With the cryptocurrency world becoming explosively popular in recent years, it was only a matter of time before more financial instruments that make crypto investing more accessible would come along.
Exchange-Traded Funds, or ETFs for short, are investment vehicles that have become more commonplace in recent years. ETFs make lives easier for traditional investors who want to invest in a basket of securities in the form of a single investment. If you are already aware of mutual funds, you can think of ETFs as similar to mutual fund products, but even better.
Are you wondering, “What is a crypto ETF?”
Today, we will take a good look at what cryptocurrency ETFs are, how they work, and everything else you need to know about them to make a more well-informed decision about investing in this exciting new asset class.
What Is A Crypto ETF?
A cryptocurrency ETF is a fund that consists of cryptocurrencies. ETFs are financial instruments that are designed to provide investors with exposure to a basket of various securities. The basket of securities could include stocks, bonds, GICs, or other assets. ETFs are typically created to track a particular index of assets to offer investors investment returns based on the performance of that index.
A crypto ETF differs from traditional ETFs because it does not track the performance of any traditional assets. Instead, a crypto ETF seeks to provide you with investment returns based on the price performance of one or more of these decentralized digital tokens.
As with other ETFs, the price of a cryptocurrency ETF can fluctuate on a daily basis based on investor sales or purchases. Like common stocks, crypto ETFs are also traded on the stock market.
How Does A Crypto ETF Work?
Now that you know what a crypto ETF is, it’s time to understand how it works. Crypto ETFs effectively offer you the opportunity to enjoy investment returns from the performance of cryptocurrencies without owning any digital tokens yourself.
Cryptocurrency ETFs offer several benefits to investors, including relieving you from the complex process of learning how to trade cryptocurrencies, lowering your costs of owning cryptocurrencies, and making crypto trading more secure for you by handling the safe storage of these digital tokens on your behalf.
To understand how crypto ETFs work, you need to understand the two different types of crypto ETFs.
The first type of crypto ETF is one that is backed by physical cryptocurrencies. In this case, the investment firm managing the ETF will purchase cryptocurrencies and store them. Ownership of the coins held by the fund is represented by shares in the funds. When you purchase shares in such an ETF, you will indirectly own cryptocurrencies yourself. This way, you can gain exposure to cryptocurrencies without the expenses and risks that come with owning them directly.
The second type of crypto ETF is a synthetic version that tracks financial instruments like cryptocurrency futures contracts and cryptocurrency exchange-traded products. Several such ETFs track the prices of bitcoin futures contracts traded at different stock exchanges. As an investor, you get investment returns based on the performance of the futures contract instead of the price of the cryptocurrencies themselves. Again, you get investment returns based on the price of cryptocurrencies without actually owning the digital tokens yourself.
Advantages Of Crypto ETFs
Crypto ETFs are still a new asset class, and they are making a place for themselves in financial markets. While there is still plenty of uncertainty surrounding cryptocurrencies and the regulatory environment is currently under development, crypto ETFs appear to be the best instrument through which you can own cryptocurrencies.
There are several advantages of investing in crypto ETFs, including:
Easier Way To Invest In Cryptocurrency
The first and most obvious advantage that comes with investing in cryptocurrency ETFs is that it is a far easier method to own cryptocurrencies. Purchasing cryptocurrency directly involves opening an account with a cryptocurrency exchange, creating a digital wallet to store your cryptocurrency, depositing money into your crypto exchange account, and then using it to buy crypto tokens.
Investing in crypto ETFs means that you can simply purchase shares of the fund, and you will gain exposure to crypto tokens based on the number of shares you own in the fund. You don’t need to go through the lengthy process of signing up with a crypto exchange and learning how everything works.
Potentially More Cost-Effective Method To Own Crypto
Once you purchase the crypto tokens, you have to take measures to ensure safe storage. Physical ownership of cryptocurrencies often comes with additional expenses, including annual fees with secure digital wallets, investing in hardware wallets for safe storage, transaction fees, and network fees.
All of these expenses can rack up into a significant amount that eats into your profits. Cryptocurrencies are also very volatile and their prices could go up or down drastically. If you are already facing significant losses through your crypto holdings, your losses might be made worse by the additional fees.
Timely Trades
Cryptocurrencies and cryptocurrency exchanges are notorious for excruciatingly long transaction processing times. It can take anywhere from several hours to a few days for some transactions to be completed with crypto exchanges, depending on the cryptocurrency token you’re transacting. It means that you can miss out on opportunities to capture profits and exit your position in a cryptocurrency during volatile environments.
Crypto ETFs trade on stock exchanges like typical stocks. You can buy and sell crypto ETF shares during the trading day much like other assets, making it a more liquid asset class that gives you exposure to crypto. If you’re looking to quickly purchase or sell shares of a crypto ETF, it is possible for you to do that without lengthy transaction times and expenses.
Wrapping It Up
Cryptocurrency ETFs present the first opportunity where traditional investment vehicles come together with a disruptive new asset class. A more liquid way to gain exposure to cryptocurrencies, crypto ETFs come with several advantages that might make them more suitable for risk-averse investors who want a degree of protection from directly owning cryptocurrencies.
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