Understanding Nuances of Cryptocurrency ETF
Let’s dive into the world of cryptocurrency.
When the entire world is discussing cryptocurrency, it is a crime to remain ignorant. If you already know about cryptocurrencies, then well. But if you are still wondering what the heck it is, then it is the right place to start.
There are various ways investors can invest in cryptos; cryptocurrency ETF is one of them. These are like regular ETFs with cryptocurrency as underlying assets. However, which regular ETFs track an index, cryptocurrency ETFs track the price of one or more digital tokens. Based on buying and selling by investors, the ETF price goes up and down like common stocks as they trade daily.
This article will discuss cryptocurrency ETF in detail and why you may need it in your portfolio.
Cryptocurrency ETFs offer several benefits to the investors, like low ownership cost of holding cryptocurrency and outsourcing the steep learning of trading cryptocurrency.
How does cryptocurrency work?
Before we discuss ETFs, let’s understand what cryptocurrency is.
Cryptocurrency is a virtual currency backed by cryptography, which makes it impossible to double-spend or counterfeit. The most popular cryptocurrency is Bitcoin. However, most cryptocurrencies are decentralised networks based on blockchain – a ledger system maintained by a disparate computer network system.
One defining characteristic of cryptocurrencies is that they are not issued by any government and therefore immune from the central bank’s intervention.
A cryptocurrency ETF allows investors to access a portfolio of diversified cryptocurrencies or digital tokens. Most investors prefer investing through an ETF because it ensures more transparency and authenticity. Functionally, cryptocurrency ETFs are similar to regular exchange-traded funds with crypto as underlying.
Investing in cryptocurrencies through ETFs offers several benefits to investors.
– It allows exposure to the cryptocurrency market through a diversified portfolio
– With an ETF, investors don’t have to manage multiple digital wallets
– It makes it easier to track the performance of the fund against a bucket of digital tokens
How does it work?
In regular ETFs, the fund provider owns the stocks or commodities that are tracked. Similarly, a company offering crypto ETFs must hold the assets or the digital tokens it wishes to follow. The asset under the fund is offered to investors as shares, and by investing in the fund, investors directly own the digital tokens.
There are two types of cryptocurrency ETFs available for investing. The first type is backed by physical cryptocurrencies. The fund management firm buys cryptocurrencies, which they divide as shares between investors.
The second type tracks cryptocurrency derivatives like futures contracts and cryptocurrency exchange-traded products. The ETF’s share price mimics the price movements of the derivatives instead of following the value of actual cryptocurrencies.
The most popular crypto ETFs available for investing are Bitcoin ETFs, which trade in the US stock exchanges. However, the Bitcoin ETF doesn’t own cryptocurrencies directly. Instead, the ETF invests in portfolio stocks with exposure to blockchain technology.
– Cryptocurrency ETFs track a single or a basket of different digital tokens.
– These products allow investors exposure to cryptocurrencies at a low cost of ownership.
– There are several options offered to investors to gain exposure in cryptocurrencies without holding actual digital tokens; ETFs are one of them.
– The most popular crypto ETF is Bitcoin ETF, which trades in the US exchanges. However, the US government has denied any attempts to allow these products to trade in the exchanges.
– Several countries have already allowed trading in cryptocurrencies, but many others haven’t allowed it yet like the USA and India.
Despite the amount of volatility, cryptocurrency has gained popularity. Many companies have started to accept cryptocurrencies as a form of payment. Banks like JP Morgan and ZCash are collaborating with existing cryptocurrency companies in developing their cryptocurrencies. So sooner or later, cryptos will take hold of the finance market. Once that movement starts, cryptocurrency ETFs will gain mileage in offering structured portfolio investment opportunities to investors.
Disclaimer: Angel One Limited does not endorse investment and trade in cryptocurrencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.