What Is a Crypto ETF? Everything to Know

For more than a decade, the crypto and traditional financial markets have stayed separate with less or no interaction. As digital currencies have been accepted as a legitimate type of investment globally, crypto-related assets are becoming popular in traditional markets.

The recent development of crypto ETF comes out to be a turning point, where investors can profit from the potential of the cryptocurrency market while remaining involved in a familiar framework. Moreover, the conversation around crypto ETF is gaining pace, with industry experts entering the game of ETF. Also, investors who are looking to add crypto to their portfolio while maintaining a sense of familiarity with traditional investing may benefit from learning about crypto ETF. Therefore, we have compiled a detailed guide on this type of investment.

Crypto ETF: Meaning

The term “ETF” might sound familiar to all stock investors because these traded funds are listed on a stock exchange. They offer a simple method of investing in a wide range of assets. But when this financial instrument becomes part of the cryptocurrency industry, we call it “crypto ETF.”

These traded funds allow permission to investors to gain knowledge of cryptocurrencies without purchasing them while maintaining the regulated environment. Furthermore, crypto ETFs serve as a bridge between traditional finance and the world of digital currencies.

Different Types of Crypto ETFs

With crypto ETF, several options are available with the investors that are tailored to their preferences and risk tolerance. These exchange traded funds are bifurcated into single-asset, multi-asset, and industry ETFs. However, you can further subdivide them into spot and futures.

Single Asset ETF

These cryptocurrency exchange-traded funds focus on a particular cryptocurrency, such as Bitcoin or Ethereum. These traded funds corelates with the market movements of specific digital assets. Moreover, they are ideal for those investors who believe in the coin’s future success.

Multi-Asset ETF

Multi-asset crypto ETFs provide diversification within the crypto industry. They invest in several digital assets to help investors with the diversification of their risk across many cryptocurrencies. However, navigating these types of traded funds can reduce the impact of the poor performance of a single asset on the entire portfolio.

Industry ETF

Rather than cryptocurrencies, industry ETF focuses on firms involved in the cryptocurrency sector. They might include centralized exchanges, bitcoin mining operations, and technology companies that use crypto or blockchain solutions.

Within these major categories, you can further bifurcate crypto ETFs into spots and futures.

Spot ETFs

These exchange-traded funds hold a specifying cryptocurrency, like Bitcoin or Ethereum. The value of these funds correlates with the spot price of the digital asset they represent. Moreover, Spot ETFs provide investors with the benefit of rapid access to cryptocurrency prices and the risk associated with such crypto assets.

Futures ETF

Instead of investing in any cryptocurrency, these exchange traded funds believe to invest in future contracts on the digital asset. Also, these funds allow investors to purchase or sell cryptocurrencies at a certain price on a specific future date.

How does Crypto ETF work?

Depending upon the value of the specific asset, crypto ETFs create and redeem ETF shares. Authorized participants play an important role in the working of cryptocurrency ETFs. Moreover, these participants purchase the specific currencies and deposit them with the ETF issuer in exchange for ETF shares. The value of such share's changes in accordance with the price fluctuations of the crypto it follows.

Therefore, to maintain the value of the ETF shares, authorized participants perform the process of arbitrage by purchasing extra cryptocurrencies to produce more ETF shares during moments of strong demand and sell the assets during periods of low demand. This approach keeps the ETF share price in line with the value of the monitored cryptocurrencies.

Advantages of Crypto ETFs

The crypto exchange-traded funds are a growing asset class. Therefore, investing in these funds may provide certain advantages:

Exposure Without Ownership

The well-known benefit of crypto exchange-traded funds is that they allow investors to gain exposure to cryptocurrencies without any additional ownership cost or risk associated with the maintenance of such funds in a crypto wallet.

More Security for Investors

Cryptocurrency exchanges and poorly built blockchains have been hacked since their inception. This raises security concerns in the crypto community. Moreover, individual investors who are unfamiliar with the essential processes may struggle to secure cryptocurrency. A crypto ETF takes care of this for you.

Easy Diversification

There is no built infrastructure for purchasing and selling cryptocurrency. Although, there are few tokens or coins which are listed on specific cryptocurrency trading platforms, while others are not listed anywhere. As a result, cryptocurrency exchange-traded funds help investors in easy diversification of their investment portfolio without having to pay for individual coins.

Disadvantages of Crypto ETFs

Higher ETF Fees

Although cryptocurrency ETF helps investors to avoid some of the expenses of owning digital assets, they do have their own fees. As these traded funds are managed by experts, they may have higher costs than other ETFs.

No Direct Ownership

Another major disadvantage of investing in crypto ETF is that you are not the actual owner of the specific cryptocurrency. Although cryptocurrency ETFs are convenient, you don’t have custody or access to the coin. Moreover, the decentralized feature of cryptocurrency doesn’t apply to crypto ETF owners.

Possibility of Tracking Errors

The cryptocurrency ETFs do not always show the price movement of the specific digital asset. This is particularly true for ETFs that use futures contracts to follow cryptocurrencies, which must roll over their positions when contracts expire.

Conclusion

Crypto ETF gives investors multiple benefits including the option to invest in digital currency without owning it. However, investors must know about the risks associated with the cryptocurrency ETFs, including regulatory risk and market volatility. Before purchasing shares in these funds, investors must do complete research and determine their risk tolerance, like other financial products.