Spot Bitcoin ETF Hedging and Exchange Hedging: What’s the Difference?

As 10 asset managers in the United States begin trading billions in bitcoin (BTC) exchange-traded funds (ETFs), investors may wonder how these issuers can ensure that the underlying assets of their products are sufficiently safe.

Although cryptocurrency exchanges have lost relatively little money to hacking over the past few years due to new security improvements, the community has 2023 sees multi-million dollar attacks on exchanges like Poloniex. As a retail user?

Ophelia Snyder, co-founder of 21Shares and its parent company 21.co, said that the bitcoin holding products used in spot trading on Bitcoin ETF providers are “similar to what retail gets” on a crypto exchange.

“We are using Coinbase as a custodian for US production. “I put money on Coinbase as Ophelia Snyder and I put money on Coinbase as 21Shares. The products are structurally different,” the executive said in an interview with Cointelegraph in early January.

21Shares is one of the first active spot Bitcoin ETFs in the United States, partnering with ARK Invest on the ARK Invest and 21Shares spot Bitcoin ETF (ARKB). Based in Europe, 21.co and 21Shares also operate several crypto exchange-traded products (ETPs) in the region and are one of the leading crypto ETP providers globally.

When one uses the assets as a retail user, trading platforms such as Coinbase place the client's assets on omnibus accounts. Where user assets like Bitcoin are pooled together without strict separation. “It's right there with somebody else's money,” Snyder said, referring to such exchange accounts, where Bitcoin ETFs at ARK and 21Shares use strictly segregated accounts. She said:

“Our money goes into a wallet that's ours. In our case, actually multiple wallets, because we don't want to have a single attack surface. That way, we're split into different wallets.”

Snyder noted that for its European products, 21Shares differs across custodians to ensure better security.

According to Snyder, the Bitcoin ETF is also “very safe from a loss perspective.” “If everyone on 21Shares were to disappear tomorrow, there is a mechanism that a trustee can use to recover those assets directly from Coinbase,” the executive said. And even if Coinbase goes bankrupt, there's still a way to keep those assets from being mixed, Snyder added.

21Shares also uses multiple levels of authorization to add another layer of security to Bitcoin ETFs. “There is no single individual operating these assets within the organization,” Snyder said. Such a level of security is achieved by splitting the private key into multiple parts and storing those parts in geographically distributed repositories, he said.

21Shares has been testing its performance with watchdogs for five years, Snyder said during a Jan. 10 interview at XSpace (formerly TwitterSpace) “You can't treat this like any other asset in the world,” the executive emphasized. , adding that Bitcoin ETF providers must hold their Bitcoin offline in wallets that are not exposed to the Internet.

Related: Spot Bitcoin ETF May Cause ‘Millions of Unsupported BTC', Analyst Says

The long-awaited approval of the first Bitcoin ETF in the US took place on January 10, 2024, when the first BTC ETF began trading the next day. At launch, eight of the 10 spot Bitcoin ETF providers relied on Coinbase's custody as institutions, with some issuers such as Fidelity Investments opting for their proprietary custody solution, Fidelity Digital Asset Services.

Another Bitcoin ETF issuer, VanEyck prefers to keep its underlying BTC in partnership with Gemini, the crypto trading platform Cameron and Tyler Winklevoss. As previously reported, the Winklevoss twins were the first applicants to place a Bitcoin ETF with the US Securities and Exchange Commission in July 2013.

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