Many of you must have heard about the recent approval of Ethereum-based Exchange Traded Funds (ETF).
In this article let us have a look at what ETFs are and how they function in the cryptocurrency market.
What Are ETFs?
ETFs are a type of investment pool that can be bought or sold just like any other security.
The main purpose of ETFs is to bridge the gap that exists between an interested investor and his investment interest.
In other words, an ETF facilitates a person in investing in a group of commodities or stocks or even cryptocurrencies without having to gain firsthand trading expertise in them.
Crypto ETFs offer investors exposure to the crypto market and its traded tokens without having to set up a digital wallet or enroll in any cryptocurrency exchanges.
There are currently two popular types of ETFs when it comes to cryptocurrencies these are:
- Cryptocurrency Futures ETFs
- Spot Cryptocurrency ETFs
We will discuss the difference between these two ETFs along with other details in the coming sections.
Now, let us look into how Crypto ETFs work and from where and how to buy them.
How Do ETFs Work?
ETFs work by acting as a proxy for a particular commodity, share, or any other digital asset such as Bitcoin or Ethereum
Crypto ETFs analyzes the price of the cryptocurrency portfolio that is linked to that investment to determine the growth rate of the ETF
The price of the ETFs is designed to reflect the price of the asset the ETF is linked to through the usage of various price tracking mechanisms that the investment firm uses.
What Are The Types Of ETFs That Are Currently Available For Trade In The Market?
The most popular ETFs that are available currently in the market are Spot ETFs and Futures ETFs.
In the case of Cryptocurrency Future ETFs the value of this ETF investment is determined by a bet on the future price of an asset. For example, Bitcoin ETFs work by investing in the futures contract that has been made about the price of Bitcoin in the market.
These types of investments are highly volatile and are time bound meaning that the contract has an expiration date beyond which the call pool cannot be carried forward.
Coming to Spot Cryptocurrency ETFs these types of funds deal with the direct trade that the offering investment agency does on particular cryptocurrency coins such as Ethereum. These types of investments let the investors buy and sell their ETFs just like stocks without having to directly take part in the cryptocurrency market space.
These are the two types of Cryptocurrency ETFs that currently exist in the market and the above section details how they work.
Now, let us look at the advantages and disadvantages of CryptETFs in the next section.
Advantages And Disadvantages Of Buying Crypto ETFs
Given below are a few of the advantages and disadvantages that one should consider before investing in Crypto ETFs
Advantages
- Increased security:
Crypto ETFs have only recently gained approval for trade and sales from the Stock Exchange commissions.
Despite this, they are still under the regulation of many financial institutions, which adds a layer of security compared to cryptocurrencies which aren’t regulated by any particular entity.
- Increased Accessibility:
ETFs are much more accessible to ordinary people due to their trade in stock markets and other exchanges which makes it easier to buy and trade with them without having to take the extra steps that one has to take when buying cryptocurrencies.
- Exposure to Cryptocurrencies:
An Amateur investor can get a lot of exposure to the world of Cryptocurrencies without actually having to take all the risks that are associated with the Market.
- Lowered Costs:
Affordable ETFs are offered for popular Cryptocurrency tokens like Bitcoin and Ethereum which makes it possible for a person to buy a stake in them without having to put up a large chunk of money to make the purchase.
Now that we have looked at the advantages that come with buying Crypto ETFs instead of Cryptocurrencies themselves let us now look at some of the downsides and disadvantages of buying Crypto ETFs in the section below.
Disadvantages
These are some of the disadvantages that one has to keep in mind when buying ETFs
- Occurrence of Tracking Errors:
Often times the mechanism that keeps track of the price performance of the digital assets that an ETF is associated with may break or malfunction, thus causing price discrepancies and leading to panic over the ETF’s position.
- Higher Commissions:
The rate of the commission that many of the firms that offer Crypt ETFs are so high that they might cut into any of the gains that you have made through the ETFs.
The commission that is demanded by such companies for the issuance of Crypto ETFs will be much higher than the transaction cost while buying Cryptocurrencies through traditional methods.
- Lack of Flexibility:
Crypto ETFs are much less flexible when compared to Cryptocurrencies when it comes to their trading and exchange. Crypto ETFs limit the holder of the coin from trading it at their desired period of time due to the availability of the option to do so whenever the markets are closed.
- Lack of ownership:
Despite having exposure to Cryptocurrencies ETFs still do not give you complete ownership of that particular token. The investor in ETF cannot stake the coin or exchange it just as easily as you can do so with traditional Cryptocurrencies.
- Higher Volatility:
The lack of stability of the governing mechanism can cause higher volatility in these ETFs and lead to a loss of money for the investor.
These are some of the advantages and disadvantages that ETFs that one should consider before investing in them.
Let us now look at where you can buy Crypto ETFs and which places trade with them.
Where To Buy Crypto ETFs
ETFs are currently being offered in many platforms including online brokerage service providers, stock exchanges, advisory services, and other forms of traditional platforms.
Crypto ETFs have been traded in multiple exchanges including the New York Stock Exchange, NSE, and Nasdaq.
Final Thoughts
From the data that we have looked into in the previous section, we can conclude that ETFs are a great path for an investor to take if he is looking to find an option for exposure to the Cryptocurrency market at an affordable rate without having to take the burden of the high amount of risk associated with it.
ETFs can provide a great stepping stone for anyone to reduce the learning curve while still allowing them to take part in the Cryptocurrency revolution.
