Over the years, cryptocurrency has grown in leaps and bounds. There has been a significant improvement from the day it was first launched, and today the cryptocurrency space has more than a trillion-dollar market cap. Despite the growth associated with cryptocurrency, its volatility has made it increasingly difficult for new investors to put their money into it. ETF provides safety against risk and volatility. Many investors can invest in cryptocurrency through the ETF.
What Is An ETF?
An ETF stands for exchange-traded fund. An exchange-traded fund means buying and selling an ETF the same way you buy and sell a stock. An ETF gives you the ability to spread your investment money across many underlying assets rather than have all your investment in one underlying asset. It can be used for diversification and security of investment because you can use it to get many assets.
An ETF tracks the price of an underlying asset. For example, copper ETF tracks the price of copper.
What Is A Cryptocurrency ETF?
A cryptocurrency ETF is an exchange-traded fund that tracks the price of the cryptocurrency. Investors can buy or sell a cryptocurrency ETF in the stock exchange the same way they buy and sell other stocks. An investor trades cryptocurrency ETF in the traditional market exchange and not a cryptocurrency exchange.
How Does Cryptocurrency ETF Work?
The cryptocurrency ETF works the same way as other ETFs. The organization in charge of funds would need to own cryptocurrencies which serve as the underlying assets. The cryptocurrency would serve as shares that investors can buy. Once the investors purchase the shares as ETFs, they already own cryptocurrencies indirectly.
Since you cannot trade a cryptocurrency ETF on the cryptocurrency market exchange, you do not need a wallet to store it. For example, if you want to invest in bitcoin, you can get the bitcoin ETF from the stock exchange, and it would have the same value as the bitcoin. If the price of bitcoin increases, then the price of bitcoin ETF increases. If the price of bitcoin reduces, the price of bitcoin ETF also reduces. In essence, the price of the bitcoin ETF is dependent on the price of bitcoin.
The Top Currency ETF
There are cryptocurrency ETFs, and it is not surprising that the bitcoin ETF was the first. The first country to approve a bitcoin ETF was Canada. The name of the ETF is the purpose Bitcoin ETF and goes by the ticker BTCC on the Toronto Stock Exchange. BTCC was launched in February 2021. Three more bitcoin ETFs have been launched in Canada, bringing the total number of bitcoin ETFs to four.
Presently, Canada has approved four new Ethereum ETFs: CI Galaxy Ethereum ETF, Purpose Ether ETF, Evolve ETF, and Ether ETF. Toronto Stock Exchange is the place where all ETFs are currently trading.
The year 2021 might be the year of the cryptocurrency ETF as countries like the United States of America, Brazil, Chile, and the UAE, are considering launching it. To date, the U.S. Securities and Exchange Commission (SEC) has rejected all proposals to launch a crypto ETF. The reason cited by SEC for the rejection is related to crypto being volatile and non-regulation of the crypto market.
Despite all the rejections, we await a positive announcement from the SEC later by June. There is a high probability that a crypto ETF would be launched then.
Apart from the cryptocurrency ETF, we also have the blockchains ETF trading on the stock exchange. The popular blockchain ETFs are:
- Amplify transformational data sharing ETF
- Reality Share Nasdaq NexGen Economy ETF
- First Trust Indxx Innovative Transaction and Process ETF
- Capital Link Global Fintech Leaders ETF
- VanEck Vectors Digital Transformation ETF
Advantages Of Cryptocurrency ETF
Ease Of Investing
Cryptocurrency ETF makes it easy to invest in cryptocurrency because you do not need a wallet. You also do not have to sign up on any cryptocurrency exchange market. The use of an ETF reduces the chances of losing your cryptocurrency. And it also reduces the risk associated with having cryptocurrency directly.
For example, if you store your cryptocurrency in a personal wallet, you could lose it once the password is lost. If a centralized exchange is compromised, you can also lose your funds if you have it there. In summary, a cryptocurrency ETF gives you leverage over the risk and volatility associated with cryptocurrency.
It is easy to diversify with an ETF. You could invest in more than one underlying asset from different companies in your ETF. For example, you could have bitcoin, Ethereum, Google stocks, Tesla stocks, Facebook stocks, Guinness stocks, Coca Cola stocks, and more in your cryptocurrency ETF. The advantage of this ETF is that it helps you to reduce your risk and diversify your portfolio.
The United States of America Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate financial institutions. Cryptocurrencies are decentralized, and hence, no financial institution regulates them. Cryptocurrency ETF won't trade on decentralized platforms but regulated exchanges such as New York Stock Exchange, making it open to most tax havens and pension funds.
Long Term Return
Investors that want to invest in cryptocurrency and make better long-term returns can use cryptocurrency ETF.
Disadvantages Of Cryptocurrency ETF
Higher Management Fee
There are two ways a cryptocurrency ETF can be managed. It can either be managed actively or passively. An actively managed fund has a higher management fee than a passively managed fund. The management fee is higher for an investor with many cryptocurrency ETFs when compared with those with less.
Limitation To Trading Other Cryptocurrencies
For instance, you can trade bitcoin for Ethereum, but you cant trade bitcoin ETF for Ethereum. It is impossible to trade bitcoin ETF for Ethereum because it is an investment fund and not a cryptocurrency.
Cryptocurrencies were created not to be centrally regulated. They were created to be decentralized and not regulated by any financial institution such as the central banks. Cryptocurrency ETF won't enjoy all these benefits because they are regulated by the financial institution where they are listed.
The Inaccuracy Of ETF
One of the advantages of ETF is the fact that you can use it to diversify your portfolio. The diversification advantage can also be a disadvantage as ETF may not track the accurate price of a cryptocurrency because of the value of its other holdings.
For example, a drop of 5% in Ethereum may not reflect a 5% drop in the price of an ETF that tracks numerous assets.
Inability To Buy Things With Your Cryptocurrency ETF
While you can directly use your cryptocurrency, such as bitcoin, to buy things and make payments, you cannot use your ETF to do such.
Cryptocurrency ETFs And Institutional Investment
For Institutional investors who could not get into the crypto market for many reasons, crypto ETFs could provide an entry point for them to invest.
Cryptocurrency ETF would open up a new era of investment all over the world if it is accepted. It would allow people who have low-risk tolerance to invest in cryptocurrency. However, if you have high-risk tolerance, there might be no need to invest in cryptocurrency ETFs since the return of cryptocurrency is higher than in ETFs.
Also, read about Opyn Protocol.