Crypto ETFs are great if you want to invest or speculate on the price of cryptocurrencies without buying digital currency. ETFs are designed to help you track the price of an underlying asset, like the price of a specific cryptocurrency or a collection of several tokens.
Crypto ETFs have had a hard time coming up since they have had little support from regulatory bodies globally. Government regulators such as the US Securities Commission (SEC) have rejected applications from Bitcoin ETFs. This means their investing in ETFs is quite limited.
However, in October 2021, the SEC gave the first Bitcoin ETFs the go-ahead. This is a significant development since the US market is available globally and accessible to investors in most parts of the world.
What Is a Crypto ETF?
Exchange-traded funds are a collection of assets that are sold or bought on the stock market similarly to ordinary shares in a company. They are designed to track the performance of a specific index such as the Strait Times Index (STI)or a particular asset or commodity.
Crypto ETFs are designed to give retail investors access to the crypto market without buying the digital currency. The Indexes track the performance of one or more digital coins or tokens. Crypto ETFs allow investors to diversify their portfolios while eliminating the risk of owning any digital currency.
Here are some of the risks involved:
1. Regulation
A good number of crypto exchanges available are unregulated, but most choose to obtain the required licensing. However, most countries do not protect the users’ funds in the exchanges, like banks and stock trading platforms.
2. Custody
Crypto exchanges hold the funds on your behalf, and most users are not very comfortable with it. This might be because most exchanges are hacked.
3. Mistakes
If you make a mistake while transferring funds, they might be lost forever. While it is unnecessary to keep moving the crypto addresses, this might be pretty off-putting for many investors.
Crypto ETFs eliminate all these risks when they take custody of funds on behalf of the investors by packaging them into highly-regulated investments, which are served through traditional outlets like stock brokers.
How Do Cryptocurrency ETFs Work?
Crypto ETFs track the price of a digital currency when the crypto ETF company purchases and stores that crypto. The company then divided the shares in the coin ownership between the stakeholders.
Another model is by owning the future contracts of the digital currency. The contracts allow investors to ‘bet’ whether they think the price of the given cryptocurrency will fall or rise over a given period. The Future-based cryptocurrency ETFs were the first type of crypto ETF to be approved by the SEC.
Crypto ETF units can be bought and sold on security exchange markets, but the brokerage fee will also apply. Their price fluctuates the same as the share’s prices throughout the day as the investors buy and sell units.
Remember that ETFs are traded during market hours while digital coins can be traded 24/7. You must also pay a management fee to the ETF issuer, including the prices. They have lower fees than traditional managed funds such as hedge funds but higher than the crypto spot market.
Types of Cryptocurrency ETFs
There are three types of blockchain ETFs. They include:
1. Physical-Backed Cryptocurrency ETFs
These ETFs hold tokens and coins that underpin the value of the crypto ETF. In case the value of the digital coins owned by the ETF rises, then the value of your investment will also rise.
This is the most efficient way to invest in cryptocurrency through an ETF since the fund holds the coin on behalf of the investor. It is a good investment proxy for people who do not want or cannot hold their digital currency.
However, crypto ETFs are not as good as owning the actual digital currency since the price of ETFs lag behind the market and have restricted market hours, unlike the actual crypto assets, which trades 24/7. Its availability is also limited since it is based on the markets you have access to.
2. Future-Backed Crypto ETFs
The funds are not based on the actual digital coins but future contracts with the future-backed crypto ETFs. A futures contract is an agreement set that sets a fixed price and date for selling or buying assets.
They allow investors to profit on the bearish and bullish markets. Future-backed ETFs are used when holding an underlying asset that might be very problematic such as safely securing cryptocurrency or storing barrels of oil.
However, it is pretty expensive compared to holding real crypto, a physical ETF. It holds the risk of contango where the future contracts might cost more than the underlying assets.
This factor can make these ETFs trade at a premium compared to the spot market, making them a worse value for money than purchasing the actual digital currency.
3. Stock-Based Crypto ETFs
These are different from those mentioned above since they are based on cryptocurrency stocks and other blockchain technologies related companies. It exposes investors to a broader blockchain technology industry through a collection of stocks.
Stock-based crypto ETFs are less volatile than the ETFs that track the prices of ETFs. However, less volatility means that they offer less room for growth compared to other bitcoin ETFs. The crypto industry is still being regulated, negatively impacting whether some companies will be listed on these ETFs.
What Are the Benefits and Risks of Crypto ETFs?
Crypto ETFs have their pros and cons, just like any other type of investment. It is essential to weigh the two to see whether you should invest in ETFs.
The Pros
- A simple way to gain exposure to the digital currency market
- Easily accessible through traditional stockbrokers
- Diversified your portfolio
- Secure than buying regular digital coins
The Cons
- Highly volatile
- The annual management fee applies
- Subject to international taxes
- Limited choice of crypto-based ETFs
- Lacks risk diversification
Should You Invest in an ETF or Real Crypto?
If you are the type of person who wants exposure to the crypto markets but does not want to own or cannot own real crypto currency for one reason or another, ETFs are for you.
However, buying cryptocurrency directly through a broker or crypto exchange is more cost-effective than buying through an ETF. The ETFs management fees are higher than brokerage fees from crypto exchanges, and they can only be traded during market trading hours, unlike the coins.
Crypto ETFs are also suited for investors looking for long-term hold investments rather than an asset they want to trade actively.
Trading with ETFs means you miss out on self-custody using crypto for payments and earning interests.
If you want to venture into the crypto world without owning the actual digital coins or dealing with the crypto exchanges or crypto wallets, then ETFs are the best bet for you.
If you want to invest in the coins hoping that their prices will rise, then look into physically-backed ETF. Future-back cryptocurrency ETFs are for you if you have more experience and a deeper understanding of the markets.
If you are not interested in any specific coin but in the sector, the Stock-backed ETFs will be your best way to diversify your investment. It is also an excellent way for die-hard crypto investors to gain exposure to some sectors such as digital asset mining.
Cryptocurrency ETFs
Here are some crypto ETFs:
1. ProShares Bitcoin Strategy ETF
- Assets under management: $1.4 billion
- Expense ratio: 0.95%
The ProShares Bitcoin Strategy ETF was the first cryptocurrency etf approved for the US market. It opened the door for more US citizens to have access to Bitcoin. It is also the first based fund approved by the Securities and Exchange Commission to trade in the US after 10 years of application by ETF sponsors.
2. XBT Ether Tracker Euro
- Assets under management: EUR 729.931 M
- Expense Ratios:2.5%
The XBT Ether Tracker Euro tracks the performance of the Ethereum digital currency as it is priced in USD on the primary marketplaces. Holders of this ETF have exposure to the performance of Ethereum and its fluctuations in 18 foreign exchange rates.
3. Coinbase Index Fund
- Assets under management: $250,000 to $20 million
- Expense Ratios: 0.75%
Coinbase is one of the largest crypto exchanges in North America, making the coinbase index fund one of the largest crypto ETFs in the market. Its value is on the four best perfoming coins, with Bitcoin holding the largest share with 62 %, Ether with 27%, Bitcoin cash with 7%, and Litcoin with 4%.
Other examples include:
- Valkyrie Bitcoin Strategy ETF
- VanEck Bitcoin Strategy ETF
How to Invest in A Cryptocurrency ETF in Simple Steps
There are three ways in which you can invest in crypto ETFs. Each method has its advantages as well as disadvantages. It is important to remember that the different ETFs are spread out over various providers to privately managed funds.
Through the Exchange or Stock Broker
Here are the simple steps to follow:
1. Choose an ETF traded through a broker or a similar service. Private funds are sold via the issuing company individually and are restricted to accredited investors.
2. Sign up for a broker who has access to the ETFs you want. If you want access to ETFs on the New York Stock Exchange (NYSE) or NASDAQ blockchain economy index, you must have access to the US markets, while if you want the ones listed on the Toronto Stock Exchange (TSX), you must have access to the Canadian markets.
3. Deposit funds into your account and purchase the blockchain ETF.
Through Cryptocurrency Exchange
1. Look for crypto ETFs that are available through crypto exchanges
2. Sign up to the crypto exchange
3. Deposit funds to your account and purchase the cryptocurrency ETF of your choice
Through Private Sale
Some crypto ETFs are only available through the private sale from the issuer and come with several requirements that make them out of reach for the average investor. Most require a minimum investment of $50,000.
To get an ETF through this method, you must register your interest to the provider’s website. Some fund only offers limited spots, so keep in mind that you may meet the requirements but not purchase the ETF immediately.
Related Question
What Are the Other Ways of Investing in Coins Without Buying Coins?
Here are some of the other ways you can invest in crypto without buying coins.
1. Through Derivatives
Derivatives include options, contracts, and CFDs that track the price of an underlying asset like Ethereum and Bitcoin. Options and bitcoin futures contracts are to speculate the prices of a specific asset. Experienced investors best use them.
2. CFDS
Contracts for Difference (CDFs) invest in almost any type of asset since they track the underlying assets’ price instead of representing the ownership of the actual digital assets. CFDs offer leverage and allow you to invest in both the short and long run.
3. Stocks
Many publicly traded tech companies have exposure to the crypto sector. They include companies like the cryptocurrency exchange investments funds to mining companies. All these companies are affiliated with blockchain technology and have part of their money tied to cryptocurrencies.
These companies include Hut 8, Robinhood, Riot, Blockchain, and Galaxy Digital.
Find out how to start investing in index fund in Singapore.
Closing
Cryptocurrency ETFs are designed to allow investors to have exposure to the crypto market. These ETFs are ideal for investors who do not want to buy digital coins directly. They are a great way to diversify your portfolio without owning the digital currency.
Key Takeaways
- Crypto ETFs take custody of the funds on behalf of invests by packaging them into highly regulated investments.
- Physical–backed ETFs are the most common type of crypto ETFs whose value changes according to the coin’s value.
- Crypto ETFs are traded through stock exchanges firms, crypto exchanges, or through a private sale
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