What is a Crypto ETF?
A crypto ETF is an exchanged traded fund that replicates prices of the most popular cryptos around the world. It enables investors to buy ETFs without trading Bitcoin.
There are also blockchain ETFs that adopt the blockchain technology providing crypto assets to investors. Also, these crypto ETFs charge a management cost of around 2%.
How do crypto ETFs work?
Just like traditional ETFs which are backed by traditional assets, Crypto ETFs have the similar work process. But before jumping into its work process, let’s understand the basic meaning of ETFs, as they both work the same way.
Exchanged Traded Fund –
An exchanged traded fund is basically a financial instrument that tracks the value of an asset or asset collection. Many investors invest in ETFs as they allow them to diversify their holdings without owning assets.
Today, ETFs are available for a range of assets and industries, from commodities to currencies where a Bitcoin ETF will also work the same way, i.e., the price of one share of an ETF would depend upon a Bitcoin’s price.
Crypto ETFs further come in two forms – Physical-backed and Futures – backed which are explained below -
Futures-Backed
Under future-backed ETFs shares are based on crypto futures contracts rather than actual coins. It is an agreement to sell or buy an asset at a predetermined price and time in the future. These are less risky as there is no physical asset to be protected.
Physical-Backed
Physical-Backed crypto ETFs are created after buying some actual coins, just like buying shares for a traditional ETF. After buying actual coins, investors can set up a fund representing crypto assets’ value and list it on a stock exchange. It’s also important to note that the value of investment increases/decreases based on the fund’s digital coins value.
How to invest in crypto ETFs?
According to analysts, an ETF drives investment into digital assets, but a lot of investors are likely to face dilemmas on how to start their investments.
Since ETFs are traded in a stock market, traders can use their brokerage accounts and trade the similar way they used to trade in the traditional stock market.
Traders can open their trading accounts with foreign brokers from where they can buy or sell crypto ETFs with just one click.
However, as per analysts, traders should always consider their investment strategy before investing in any crypto ETF. They should keep a track of their investment amount, along with the future risk of loss associated with the crypto ETF trading. Investors should conduct proper research to prevent any loss.
Advantages of Bitcoin ETFs –
Crypto ETFs come with a number of benefits which are –
Convenience –
A crypto ETF provides leverage to Bitcoin’s price eliminating the risk of directly owning Bitcoin. Hence, it simplifies the overall process of investing in cryptocurrency.
Diversification
A crypto ETF can hold more than one asset, allowing traders to diversify their existing portfolios.
Tax efficiency
A Bitcoin ETF, which is trading on traditional exchanges, is regulated by the US Securities and Exchange Commission (SEC) and is eligible for tax efficiency.
Another benefit of crypto/Bitcoin investment is that as an ETF is an investment vehicle, investors can short sell their shares, which is something that can’t be done in the traditional crypto market.
Some disadvantages of crypto ETFs
Although there are many benefits of trading in crypto ETFs, there are some disadvantages as well, which are –
ETF inaccuracy
While ETFs track underlying asset prices, they can also have multiple holdings. However, as per analysts, a 50% rise in Bitcoin’s price may not be reflected in an ETF value due to a diversified portfolio. Hence, it may or may not come with an accurate price tracker.
Limits to Crypto trading
Unlike Bitcoin trading, a Bitcoin ETF would not be eligible to trade for other cryptos and also comes with a management charge of around 2%.
Bottomline
ETFs will allow a lot of investors to start trading through traditional investment channels as the rise of Bitcoin ETFs has also supported crypto investment.