An EFT is a cryptocurrency exchange-traded fund (ETF) consisting of cryptocurrencies.
The first cryptocurrency ETF started trading in October 2021: the Proshares Bitcoin Strategy ETF, which tracks bitcoin futures prices.
Although most ETFs track an index or a basket of assets, a cryptocurrency ETF tracks the price of one or more digital tokens. The share price of cryptocurrency ETFs fluctuates daily based on investor sales or purchases. They are also traded daily and can be tracked on the best ETF platform.
Cryptocurrency exchange-traded funds (ETFs) track a single cryptocurrency or a collection of different digital tokens and currencies.
ETFs have several benefits, including a low cost of ownership diversification and outsourcing of knowledge and time-intensive functions related to picking crypto tokens.
Many alternative funds in the market allow for exposure to cryptocurrency without requiring investors to manage the digital assets themselves.
Cryptocurrency exchange-traded fund (ETF) has several benefits to investors, and this includes significantly lower cryptocurrency ownership costs and outsourcing the steep learning curve required to trade cryptocurrencies.
There are two types of ETFs.
- One that is backed by physical cryptocurrencies. Purchases are made by the investment managing the fund, and ownership of the coins are represented as shares. After purchasing shares in the ETF, investors will own the cryptocurrency indirectly. Therefore, owners can gain exposure to cryptocurrencies without the accompanying expense and risk of outright ownership.
- The other type is a synthetic variant that tracks cryptocurrency derivatives like futures contracts and cryptocurrency exchange-traded products (ETPs).
The ETF share price is very similar to the price movement of derivatives instead of actual cryptocurrencies. Therefore, the price of shares in a given ETF rises with an increase in futures contract prices. It decreases with a corresponding decline. Like other derivatives, synthetic ETFs have added risk because their operations may not always be transparent.
Benefits of Cryptocurrency ETFs.
Cryptocurrency ETFs are a developing asset class, and given the regulatory uncertainty, the market is still being defined. However, they might be one of the best instruments to own cryptocurrencies. Some of the benefits of owning shares in cryptocurrency ETFs are highlighted below:
- One major benefit of cryptocurrency ETFs is that they provide exposure to the crypto without the extra expenses of ownership. Owning physical cryptocurrencies entails several additional expenses. For instance, there are custody charges associated with cryptocurrencies. A secure digital wallet that helps store-purchased cryptocurrencies also charge an annual fee. The accumulation of these fees adds up to a tidy annual sum. Direct cryptocurrency ownership also comes with other hidden charges, including transaction and network fees. ETFs outsource these expenses onto ETF providers.
- A Cryptocurrency ETF outsources security functions to the providers of these ETFs. Generally, cryptocurrencies have been hacked since they were launched; this has prompted the questioning of the security of the nascent asset class. Most times, ensuring the security of cryptocurrencies can be a tall order from individual investors who are usually not familiar with their workings. ETF gives this advantage since the security functions are outsourced to the providers of these ETFs.
- Other benefits include ETFs enabling investors to diversify without incurring the costs for each token. Investing in a cryptocurrency ETF also outsources the learning curve to an analyst.
