You’ve likely heard or read about cryptocurrencies and the cutting-edge trading tools associated with them. It’s a topic that’s on everyone’s radar, as it continuously makes headlines and rises in popularity.
Cryptocurrencies are virtual or digital currencies that can be traded or used to purchase goods and services, albeit few stores accept them and several nations have outright outlawed them. They are exchanged through person-to-person transactions, which means they are not mediated by banks or other third parties.
- How do they work?
- The first Bitcoin ETF
- What are the advantages of crypto ETFs?
- Why not invest directly into the cryptocurrency?
- Are there any disadvantages to crypto ETFs?
- 5 crypto ETFs to invest in
- In summary
There are several ways to invest in cryptocurrencies, one of which is through exchange-traded funds (ETFs). These are simply known as either crypto ETFs or Bitcoin ETFs. A crypto ETF tracks the value of one or multiple digital coins.
Cryptocurrency ETFs offer investors a number of advantages, including decreased cryptocurrency ownership fees and the elimination of the sharp learning curve that takes place when you start trading cryptocurrencies.
How do they work?
An ETF is a basket of shares that mimics the price of an underlying asset or index. ETFs are now accessible for a variety of assets and industries, including commodities and currencies.
A crypto ETF would function in much the same way as a regular ETF. For instance, if Bitcoin’s value rises, so does the value of the Bitcoin ETF, and vice versa. However, rather than trading on a cryptocurrency exchange, the ETF would trade on a stock exchange such as the NYSE.
The share price of cryptocurrency ETFs swings on a daily basis based on the buying and selling activities of the investor, and they are traded on a daily basis, just like regular stocks are.
The first Bitcoin ETF
The ProShares Bitcoin Strategy ETF (BITO) was the first cryptocurrency ETF, which began trading in October 2021. This is an ETF that tracks the price of bitcoin futures.
The fund operates under the ticker BITO and uses futures contracts traded on the Chicago Mercantile Exchange to follow Bitcoin (BTCUSD) prices.
It isn’t directly linked to the price of bitcoin, but instead monitors the price of bitcoin in the future. This suggests that the profits from ETFs like BITO (that invest in bitcoin futures contracts) can range significantly from the market price of bitcoin. Contango, a scenario wherein longer-dated futures contracts have higher costs than short-term contracts, might result in losses for funds that monitor the prices of risky assets such as cryptocurrency.
What are the advantages of crypto ETFs?
The total market capitalization of cryptocurrencies now exceeds $2 trillion, with Coinbase Global Inc. Being the largest bitcoin exchange in North America.
Although some people have made huge profits by investing in cryptocurrency early on, the sector is still in its infancy. There’s a lot of room for profit, but there’s also a lot of room for investment losses. The return of high volatility in late 2021 and early 2022 is proof.
Crypto ETFs are a new investment vehicle, and they are ever-evolving due to regulatory unpredictability. However, they could already be considered one of the greatest ways to invest in crypto. The following are some of the advantages of owning shares in crypto ETFs:
Investing in a crypto ETF has delegated the crypto learning curve to professional analysts. A crypto ETF allows you to gain exposure to the price of that particular cryptocurrency without having to learn how it works, face the risks of direct ownership, or join up for a cryptocurrency exchange. Bitcoins, for instance, are stored in a wallet, and if an investor forgets the wallet’s password, their Bitcoin is lost for good. The process of buying into a chosen cryptocurrency is made easier with the ETF structure.
Furthermore, Crypto language – i.e. words like ‘halving’ and ‘blockchain’ – is deep in its technological roots and has remained an obstacle for investors. ETFs largely remove this obstacle.
The bulk of the world’s tax havens and pension funds do not allow Bitcoin purchases due to its uncontrolled and decentralized nature. However, a Bitcoin ETF traded on standard exchanges would almost certainly be regulated and qualify for tax benefits.
Crypto ETFs allow you to gain exposure to cryptocurrency without incurring the additional costs of ownership, such as custody fees, and annual fees for your digital wallet, which add up over time. Furthermore, the price of cryptocurrencies, particularly bitcoin, has soared in recent years. They are mostly out of reach for the average investor. A crypto ETF is a cost-effective way for investors to invest in the asset class.
An ETF can hold a variety of assets. A Bitcoin ETF, for example, might own Bitcoin, Apple stocks, Facebook stocks, and other assets, allowing investors to diversify their portfolios while reducing risk.
ETF providers are responsible for the security aspect of your crypto ETF. Since their inception, cryptocurrencies have been regularly hacked, raising concerns about the young asset class’s security. However, with an ETF, there is a higher sense of safety.
Why not invest directly into the cryptocurrency?
If a crypto ETF is mimicking the price of the actual cryptocurrency, why wouldn’t you just invest directly into the coin? For starters, ETFs are still far more well-known in the investment space than cryptocurrencies, so investors can continue trading in a vehicle they are already familiarised with as opposed to learning the complexities of a new asset class.
Additionally, investors might wish not to deal with difficult-to-grasp cryptocurrency exchanges, and ETFs can be conveniently purchased and sold through regular exchanges and marketplaces that they understand better.
Last but not least, with ETFs, investors are able to short sell shares if they predict the price of bitcoin will fall in the future, which, at present, can’t be done in the typical cryptocurrency market.
Are there any disadvantages to crypto ETFs?
As well as the added risk of investing in a new, up and coming, and often volatile asset class, what other potential drawbacks should investors consider?
Ownership and trading limitations
Cryptocurrency ETFs do not make the investor a cryptocurrency owner. This imposes some restrictions on bitcoin usage, such as the shareholders’ ability to:
- Trade their Bitcoin for Ethereum and the other way around
- Take advantage of bitcoin’s decentralized financial system
If ETFs track numerous digital assets at once, they may have inaccurate bitcoin price tracking. A 10% increase in the price of Bitcoin, for instance, may not translate to a 10% increase in the value of an ETF that tracks both Ethereum and Bitcoin.
5 crypto ETFs to invest in
If you want to avoid the hassle of trying to pick a winning cryptocurrency by yourself, ETFs will provide you with excellent exposure without the extra hard work. Here are our top picks:
ProShares Bitcoin Strategy ETF (BITO)
The BITO ETF holds Bitcoin futures contracts, manages around $1 billion in assets and has an annual cost ratio of 0.95%, or $95 for every $10,000 invested.
Amplify Transformational Data Sharing ETF (BLOK)
An ETF with $1.07 billion in assets under management that focuses on companies that are active in crypto or provide indirect crypto price exposure.
Bitwise 10 Crypto Index Fund (BITW)
The Bitwise 10 Crypto Index Fund gives investors exposure to the top ten cryptocurrencies in terms of market capitalization. It has an AUM of $908 million and has a 2.5% expense ratio.
Valkyrie Balance Sheet Opportunities ETF (VBB)
Rather than investing in Bitcoin or Bitcoin futures, the ETF invests in 20 different public firms that hold Bitcoin on their books, giving investors a diverse basket of Bitcoin and blockchain-related tech stocks that are closely tied to crypto prices. It has a 0.75% expense ratio and assets of less than $1 million.
Siren Nasdaq NexGen Economy ETF (BLCN)
This ETF invests in companies developing and using blockchain technology. It has $232 million assets under management and an expense ratio of 0.68%.
All in all, just remember that crypto ETFs are considered a risky investment.
They are still a relatively young asset class, which means crypto-focused ETFs are even newer. You should expect a lot of volatility in cryptos, as well as the firms centered on their growth, as with any nascent asset class.
If you do buy into this new class of asset, remember two things: keep any investments minimal, and concentrate on the value of crypto and blockchain’s long-term prospects.
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