Cryptocurrencies have burst onto the world stage with the aim of disrupting the world of money and finance with their talk of decentralization appearing as a break from the centralized and close-knit world of high finance.
While for a long time Wall Street remained skeptical of the promise of change that crypto could bring, it didn’t take long to see crypto as yet another financial product that it could package and sell to interested buyers.
The latest on the scene are crypto exchange-traded funds or ETFs. Here is an explainer of what they are.
What are ETFs?
Exchange-traded funds (ETFs) are very similar to mutual funds. ETFs track the movement of an underlying asset such as gold or an assortment of assets such as the NIFTY50. Borrowing from this concept, crypto ETFs are funds that track the movement of a single token or multiple crypto tokens.
Like any other stock, ETFs can be traded on an exchange through a brokerage service. This simplifies the process of portfolio diversification by providing investors with easy access to an entire asset class. The buying and selling activity of investors leads to price fluctuations, thereby causing ETF prices to move daily.
As cryptocurrencies continue to grow in popularity, they are also gradually taking a larger share of global investment. It comes at a time when inflation worries continue to mount, with the United States battling its highest levels of inflation in decades.
“Globally, this is obviously a phenomenon that is starting to take off,” Leah Wald, CEO of Valkyrie Investments, told Bloomberg in December 2021. Walk added that she has seen interest in crypto investments increase despite the volatility bitcoin and other tokens.
What makes ETFs so important?
Last year, the big moment for crypto funds came when the Proshares Bitcoin ETF was launched, taking just two days to garner $1 billion worth of investments.
In 2021, investments in crypto funds grew from $24 billion at the end of 2020 to $63 billion at the end of 2021, a jump of 162%, according to Bloomberg.
How do crypto ETFs work?
Crypto ETFs appeal to investors because they work similarly to traditional asset-backed ETFs. As such, there are two types of crypto ETFs, each with its own mechanism of operation:
ETFs backed by physical securities:
The prices of these ETFs are highly dependent on the actual crypto tokens, and therefore the asset management companies must also purchase the crypto tokens backing the ETF themselves. The fund represents the value of each crypto token it holds. Therefore, if the value of the crypto tokens held by the company increases, the value of your investment also increases with it.
This ETF tracks the price movements of crypto futures. These are firm buy/sell agreements such that the buy/sell price is predetermined for a fixed date in the future. This is regardless of the price of crypto token prices on that date. They are safer investment options than physical-backed ETFs, as one does not have to worry about managing the crypto tokens themselves.
Advantages of Crypto ETFs:
1. The convenience of investing is one of the biggest advantages of investing in a crypto ETF. The investor does not have to worry about managing the underlying asset, i.e. the crypto token.
2. Since crypto ETFs are traded on traditional exchanges, their buying and selling is well regulated. This results in better oversight and protection against price manipulation by the governing authority – something unregulated crypto exchanges cannot offer. While crypto wallets and exchanges are vulnerable to cyberattacks and hacks, ETFs make investors immune to these risks.
3. Volume investing in cryptocurrencies can drain investors’ funds while engaging them in the tedious process of opening accounts with multiple exchanges and maintaining numerous crypto wallets. Crypto ETFs provide indirect exposure to cryptocurrencies through a single investment vehicle.
Disadvantages of Crypto ETFs:
1. There are currently limited options in the ETF space for investing. Traditional ETFs cover a wider range of underlying securities, unlike crypto ETFs which only cover a few cryptocurrencies.
2. As cryptocurrency price movements experience high volatility, they also convey the same effect to crypto ETFs. So the repercussions.
3. Since crypto ETFs are also traded on centralized exchanges, investors cannot exactly take advantage of decentralization on crypto blockchains.
Crypto ETFs available worldwide:
1. Amplify the Transformational Data Sharing ETF
2. Bitwise 10 Crypto Index Fund
3. Siren Nasdaq NexGen Economy ETF
4. First Trust Indxx Innovative Transaction & Process ETF
5. ETFs Bitwise Crypto Industry Innovators
6. Global X Blockchain ETF
7. X Blockchain and Bitcoin Global Strategy ETF
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Everything You Need To Know About Crypto ETFs
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