7 min readInvestors are increasingly seeking ways to generate income from their portfolios. Among the newer opportunities, particularly for those interested in digital assets, are staked ETPs (Exchange-Traded Products). Much like traditional dividend-focused ETFs, staked ETPs provide a way for investors to earn passive income generated at the ETP level. In this article, we’ll explore the concept of staking, how staked ETPs work, and their potential risks and benefits. We’ll also focus on a real-world example: the CoinShares Finanzen.net Top 10 Crypto ETP (CFTN), which offers broad market exposure with a built-in staking reward feature.
Staking: A new income stream
Before diving into staked ETPs, it’s important to understand staking itself. In the world of cryptocurrencies, many blockchain networks, especially those using a Proof-of-Stake (PoS) consensus mechanism, allow token holders to "stake" their assets. Staking involves locking up a portion of one’s holdings to support the network’s operations, such as validating transactions and securing the blockchain. In return, stakers earn rewards—typically additional tokens—for their contribution.
For many investors, staking represents an appealing opportunity to earn passive income, much like receiving dividends from stocks or interest from bonds. However, directly participating in staking requires both technical knowledge and risk management. This is where financial products like staked ETPs come in, simplifying the process while offering similar benefits.
Staked ETPs: A simplified approach to staking rewards
Staked ETPs provide investors with exposure to staking rewards without the need to manage the complexities of direct participation. The concept is comparable to an accumulating dividend ETF, where investors don’t have to reinvest dividends themselves because the fund automatically reinvests them. In the case of staked ETPs, the issuer stakes part of the underlying assets on behalf of the investors and accumulates the staking rewards within the ETP.
This passive income stream is built into the structure of the product, making it an attractive option for investors who want to benefit from staking without needing to directly engage with blockchain protocols.
Example: CoinShares Finanzen.net Top 10 Crypto ETP
The CoinShares Finanzen.net Top 10 Crypto ETP (CFTN) offers an excellent example of how staked ETPs can be beneficial for investors. This product provides broad exposure to the top 10 cryptocurrencies by market capitalisation, giving investors a diversified way to invest in the crypto market without the need to manage individual assets.
Broad crypto market exposure, plus built-in staking rewards
One of the standout features of the CFTN is its staking reward mechanism.
On a quarterly basis, CoinShares’ Staking Agent reviews the expected staking rewards associated with the underlying assets in the ETP. The staking reward - expressed as an annual percentage and accrued daily - is then announced alongside the rebalancing of the underlying index. This ensures that investors not only benefit from the price appreciation of the top cryptocurrencies, but also associated staking rewards, both of which are reflected in the performance of the ETP.
Here’s how it works in more detail:
Quarterly review: Every quarter, a specialist Staking Agent reviews the expected staking rewards associated with the underlying cryptocurrencies in the ETP.
Coin Entitlement: The staking rewards are added via a mechanism known as the Coin Entitlement, which transparently shows the amount of crypto that each unit of the ETP provides exposure to on a given day. Investors therefore know in advance what their staking reward and overall exposure will be for the upcoming quarter, giving them clear visibility into each component of their investment.
Reflected in performance: Both the price movements of the top cryptocurrencies and the impact of associated staking rewards are directly reflected in the performance of the CFTN. This means investors benefit from two distinct sources of potential return: market growth and income generation from staking.
Simplified process: With the staking rewards built into the Coin Entitlement, investors can enjoy the advantages of staking without needing to lock up tokens, monitor validator nodes, or navigate complex blockchain processes.
Transparent rewards: By reviewing and announcing the staking rewards on a quarterly basis, the product structure ensures that investors have a clear understanding of the expected rewards for the next quarter, providing transparency and predictability.
This unique mechanism ensures that investors not only gain broad exposure to the crypto market but also benefit from staking rewards in a way that is transparent and easy to manage.
Risks and benefits of staked ETPs
Like any financial product, staked ETPs come with both potential risks and benefits. Understanding these is crucial for making informed investment decisions.
Benefits
Staking rewards: Staked ETPs offer the opportunity to gain exposure to staking rewards in addition to the price of the underlying digital assets. These rewards are built into the return profile of the ETP.
Simplicity: For investors who want exposure to staking but don’t want to manage the technical and operational aspects themselves, staked ETPs provide a simplified way to participate.
Professional management: The periodic review and rebalancing of the staking rewards in the CoinShares Finanzen.net Top 10 Crypto ETP ensure that investors get the most out of their investment, with professional oversight and management.
Regulated structure: As listed products, staked ETPs operate within regulated frameworks, which provides greater transparency, investor protection, and governance oversight. This can help mitigate some of the risks typically associated with unregulated cryptocurrency investments.
Risks
Volatility: Cryptocurrencies are known for their volatility, and the same applies to staked ETPs. While staking rewards can help cushion price fluctuations, they do not eliminate the inherent risks associated with the underlying assets.
Liquidity risk: Staking may require assets to be locked up for a period of time, which can affect liquidity. However, staked ETPs like the CFTN handle this by allowing investors to trade the ETP on an exchange, providing liquidity while still benefiting from staking rewards.
Slashing risk: In some PoS networks, validators (and by extension stakers) can be penalised for dishonest or malicious behaviour, a process called "slashing." It’s important to be aware that the underlying assets could be subject to slashing penalties, which would affect overall returns.
How to Buy the CoinShares Finanzen.net Top 10 Crypto ETP
Investing in staked ETPs like the CoinShares Finanzen.net Top 10 Crypto ETP is straightforward. Most major online brokers and trading platforms offer access to ETPs, including those offered by CoinShares. Simply log in to your preferred brokerage account, search for the ticker symbol, ISIN or WKN of the ETP, and place an order.
Once purchased, the ETP will function like any other listed security, and you’ll automatically benefit from both the market exposure and the staking rewards built into the product.
Conclusion
Staked ETPs represent a promising development for investors seeking income and exposure to the cryptocurrency market. With products like the CoinShares Finanzen.net Top 10 Crypto ETP, investors can enjoy the benefits of staking without the complexities of directly managing digital assets. While these products come with risks, their ability to generate passive income built into the ETP and provide broad market exposure makes them an appealing option for many portfolios.
As always, it’s important to carefully consider your investment goals and risk tolerance when adding any new asset class to your portfolio. Staked ETPs offer an innovative way to diversify, capture exposure to additional income, and gain exposure to one of the fastest-growing markets in the world of finance.
