What is Crypto ETF – Types & How Does It Work

What is crypto ETF? ETF or Exchange Traded funds have gained increasing popularity amongst western superpowers like the USA and Russia.

An ETF is a form of security that tracks an index, commodity, or other assets, but they can sell or buy like stocks.

Due to its unique nature, it can track a diverse collection of securities and also implement specific investment strategies based on the particular stock.

Since lately, there has been a high rise in investments in cryptocurrencies like Bitcoin and other Altcoins. Check out Best Crypto ETFs.

Usually people invest and trade the crypto assets through crypto exchanges as well as different P2P platforms that are available but due to the complexities involved in it, they are looking for easy and more productive alternatives.

As a result, several crypto companies have plans for launching cryptocurrency ETFs. Very soon these will make their mark across the globe like the crypto exchanges already have.

If you are unaware of it, this article will enlighten you about crypto ETFs with in-depth information and comparison of crypto ETFs with traditional ETFs.

What is Crypto ETF?

What is Crypto ETF

Crypto ETF or Cryptocurrency Exchange Traded Funds is almost like other types of ETFs but instead of tracking index or commodities, it tracks different types of digital tokens.

Like all other traditional ETFs available in the financial market, the crypto ETFs trade like stocks and are subject to price changes as well.

However, launching crypto ETFs involves some issues for the simple reason that the crypto coins are mostly unregulated.

Apart from that, the Securities and Exchange Commission or SEC is apprehensive about crypto ETFs making its way to the general public.

They fear that it might disrupt the financial market. To support their repeated rejections of applications to launch a crypto ETF in the United States, they say that the Bitcoin market is extremely volatile.

They also opine that it can be easily manipulated since it lacks proper and adequate surveillance by any external governing body.

Exchange Traded Funds:

Before diving into the depths of crypto ETFs, it is prudent to learn a little bit about the general forms of ETFs that operate in the stock market.

An ETF is different from mutual funds and is a better investment option as it is more liquid in nature and more cost-effective. This is because it has low expense ratios and fewer broker commissions.

Unlike mutual funds that trade once in a day, ETFs trade like stocks, and it buys and sells on the market throughout the trading day.

ETFs harness various purposes such as:

  • Income generation
  • Speculation
  • Price increases and more.

The funds invested in an ETF are managed by an experienced and efficient fund manager.

The manager is responsible to allocate the entire sum invested in different accounts in the portfolio according to a specific percentage and trade according to the trading signals and indicators.

This reduces the elements of risks involved in making such investments.

Since your investment is diversified extensively, even if you incur loss in one specific product, the profit made from the other assets will annul the loss and eventually keep you on the side of profit.

All these benefits, peace of mind, and hassle-free investment return are offered to you by the ETFs in exchange for a fee, which, however, can be quite significant.

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Types of ETFs:

Listed below are some of the popular types of ETFs available in the global market today:

  • Bond ETFs: It is used to turn out ordinary or fixed revenue to financial backers. Its pay dissemination relies primarily on basic government, corporate, state, and local bonds.
  • Stock ETFs: It consists of a basket of stocks that track a single industry or specific sector.
  • Industry ETFs: These ETFs are single industry or sector-focused. It helps in buying and selling large amounts of stock during economic cycles.
  • Commodity ETFs: Commodities such as gold and oil are the areas of investment in this case. It is cheaper than the actual physical possession of commodities.
  • Currency ETFs: These are group investments that enable the tracking of currency pairs of domestic and international currency.

And now, the world is about to have the crypto ETFs that will specifically deal with the digital currencies.

Investing in ETFs:

There are three steps to follow before you begin investing in any Exchange Traded Fund. These are:

  • Finding a genuine and trusted ETF investing platform. There are some mobile apps and websites that can also help you invest with zero or a bare minimum commission
  • Being thorough with your research on ETFs and keeping in mind the amount you can spend, within what time frame do you expect an income or growth and what industries and sectors are you interested in
  • Considering a particular trading strategy that you think will be beneficial to the kind of returns or growth you are looking for.

At present some of the most popular ETFs include SPDR S&P 500, ARKG, and Vanguard Growth.

The good thing is that you will not need to be a certified investor to buy ETFs. All you will need is an online brokerage account or use one of the many mobile apps available to buy and sell a diverse range of ETFs.

Pros and Cons:

Before you invest in an ETF, it is best to be aware of its pros and cons as well.

Benefits:

  • It offers a diversified portfolio that minimizes the risks involved in making an investment
  • It is more cost-effective due to fewer broker commissions and low expense ratios
  • It can be traded like stocks and
  • It can target a particular industry as and when required.

Downsides:

  • Lack of liquidity hinders transaction
  • Lack of awareness about ETFs amongst masses and
  • Higher fees for Advance Managed ETFs.

Now that you have a fair bit of knowledge about ETFs, it is time to know a little bit about the crypto ETFs.

The Current Scenario:

For one looking to diversify their crypto portfolios, a crypto Exchange Traded Fund can prove to be a great alternative to manage their digital assets most efficiently by a professional fund manager.

This will enable one to reap the maximum benefits from their investments in this extremely volatile crypto market and the frequent price changes of the coins.

However, sadly, as of now, there are no crypto ETFs in the US. You will find only 3 new Ethereum ETFs in Canada namely:

  • The Purpose Ether ETF (ETHH)
  • The CI Galaxy Ethereum ETF (ETHX) and
  • The Ether ETF (ETHR).

Canada also happens to be the first country that has approved a Bitcoin ETF in North America with a BTCQ ticker.

All these specific crypto ETFs trade on the Toronto Stock Exchange as of now.

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Following the footsteps of Canada, several other countries are now considering launching crypto ETFs in 2021 as well. These countries include:

  • Australia
  • Brazil
  • Japan
  • Chile and
  • UAE

As with America, you may find a few Bitcoin ETFs as of now but those cannot be considered to be a true crypto ETF.

This is due to the fact that these ETFs do not have direct ownership of the crypto coin. Instead, they have ownership of those stock portfolios that deal with blockchain technology.

However, the Securities and Exchange Commission or SEC is now considering looking at the applications of crypto ETFs seriously that have been gathering dust until now.

It is expected that they will come up with a decision by mid-2021.

Critics believe that SEC will approve crypto ETFs soon especially due to the fact that it is already available in North America.

However, they also believe that it will not happen until Gary Gensler, an expert and academic on crypto, is appointed to lead the SEC.

Considering all these facts, it seems that 2021 will be the year of the crypto ETFs to start their journey, in spite of staunch resistance by the US regulators in its approval.

Reasons for Popularity of Crypto ETFs:

There are several good reasons for the growing popularity of crypto ETFs that has put additional pressure on the SEC to reconsider its stand on the approval of crypto ETFs. These are:

  • First, investors will not have to worry about the security and safety aspects because they will not have to hold the coins as they would while investing in a crypto coin directly.
  • Second, users do not need to work with the crypto exchanges for trading their digital assets which minimizes the hassles involved in it.
  • Third, being an investment vehicle, crypto ETFs will allow the investors to short sell their shares of the Exchange Traded Fund if they anticipate a fall in price of the coin in the future, a feat that cannot be achieved in a traditional crypto market.
  • And finally, ETFs as such are quite easy to understand in comparison to the cryptocurrencies itself in the investment world. It makes it much easier to trade on a vehicle that is well understood and without the need of learning the seemingly complicated ins and outs of the trading mechanism.

In short, a crypto ETF simplifies the complicated process of trading crypto coins, especially through an exchange.

There is no need to look for storage, which is another complicated task and also comes with the risks of hacking and cyber attacks that may result in the loss of the entire capital.

However, it is prudent to be aware of the workings and patterns of the crypto ETFs before you make your investment.

How will Cryptocurrency ETFs Work?

For a cryptocurrency Exchange Traded Fund to work, the organization managing the investment funds must own the cryptocurrency assets they aim to track.

The ownership of these assets allows them to be represented as shares and investors buying these shares become their indirect owners.

Very much like the traditional ETFs that embody a basket of stocks or an index focused on a  particular service or product, the crypto ETFs also track the value of a basket of stocks which includes several crypto coins and digital tokens.

However, ETFs do not trade on a crypto exchange. Instead, it trades on the NYSE or Nasdaq. This makes it more convenient to use, though it comes with a significant fee for the management of funds.

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Also, it comes with several other limitations, which is why you should go through the pros and cons section of this article.

If you consider a traditional Exchange Traded Fund, the ownership of the underlying assets in the fund is of the fund provider and not of the shareholders.

Tracking is done to sell the shares to the investors who, in turn, purchase a part of the fund.

Almost in the same way, the crypto ETF providers have the ownership of the digital coins and tokens. They only provide an exposure to these to the potential shareholders.

Pros and Cons

Your knowledge of the digital token scenario and rule will not be complete without knowing the set of pros and cons that cryptocurrency ETFs come with.

Pros:

  • It encourages mainstream investors to enter the cryptocurrency market by removing market barriers
  • It could track a single type of cryptocurrency or different types of digital tokens at once
  • It allows investors to take advantage that are offered by a traditional cryptocurrency exchange while leaving management and security aspects to the experts
  • Since these are issued by regulated companies, the common risks associated with cryptocurrency such as scams, frauds, and collapses are reduced
  • It diversifies investments and reduces the impact of loss incurred on one specific coin since it holds a basket of digital coins
  • It is easier to invest in ETFs as compared to investing in a crypto coin directly
  • Traditional brokerage accounts can be used to buy, sell or hold ETFs and
  • There is no need of setting up a digital wallet and thereby losing the password.

Most importantly, investing in crypto ETFs will unlock tax benefits and you will be eligible for government regulated tax plans since ETFs are regulated by the government.

As of now, the Canadian crypto Exchange Traded Funds allow their investors to enjoy tax benefits in the form of the Tax Free Savings Account (TFSA) and the Canadian Registered Retirement Savings Plan (RRSP).

Cons:

  • Most countries still do not allow trading in cryptocurrency ETFs
  • The providers have the actual ownership of underlying assets and not the shareholders which results in some restrictions in the use of the assets and
  • The management fee is quite high in comparison to that of a traditional ETF.

Apart from that, the tracking of the prices of crypto coins may not be accurate by the crypto ETFs simply because they have to track the prices of several digital coins at the same time, which may be a bit confusing and prone to errors.

Conclusion

Since virtual cash is on the rise in the global investment markets, there is a possible bright future for crypto ETFs in the coming days.

Knowing about it before it makes an entry into the crypto world and starts trading will be beneficial for all.