A guide to cryptocurrency Exchange-Traded Funds, and whether investing in one is right for you.
If you’re unfamiliar with the concept of Exchange-Traded Fund (ETF), it is a type of pooled security fund that exists both in the standard investment world, and within the cryptocurrency space. It operates similarly to a mutual fund, although unlike a mutual fund, an ETF is a passively managed investment option. Like a standard ETF, a cryptocurrency ETF consists of a large number of securities. In the case of cryptocurrency ETFs, these securities consist of cryptocurrency.
Cryptocurrency ETFs fluctuate in value in line with the cryptocurrency securities that they consist of. For example, if the price of Bitcoin goes up in value, so will Bitcoin’s exchange-traded funds. The difference is that while you would trade Bitcoin on a cryptocurrency exchange, you would trade a Bitcoin ETF on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq.
But what are the benefits of a cryptocurrency ETF, and is it worth investing in one? Find out everything you need to know below.
The pros and cons of cryptocurrency ETFs
There are a number of benefits and drawbacks to cryptocurrency ETFs. Understanding what they are can help you to make a better informed decision as to whether you which of the two you might prefer to invest in.
Pros of cryptocurrency ETFs
- More cost effective. What is usually considered to be the biggest benefit of investing in a cryptocurrency ETF as opposed to buying the crypto direct from an exchange or via a broker is that there are less hidden fees involved. Buying crypto from an exchange or via a broker usually entails overheads such as transaction fees, custody charges, commission fees, digital wallet purchase costs, deposit costs, network fees, withdrawal fees, and possibly more. None of these apply when investing in a cryptocurrency ETF, as these expenses are outsourced onto ETF providers.
- Reduced risk. There is less risk of having your crypto stolen when buying shares in ETFs as opposed to buying cryptocurrency. There’s also no risk of losing your wallet keys and not being able to access your crypto, as there is with owning cryptocurrency outright.
- More diversified. ETFs can hold more than one asset at a time. This means that your ETF could hold various different types of cryptocurrency, but it can also hold various stocks. Diversifying your portfolio also helps to reduce risk to your assets, as it makes it less likely to decrease in value.
- Simplicity. Investing in a crypto ETF, rather than buying cryptocurrency outright, is generally easier and more user-friendly. First time crypto buyers may prefer to invest in ETFs because it is simpler and less time consuming – particularly if you are investing in more than one form of crypto.
- Tax efficient. The unregulated nature of cryptocurrency means that most of the world’s tax havens and pension/superannuation funds do not allow for direct crypto purchases. ETFs, on the other hand, are regulated by the SEC. This makes them a more tax efficient purchase.
Cons of cryptocurrency ETFs
- Limitations.Given that Bitcoin is unregulated and decentralised, the majority of the world’s tax havens and pension funds do not allow for purchases of Bitcoin. On the other hand, a Bitcoin ETF trading on traditional exchanges would likely be regulated by the SEC and eligible for tax efficiency.
- Fees. While you may avoid many of the fees that are involved with buying cryptocurrency outright, you will still incur various management fees when opting for an ETF.
- Systemic flaws. ETFs track the price of cryptocurrency and provide leverage on that price. However, crypto price may not be accurately reflected in the value of exchange-traded fund holdings. ETFs only trade during market hours, but cryptocurrency trades 24/7 – which can lead to discrepancies in pricing. This could potentially mean that you lose out on some of the value of your holdings.
- Can’t be traded for other crypto. A cryptocurrency ETF cannot be traded for other cryptocurrency. If you own crypto outright, such as Bitcoin, for example, you can trade it for Ethereum, Dogecoin, or any other cryptocurrency in the same way that you can purchase it for fiat currency. Crypto ETFs, however, aren’t tradable for other crypto.
- Lose decentralisation benefits. While the regulation of ETFs by governing bodies makes them more tax efficient, it does also mean that you lose some of the benefits that are associated with decentralised currency. Owning cryptocurrency outright means that you are protected by the blockchain, and it mitigates any of the risks associated with the standard financial system.
How to invest in a crypto ETF
There are three ways that you can invest in a cryptocurrency ETF. These include:
- Via a brokerage. You can buy a cryptocurrency ETF by signing up to a stock broker online. You will usually be required to provide ID and a few personal details before transferring your funds.
- Via an exchange. Some cryptocurrency exchanges also offer ETFs. The process of signing up with an exchange will be very similar to that of a brokerage.
- Via private sale. You can only access some ETFs via private sale from the issuer. These will come with certain requirements, such as high minimum investment amounts.
Remember that it is always a good idea to compare your options thoroughly when purchasing a cryptocurrency ETF.