What is Crypto ETF? Is It Right for You?
- By Localcoin
- August 10, 2023
Interested in investing in the future of cryptocurrencies? Believe it or not, there are actually a variety of ways to go about doing that. While many crypto-enthusiasts will buy, sell and hold crypto coins directly in their wallets, it’s actually not the only way to participate in cryptocurrency marketplaces.
An increasingly popular way to invest in crypto without actually holding coins is by investing in what’s called an “ETF”. If you’ve heard the term tossed around and are wondering whether or not this is the right investment vehicle for you, keep reading to learn about what crypto ETF is, its potential benefits and shortfalls.
Browse This Content:
- What is an ETF?
- What Is a Cryptocurrency ETF?
- Where Did Crypto ETFs Come From?
- Pros and Cons of Crypto ETFs
What is an ETF?
ETFs (Exchange Traded Funds) are investment funds that are traded by their issuers on stock exchanges just like any regular stock. ETFs are day-traded by computers constantly throughout the day, unlike mutual funds, for example, which settle once at the end of the day.
The key point that distinguishes an ETF is that it contains a variety of assets in one managed fund; this can include stocks, indexes, bonds, currencies and/or commodities. ETFs are divided into shares held by shareholders. The shareholders indirectly own the assets of the fund and are entitled to a share of the profits in the form of interest or dividends.
ETFs are popular among those looking for a more hands-off way to invest, as you don’t need to be actively engaged in what’s going on daily with the markets if you don’t want to.
Plus, because there are a variety of assets in one fund, ETFs allow for easy diversification, acting almost like a mini portfolio. This can help investors offset losses; if one stock is not doing well, another may be doing well enough to make up for it.
Now that we have a basic idea of what an ETF is, let’s dig into how this type of fund can be used in the context of cryptocurrencies.
What Is a Cryptocurrency ETF?
A “crypto ETF” refers to an ETF that tracks one or more digital coins, or one that invests in crypto-related companies such as a Bitcoin mining group, a blockchain technology company, or any business that holds a lot of cryptocurrency. Either way, a crypto ETF allows investors to participate in the crypto markets indirectly. This means that one can invest in the future of crypto without having to set up a wallet, keep private keys safe, come up with their own investment strategies and so on.
Still confused? Here’s an example that can help paint a picture: During a gold rush, instead of buying and selling actual gold, one could theoretically invest in a gold mining company instead. The volatility of the gold market would still affect one’s investment, but this way, they are indirectly invested in the anticipated success of the commodity without having to actually go out, buy and sell gold.
Where Did Crypto ETFs Come From?
The world’s first Bitcoin ETF was created in Canada in February of 2021 and traded on the Toronto Stock Exchange (TSX). In the US, Bitcoin ETFs are still not available domestically as of August 2021, and they won’t be until they receive full SEC (Securities and Exchange Commision) approval. Even Ethereum ETFs can be traded now in Canada while there are no domestic crypto coin ETFs for US-based investors, only foreign ones.
Prior to the existence of these ETFs, really the only way for North Americans to invest in Bitcoin through the stock market was with the Grayscale Bitcoin Trust (GBTC) fund. GBTC is a closed-ended fund, meaning that the number of available shares is limited and that supply and demand mostly determines their price. This has historically led to significant price differences between the net asset value and the price of a share, which can either work in one’s favour or force one to pay more per share than it is worth. Investing in GBTC also often came with high associated fees.
On the other hand, ETFs are open-ended crypto funds where shares can be created at will, making premiums and discounts unlikely. The stability associated with open-ended funds can potentially allow them to be less risky than closed-ended funds, making crypto ETFs somewhat of a game-changer for investors looking to get exposure to cryptocurrency.
Pros and Cons of Crypto ETFs
Crypto ETFs can appear to be exciting investment opportunities at first glance, but that doesn’t mean they will be suitable for everyone. While investment strategy is best left between you and your preferred financial advisor, the high-level advantages and disadvantages of owning crypto ETFs can help you decide if this is an investment fund that aligns with your financial goals and is something worth pursuing.
Pros of Crypto ETFs:
Stored Safely & Securely
Something investors can feel good about, however, is the fact that if they are invested in crypto ETFs that track digital coins, these coins may be kept in offline, cold storage and covered by millions of dollars of insurance. This means safety from hackers and possibly from bankruptcy.
Crypto ETFs offer exposure to a diversified portfolio of cryptocurrencies, reducing the risk associated with investing in individual tokens.
This diversification is not only across various cryptocurrencies but also within different sectors of the crypto market, such as coins, tokens, and blockchain projects. This broader exposure helps mitigate the impact of poor-performing assets and provides a more balanced investment approach, reducing overall portfolio volatility.
Cons of Crypto ETFs:
Day-Traded Between Limited Hours
Just like any other stock, crypto ETFs are traded on stock exchanges. Being day-traded on the stock exchange also means being subject to regular day-trading hours. This may never negatively impact you, but consider scenarios where major events happen that drastically change the price of Bitcoin or Ethereum.
Because of their previous volatility, this is certainly not out of the realm of possibility. If one of these events happens outside of day-trading hours, you are left immobile; you will have to wait until the markets open again in order to make any adjustments, buy or sell. Investing in crypto coins via an ETF can also generally make investors feel immobile as your coins aren’t readily available in a wallet.
Subject to a Variety of Fees
Unfortunately, though, this doesn’t come without a cost in the form of fees. Paying for the assurance that your investment is safe may not be a big deal for you, especially if you are holding your coin ETF in a tax-free account such as a TFSA or an RRSP for the long-term. Plus, if you’re invested for the long-term, you probably aren’t racking up many transaction fees.
At the same time, these long-term gains are typically subject to compound interest and management fees. There are actually a whole host of fees that can be associated with ETFs depending on the issuer.
We hope that by now you will have a clear understanding of what a crypto ETF is. As the landscape continues to evolve, crypto enthusiasts and investors alike will navigate this new avenue, carefully considering their investment goals, risk tolerance, and the ever-changing dynamics of the cryptocurrency market.
From investing in crypto ETFs and investing in crypto-involved companies through ETFs to managing your own crypto coins, there are many different ways to engage in the markets and be a part of a growing community of crypto-enthusiasts.
Whether you’re a seasoned expert or a curious newcomer, Localcoin is here to help you feel confident about buying and selling crypto! With hundreds of Bitcoin, Ethereum and Litecoin terminals across Canada and the United States, Localcoin makes it safe, easy and secure to buy and sell cryptocurrencies at your own pace and on your terms.