees being included when allocating to a crypto ETP, the results are encouraging.**

The net effect is to see a healthy increase in return for a moderately higher level of risk. In the case of the 10% allocation, the impact of including BTC is to move the portfolio’s risk rating from that of a balanced portfolio to a growth portfolio.

Regulatory Considerations

As a wealth manager exploring the integration of crypto ETFs into multi-asset model portfolios, understanding the evolving regulatory landscape is critical. The treatment of crypto ETFs varies significantly across jurisdictions, influencing their accessibility, compliance requirements, and suitability for different investor types.

Switzerland: A Pioneering Approach

Switzerland has been at the forefront of embracing crypto ETFs and ETPs, with a supportive regulatory framework that has made SIX Swiss Exchange a leading hub for crypto-listed products. Crypto ETPs in Switzerland are classified as structured products and are subject to oversight from both SIX Exchange Regulation and the Swiss Financial Market Supervisory Authority (FINMA). A key regulatory enhancement in February 2024 mandated that all crypto ETPs must use a prudentially supervised custodian – either a regulated Swiss bank, fintech, or an equivalent licensed entity abroad. This change addressed previous concerns regarding asset security, ensuring that investor holdings are protected through supervised custody solutions. Furthermore, Swiss regulations require prospectuses for crypto ETPs to disclose potential risks such as volatility and technology-related threats.

For wealth managers operating in Switzerland, this regulatory clarity provides confidence that crypto ETFs listed on SIX meet stringent security and transparency standards. Institutional and retail investors alike can access these products, making them a viable addition to diversified investment portfolios.

European Union: A Patchwork of Regulations

Across the European Union, the regulatory approach to crypto ETFs and ETPs remains fragmented. While some national exchanges, such as those in Frankfurt, Paris, and Amsterdam, facilitate listings, the eligibility of crypto assets within regulated investment funds is inconsistent. Certain jurisdictions, such as Germany and Malta, permit limited incorporation of crypto into UCITS or other regulated fund structures, whereas major fund domiciles like Luxembourg and Ireland prohibit it.

The introduction of the Markets in Crypto-Assets Regulation (MiCA) in 2023 marked a significant step towards regulatory harmonization. However, MiCA primarily addresses licensing for crypto service providers and token issuance rather than explicitly defining the role of crypto in UCITS funds. Recognizing this gap, the European Securities and Markets Authority (ESMA) initiated consultations in 2024 on expanding the list of eligible assets within UCITS and AIFs to potentially include crypto. This ongoing regulatory evolution presents both opportunities and challenges for wealth managers: while crypto ETFs offer diversification benefits, navigating country-specific approval processes remains essential to ensure compliance with local laws.

United Kingdom: Cautious and Restrictive

The UK has historically taken a stringent stance on crypto ETFs, particularly concerning retail investors. In January 2021, the Financial Conduct Authority (FCA) banned the sale of crypto derivatives and ETNs to retail customers, citing concerns over extreme volatility and investor protection. However, in March 2024, the FCA introduced a notable shift by permitting the listing of crypto exchange-traded notes (ETNs) on the London Stock Exchange for professional investors. The exchange subsequently announced that it would accept applications for Bitcoin and Ether ETNs from Q2 2024, though retail investors remain excluded.

For UK wealth managers, this means segmenting clients into retail and professional categories to determine eligibility for crypto ETF exposure. While institutional and accredited investors can access these products under FCA-approved frameworks, retail clients face significant restrictions. Looking ahead, the UK government has signalled an interest in positioning the country as a crypto-friendly hub, with broader regulatory reforms expected in 2025-26. Until then, compliance teams must adhere strictly to existing restrictions when considering crypto ETFs within UK-based portfolios.

United States: A Landmark Shift in Regulation

The US regulatory landscape for crypto ETFs has been one of the most scrutinized globally. For years, the Securities and Exchange Commission (SEC) rejected applications for spot cryptocurrency ETFs, citing market manipulation risks and inadequate oversight of underlying crypto exchanges. Instead, the SEC approved only futures-based Bitcoin ETFs in 2021 and Ethereum futures-based ETFs in 2023, as these derived their valuations from regulated CME futures markets.

However, a pivotal regulatory shift occurred in early 2024 when the SEC, following legal and industry pressures, approved the first US spot Bitcoin ETF. This milestone spurred significant institutional adoption, with BlackRock’s iShares Bitcoin Trust (IBIT) becoming the fastest ETF to surpass $10 billion in assets under management. The introduction of spot Bitcoin ETFs allows US wealth managers to integrate crypto exposure more seamlessly within portfolios without relying on offshore structures or private trusts.

Despite this progress, compliance considerations remain paramount. The SEC continues to emphasize robust risk disclosures, suitability assessments, and potential trading surveillance to mitigate market manipulation risks. Additionally, the classification of other cryptocurrencies as securities or commodities remains an unresolved issue, influencing the potential for future ETFs on assets beyond Bitcoin and Ethereum.

Key Compliance Considerations for Wealth Managers

Integrating crypto ETFs into multi-asset portfolios necessitates careful adherence to regulatory and risk management principles. Key considerations include:

• Suitability and Fiduciary Duty: Given the volatility of crypto assets, wealth managers must ensure that client portfolios align with investment objectives, risk tolerance, and regulatory constraints. Explicit client consent and education about potential drawdowns are essential components of compliance.
• Regulatory Restrictions: The eligibility of crypto ETFs varies by jurisdiction, requiring wealth managers to verify approval status before offering these products to clients. For instance, a Swiss-listed ETP might be passported across the EU, but national regulators in certain countries could impose additional
restrictions.
• ALM/KYC Protocols: While crypto ETFs are exchange-listed securities, firms must remain vigilant about the sources of client funds, particularly for individuals with significant prior exposure to direct cryptocurrency holdings.
• Disclosure and Reporting: Regulatory authorities mandate transparent risk disclosures in marketing materials, fact sheets, and client statements. Wealth managers must ensure that documentation accurately represents the volatility and risks associated with crypto ETFs.
• Risk Management and Portfolio Limits: Many firms implement internal concentration caps on crypto allocations to prevent overexposure. Given crypto’s historically high volatility, a small allocation can contribute disproportionately to portfolio risk.
• Custody and Operational Considerations: Firms holding client assets must assess whether crypto ETFs impact regulatory capital requirements. Additionally, understanding how ETP issuers handle crypto-related events such as forks or airdrops is crucial for ensuring seamless investment management.

Shifting Regulatory Landscape

The global regulatory environment for crypto ETFs continues to evolve, with Switzerland and parts of Europe leading adoption, the UK gradually opening to professional investors, and the US recently approving spot Bitcoin ETFs. For wealth managers, staying informed about jurisdictional changes is crucial to maintaining compliance while offering clients diversified exposure to digital assets.

The direction of regulation appears to be moving toward increased acceptance under well-defined rules, rather than outright prohibition. However, strong investor protection measures remain a core priority for regulators. As such, wealth managers must collaborate closely with compliance teams to navigate the complexities of crypto ETF integration effectively. By aligning investment strategies with evolving regulatory frameworks, wealth managers can position themselves at the forefront of innovation while safeguarding client interests.

Considering recent developments under President Donald Trump's administration, the regulatory landscape for digital assets in the United States has undergone significant transformation. On January 23, 2025, President Trump signed an executive order titled "Strengthening American Leadership in Digital Financial Technology," signalling a robust federal endorsement of the cryptocurrency sector. This order establishes a working group tasked with proposing a comprehensive federal regulatory framework for digital assets within 180 days and evaluating the potential creation of a national digital asset stockpile. Notably, the order also prohibits the establishment or promotion of a Central Bank Digital Currency (CBDC) within the United States.

This policy shift reflects President Trump's commitment to positioning the US as a global leader in the crypto industry, aiming to foster innovation and provide regulatory clarity. For wealth managers, this evolving environment presents new opportunities to integrate crypto ETFs into multi-asset portfolios, backed by a more supportive regulatory framework. However, it remains imperative to stay informed about ongoing regulatory developments and ensure that all investment strategies align with the latest compliance requirements.

Conclusion: Positioning for the Future

As a wealth manager, staying ahead of market innovations is critical to delivering value to clients. With the rapid expansion of digital assets, particularly the evolution of crypto ETFs and tokenized securities, the investment landscape is undergoing a transformation. Any roadmap for the future should outline a structured approach to integrating digital assets into multi-asset portfolios while managing risk and optimizing opportunities.

The approval of spot Bitcoin ETFs in the US and the expected introduction of Ether ETFs signal a major shift toward mainstream adoption. The success of these products demonstrates strong investor demand, and as more traditional asset managers enter the space, competition will drive costs down and liquidity up.

Before adding digital assets to client portfolios, a structured investment policy should be created to define the role of crypto exposure within a broader asset allocation strategy. Expect the next wave of product innovation to move beyond basic exposure to include Multi-Asset Crypto Funds, Active & Quant Strategies and Tokenized ETFs comprising Blockchain-based ETF structures that enable 24/7 trading and real-time settlement. These products will provide a potential source of uncorrelated returns, shifting the efficient frontier higher.

With the next generation of investors being highly crypto-savvy, clients increasingly expect digital asset exposure as part of their portfolios. Despite the opportunities, digital assets remain volatile, and regulations are still evolving. A well-defined risk management strategy is essential. As digital assets become standard in multi-asset investing, wealth managers must adapt their business models accordingly: by offering specialized advisory services for digital asset strategies; creating differentiated model portfolios with strategic crypto allocations and collaborating with crypto-native firms for research and co-managed funds.

Integrating digital assets into a multi-asset portfolio requires a thoughtful, structured approach. By leveraging the expanding universe of crypto ETFs, refining risk management techniques, and maintaining regulatory awareness, wealth managers can position themselves at the forefront of investment innovation. By taking these steps, you can ensure that your firm is not only prepared for the future of finance but is actively shaping it.

**Data and analytics provided by Algo-Chain

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*The podcast provided by Allan Lane & Irene Bauer has been converted from their own original content, into a podcast using Generative AI tools and the voices used in the podcast are not their own. All information provided has been fact checked.

The investments referred to in this podcast is targeted at professional Wealth Managers & Financial Advisors and may not be suitable for all investors. Twenty20 Solutions Ltd does not provide, and nothing in this podcast should be construed as, investment or other advice. It is not intended that anything stated in this podcast should be construed as an offer, or invitation to treat, or inducement for you to engage in any investment activity. The information in this podcast relating to model portfolios & individual funds suggested by Algo-Chain is purely for research and educational purposes only.