For a long time now, exchange-traded funds (ETFs) have grown in popularity as a means of investing due to their liquidity and low transaction costs. They generally track an asset’s price, making it easy for investors to diversify their portfolios by acquiring access to an entire asset class.
So, what exactly are ETFs, and why have they become so popular in crypto?
What are Cryptocurrency ETFs?
In the securities market, ETFs enable traders to trade their shares, unlike mutual funds, which only permit them to purchase or redeem shares at the trading day’s close. In the crypto market, however, a crypto ETF is mainly a fund that tracks the price of one or several digital tokens of various cryptocurrencies.
As is with other common stocks, ETFs can be traded daily, as based on the sales or purchases, their share price fluctuates daily. Like other ETFs, you can trade crypto ETFs on regular stock exchanges and hold them in their brokerage accounts.
As such, it becomes easier for you to have a certain amount of exposure to cryptocurrency prices without having to carry out any business on a crypto exchange or even deal with the costs and hassle of directly owning digital assets.
It is also important to note that cryptocurrency ETFs are an extended use case of blockchain technology. For example, Bitcoin ETFs make up the first ever crypto ETF to be able to track the price of BTC.
How Does a Cryptocurrency ETF Work?
Crypto ETFs either own the cryptocurrency futures, options, or other crypto-based securities, which is different from traditional ETFs that directly hold the underlying asset. They operate in such a manner that they try to emulate the fundamental cryptocurrency’s price fluctuations.
However, there are moments when the movements of the ETFs do not precisely match those of the underlying cryptocurrency because they do not hold any of it themselves.
Cryptocurrency ETFs are backed by either a physical crypto asset or synthetic variants such as derivatives.
However, Spot ETFs directly hold the cryptocurrency, which builds a portfolio replicating the performance of the digital assets it contains.
The United States Securities and Exchange Commission (SEC) has not approved any Spot ETFs. Under the current regulations laid by the regulator, however, only one kind of cryptocurrency ETF is available in the U.S.: a synthetic variant tracking crypto derivatives like futures contracts and exchange-traded products.
Advantages of Cryptocurrency ETFs
There is some uncertainty surrounding cryptocurrency ETFs. However, with the outlook towards regulatory uncertainty, things may look different. Nevertheless, having some shares in cryptocurrency ETFs may be advantageous for you to access the crypto markets. Some of these include:
- One of the most vital benefits of crypto ETFs is that they provide exposure to crypto without you owning the asset, reducing expenses and risk exposure.
- Most average investors are usually overwhelmed in the crypto space trying to grasp used jargon in the industry. With crypto ETFs, it lowers the learning curve, making learning manageable.
- With crypto exchanges, storage devices, wallets, and some poorly designed blockchains are prone to hacks and another attacker, bringing in more security worries. Crypto ETF removes the likelihood of using such options prone to dangers associated with the space.
- Crypto ETFs also allow you to diversify your assets without incurring the costs and the hassles of buying and exchanging the tokens.
Disadvantages of Crypto ETFs
With the novelty of the ETF concept, it is essential to know their potential issues before jumping into this ship.
- Although crypto ETFs make it easier for some things involved in trading digital currencies, they are still subject to the dramatic price swings of the crypto markets.
- With crypto ETFs, you do not own the digital assets, which means that the decentralization and anonymity of crypto will not apply to ETF shareholders.
Top Crypto ETFs
Crypto ETFs are among the top-performing investments in 2023. Here are the top crypto ETFs that have been in the spotlight.
- Bitwise Crypto Industry Innovators ETF (BITQ): It is often considered as one of the best options for an investment portfolio due to its unique approach. BITQ focuses on companies that build the infrastructure that is essential to the crypto world.
- Bitwise 10 Crypto Index Fund: Invests in the top 10 cryptocurrencies based on their current market cap.
- Siren NASDAQ NexGen Economy ETF: It brings together companies that deal with general technology and might be interested in crypto or blockchain technology.
ETFs make up a retail investor-friendly way to gain exposure to assets that might otherwise be too costly. Whatever you think about the future of ETFs, it is clear that they are here to stay.
However, before jumping in on a decision, please remember that ETF is still a newbie on the block. They are related to crypto, and as such, price volatility may be something you cannot avoid. Always aim at investing something you can afford to lose and aim for a long-term investment goal.