Crypto investing is becoming more accessible. With the crypto ETFs, investors can experience digital crypto assets without dealing with blockchain technologies. For many, this is the ideal way to have exposure to cryptocurrency.
What Is a Cryptocurrency ETF?
A cryptocurrency exchange traded fund (ETF) is a fund consisting of cryptocurrencies. Most ETFs track an index (such as the S&P 500) or a basket of assets (like the Dow Jones Industrial Average). However, a cryptocurrency ETF tracks individual cryptocurrencies or groups of tokens. Just like common stocks, ETFs are also traded on a daily basis using the crypto index fund. The share prices fluctuate daily according to investor sales or purchases.
How Does a Cryptocurrency ETF Work?
Cryptocurrency ETF investments offer several benefits for investors, including significantly lower ownership costs and outsourcing a steep learning curve required to learn how to trade cryptocurrencies.
There are two kinds of cryptocurrency ETFs:
Cryptocurrencies backed by real assets are physical. The investment firm manages the fund, which invests in cryptocurrencies. Each coin is owned by a share. Investors who purchase shares in an ETF indirectly own cryptocurrencies. Owners can gain exposure to cryptocurrencies by investing in them through an exchange without incurring the associated costs and risks of ownership.
The second type is an ETP that tracks cryptocurrencies like Bitcoin Futures Contracts. For example, many Bitcoin ETF proposals submitted to the U.S Securities and Exchange Commission (the SEC) track the prices of CME bitcoin futures contracts.
Instead of tracking the price movements of actual cryptocurrencies, an ETF tracks the price movements of derivatives. As a result, the price of shares of a given cryptocurrency ETF rises when futures contract prices rise. It decreases when there is a corresponding decrease. Like other derivatives, synthetic crypto ETFs carry added risks because they may not always be transparent, and there could be hidden costs.
Regulatory Status of Cryptocurrency ETFs
It was announced in April 2022 that the U.S. Securities and Exchange Commission allowed NYSE Arca and Teucrium to issue Bitcoin futures exchange-traded funds. The SEC announced the approval in a filing on its website, adding Teucrium to a host of other bitcoin futures ETF issuers.
The approved trading platforms to list and trade digital economy ETF include ProShares, Valkyrie, and VanEck.Trading bitcoin futures ETFs in the U.S. is limited so far. However, there is an expectation for further expansion.
Benefits of Cryptocurrency ETFs
Given the regulatory uncertainty surrounding cryptocurrency ETFs, it’s understandable investors concerned with volatility will point out that the market is still in its infancy. But that doesn’t change the fact that assets under management might be among the best instruments for owning cryptocurrencies.
Perhaps the biggest benefit of using the crypto exchange is that they provide exposure to the crypto without the additional expenses of ownership. Physical ownership of cryptocurrencies entails many additional expenses, such as custody charges and secure digital wallets to store purchased cryptocurrencies which charge an annual fee. The asset manager absorbs the management fee with crypto ETF, such as transaction and network fees. Cryptocurrency ETFs outsource these expenses onto ETF providers reducing the annual expense ratio for crypto investors.
Some of the benefits of owning shares in cryptocurrency ETFs include:
- Cryptocurrency ETFs are similar to traditional stock index funds because both track indexes.
- There are fewer costs involved with investing in cryptocurrency ETFs than with physical ownership.
- Cryptocurrency ownership comes with hidden fees, whereas ETFs do not.
- Shares in cryptocurrency ETFs offer access to the growing market of digital assets.
- Cryptocurrency prices have increased substantially over the last few years.
- ETFs allow you to invest in crypto without having to learn about every single coin.
- Cryptocurrency jargon can be confusing. It’s a known roadblock for less tech-savvy investors. ETFs narrow the learning curve.
- Cryptocurrencies have been hacked ever since their launch. A crypto ETF outsources security functions to the provider of the ETF, adding a layer of protection.
- There are more than 1,800 crypto ETFs available to trade. Investors can diversify without incurring costs for each token.
Are you ready to explore the crypto market? Consider crypto ETFs investing. You’ll have indirect exposure to crypo and your investment offerings will be monitored by professional investors.