The holiday season is approaching, and I have a rather interesting fact to share. It was in the 11th century that the French introduced the concept of gift hampers in England. The idea emerged from a basket (woven from willow) used to transport food and drinks at that time. Soon, this basket took the shape of one of the most gifted items in the history of mankind. A gift hamper!
But why am I talking about baskets all of a sudden? Turns out, ETFs are no different. ETFs or exchange-traded funds are a type of investment that holds multiple assets under it. And you guessed it right. A cryptocurrency ETF holds multiple digital assets (crypto under its name).
But how do they operate? What are the advantages and disadvantages of investing in them? I’ll answer all of that now. Let’s get started.
What Is a Cryptocurrency ETF (Exchange Traded Fund)?
As described earlier, a cryptocurrency ETF is a basket of digital assets. In traditional web2-based ETFs, they are meant to track indices (Eg. Niftybees tracks Nifty) or some specific stocks (e.g., Motilal Oswal S&P Low Volatility ETF tracks selected stocks from S&P).
The overall price of the ETF fluctuates daily as the price of underlying assets moves up and down. And very similar to stocks, they are listed on exchanges and can be traded at any given point.
How Do Cryptocurrency ETFs Operate?
Apart from offering low-cost ownership to traders, ETFs are a fantastic way to skip the lengthy learning curve involved in cryptocurrency trading.
Now an ETF can take one of the two forms mentioned below:
1. Physical ETFs
Physical ETFs are backed by physical cryptocurrency. Now don’t get me wrong. Cryptocurrency is purely digital. But these ETFs actually buy and hold the cryptocurrencies. And ownership of these cryptocurrencies is represented as shares.
When you purchase this type of ETF, you become an indirect owner of cryptocurrency. As an investor, this allows you to explore the crypto realm without leaving the existing legal framework.
2. Synthetic ETFs
These ETFs do not buy and hold cryptocurrency. Rather, they hold a cluster of contracts called futures and derivatives. So essentially, they would buy put-and-call options instead of buying the actual cryptocurrency. This way, they can leverage the price swings of the asset without actually owning it.
A lot of ETFs proposed to the SEC intend to track Bitcoin future contracts.
Advantages and Disadvantages of Cryptocurrency ETFs
I know you are already looking for options to invest in ETFs in the other tab right now. But before doing that, let us try to evaluate the advantages and disadvantages of investing in them.
Advantages
ETFs generally have an edge over other asset classes owing to their high liquidity and low cost. Let us understand how this is even more relevant for the crypto-verse.
1. Hassle-free storage
If you were to own cryptocurrency directly, storing them is quite problematic. Say you decide to take the hardware wallet route. In that case, you end up spending north of $100. It doesn’t end there. After that, you have to safely store the device and take care of the 12-word keyphrase attached to it. If you lose the phrase, you lose the crypto forever. No second chances.
Coming to custodians. These are agencies that could take away the worries of maintaining a hardware wallet and the seed phrase. But then they come at a cost. And this cost adds up to a good chunk.
ETFs, on the other hand, are regulated and therefore manage the crypto with proper audits while giving you the benefit of indirect ownership.
2. Outsourcing learning
There is indeed a steep learning curve involved in getting started with crypto. This creates a big problem for adoption amongst the masses.
Even if you are simply trading digital assets, learning the way around the exchange does take a while.
ETFs, solve these problems. You can simply buy the ETF from the stock market and sit back.
3. Hack-proof
Centralized ownership of cryptocurrency comes with a risk of losing all your assets. You see, your stock market is centralized but regulated. On the other hand, blockchain and Decentralized Finance is decentralized but not regulated.
Centralized exchanges like FTX are the worst of both worlds. They are centralized and non-regulated. Therefore, getting exposure to crypto through these exchanges can end up pretty badly.
However, ETFs offer regulation and safely store the crypto on your behalf.
4. Low-cost buying
There are over 15,000 tokens in the market. No exchange lists all of them. And if you buy them on a decentralized exchange, it would cost gas fees.
Cryptocurrency ETFs enable buyers to diversify into these tokens without additional costs.
Disadvantages
Let’s talk about the other side of the story now. Because there’s no white without black, right?
1. Lack of options
While ETFs are a proven source of exposure to cryptocurrency, there aren’t many options available in the market. Most of the ETFs are approval-pending with the SEC. And SEC is generally resisting to approve of them, citing risk concerns.
Moreover, the ETFs that have made it to the market do not offer a wide variety of assets under them.
2. Volatility
Volatility is an inherent trait of any new asset class. Cryptocurrency is no different. Therefore, these ETFs are highly volatile.
3. Custody
When Satoshi Nakamoto designed Bitcoin, the entire aim was to make a censorship-resistant, self-custody-based asset. Think of it like this. If the government decides to go after you tomorrow, they can freeze your bank account, revoke your access to your stocks, and seize your real estate.
However, for Bitcoin, all you need to do is memorize a 12-word keyphrase; no one can take that away from you.
But holding Bitcoin in a regulated ETF creates similar risks as mentioned above.
Top 5 Crypto ETFs That Are Globally Accessible
If you have made it this far, pat yourself on the back. You are one of the rare folks that evaluate the in and out of an investment class before jumping in. It’s you who deserves this section more than anyone. Let us talk about some of the best ETFs in the market today.
1. Amplify Transformational Data Sharing ETF
Amplify is not a pure cryptocurrency fund. In fact, it invests in emerging technologies, and cryptocurrency happens to be one of them. But then, it does not directly invest in cryptocurrencies. Rather, it invests in companies that are in the auxiliary cryptocurrency business.
For example, this ETF contains Coinbase, one of the largest publicly listed cryptocurrency exchanges. Apart from that, it invests in Nvidia, which is into GPU manufacturing (a key component used for mining). Other than that, it invests in a bunch of mining companies like Hut 8.
2. Bitwise 10 Crypto Index Fund
The Bitwise 10 crypto index fund invests in the top 10 cryptocurrencies by market cap. The weights of these currencies are constantly changing depending on the market conditions. Since it is an actively managed fund, the expense ratio is roughly 2.5%. This means if you invest $1000 in this fund, you will pay $25 as a fee to manage your money.
Also, this used to be a private placement fund, but shares of it can now be bought over the counter (OTC).
3. Siren Nasdaq NexGen Economy ETF
Similar to Amplify, Siren invests in companies that are into cryptocurrency and Blockchain business. However, instead of simply focusing on cryptocurrency, it also has a stake in Blockchain centric companies like IBM (Hyperledger by IBM is one of the most famous Blockchains), Visa, and American Express (actively experimenting with this technology)
4. First Trust Indxx Innovative Transaction & Process ETF
First Trust is an established player in the ETF industry. Therefore they do enjoy a stature of trust. However, it is one of the most underperforming ETFs on this list.
With that being said, it invests in Cryptocurrency centric listed businesses. It has a basket of 103 stocks which is the highest number of stocks in any other ETF focusing on crypto.
5. Bitwise Crypto Industry Innovators ETF
This Bitwise ETF is a relative newcomer in the industry. Launched in May 2021, it has only 35 stocks. Most underlying stocks in this fund are miners and investments in Coinbase and Microstrategy (the world’s largest Bitcoin holder publicly listed company).
Conclusion
It is pretty evident that most of the regulated ETFs aren’t investing in cryptocurrency directly. Rather, most of them are taking bets on companies that are related to this space.
So, if you want to take the basket route for investing in cryptocurrency, you are better off using Coinsets by Mudrex. Similar to an ETF, a coinset is basket of cryptocurrencies based on themes actively managed by experts and periodically rebalanced. On top of it, you can choose from multiple options, each depending on a theme like Layer 1, Layer 2, etc.
FAQ
1. Which crypto ETF is best?
The ETF space is just spreading its wings in the crypto realm. It is hard to pinpoint the best ETF as of now as none of them are directly investing in cryptocurrency. But for searching for the best ETF, an investor must pay attention to the past returns and expense ratio.
2. Is there an ETF that owns Bitcoin?
As of now, a few ETFs filed for approval by SEC for Bitcoin futures ETF. But even if it gets approved, this ETF is going to invest in futures contracts and not actual Bitcoin. Other than that, current ETFs are only investing in crypto-related listed companies.
3. Is crypto ETF safe?
ETFs are generally considered safer investments than individual assets because they inherently diversify your holdings and offer a cheap alternative. From a crypto ETF standpoint, they are volatile because of the underlying asset.
