What Is a Cryptocurrency ETF?
An exchange traded fund (ETF) for cryptocurrencies is a fund made up of cryptocurrencies. A cryptocurrency ETF measures the price of one or more digital tokens, whereas the majority of ETFs track an index or a basket of assets. The share price of bitcoin ETFs varies every day based on investor sales and purchases. They are also exchanged every day, just like conventional stocks.
How Does ETF Work?
A cryptocurrency exchange traded fund (ETF) is a fund made up of cryptocurrencies. Unlike other ETFs, which follow an index or a basket of assets, a cryptocurrency ETF tracks the price of one or more digital tokens. Based on investor sales and purchases, the share price of bitcoin ETFs changes every day. Like traditional equities, they are likewise traded every day.
Two different types of cryptocurrency ETFs exist:
The first kind is supported by actual cryptocurrency. The cryptocurrency purchases are made by the investment company running the fund, and shares are used to indicate ownership of the coins. Investors who purchase shares in the ETF will subsequently acquire cryptocurrencies. Owners can thus become exposed to cryptocurrencies without the cost and danger of outright ownership.
The second form is a synthetic variation that follows derivatives for cryptocurrencies, such as futures contracts and cryptocurrency exchange traded products (ETPs). The values of bitcoin futures contracts traded at the Chicago Mercantile Exchange, for instance, are tracked by a number of ETFs that have been suggested to the U.S. Securities and Exchange Commission (SEC) (CME).
Cryptocurrency ETFs’ Regulatory Status
ETFs are seen by supporters of cryptocurrencies as the holy grail that will increase bitcoin acceptance and liquidity. The Winklevoss twins submitted an ETF proposal for bitcoin (BTCUSD) to the SEC as early as 2014, or almost five years after the cryptocurrency first started trading at an exchange.
The SEC elucidated its concerns in a January 2018 letter and explained the rationale for rejecting ETF applications. Among its concerns are the absence of transparency at cryptocurrency exchanges (which set the price of individual tokens), the potential for market manipulation, and low liquidity levels in cryptocurrency markets.
In the time since the agency’s letter was issued, the situation in the cryptocurrency markets has altered. Exchange trading volumes have increased. The total market value of cryptocurrencies has topped $2 trillion as of April 2022.
(Its peak was $800 billion at the time the SEC’s letter was published.) As previously indicated, the first cryptocurrency ETF began trading in October 2021, and Coinbase Global Inc. (COIN), the largest cryptocurrency exchange in North America, is now a publicly traded company.
Benefits of Cryptocurrency ETFs
The fact that bitcoin ETFs offer exposure to the asset class without the associated ownership costs is arguably their largest advantage. Cryptocurrency physical ownership comes with a lot of additional costs. Custody fees, for instance, are related to cryptocurrency. Additionally, there is an annual fee for secure digital wallets used to hold cryptocurrency purchases. These fees add up to a sizable annual total. Other unstated costs associated with cryptocurrency ownership include network and transaction fees. These costs are outsourced by cryptocurrency ETFs to ETF suppliers.
Shares in cryptocurrency ETFs provide exposure to a rapidly expanding asset class for a fraction of the price of buying actual cryptocurrency. The cost of cryptocurrencies, particularly bitcoin, has risen in recent years. For the typical investor, they are now essentially unreachable. An inexpensive alternative for those looking to invest in the asset class is a cryptocurrency ETF.
Average investors find it challenging to understand the scope and operation of cryptocurrencies. Investors who are not tech-savvy could find understanding the jargon of the cryptocurrency world, like blockchain and halving, to be a challenging process. The learning curve is outsourced to analysts while investing in a bitcoin ETF.
Since their debut, cryptocurrencies have seen numerous hacks, raising serious concerns about their security. Individual investors may find it difficult to ensure cryptocurrency security since they may not be familiar with how they operate. An ETF for cryptocurrencies outsources security operations to the companies that make these ETFs.
In trading marketplaces, there are more than 1,800 cryptocurrencies. There is currently no infrastructure in place for buying and selling these tokens.
The acquisition of these tokens entails a substantial expense as well. Investors can diversify with cryptocurrency ETFs without having to pay for individual tokens.