Cryptocurrency exchange traded funds, also known as ETFs have recently emerged as a new investment opportunity that bridges the gap between the world of digital assets and the world of the traditional finance markets.
These ETFs allow investors to add certain cryptocurrencies, such as Bitcoin and Ethereum to their investment portfolios without the added hassle of having to manage the assets themselves in the form of a wallet. Since cryptocurrency has started to gain some ground with institutional investors and has made significant regulatory advancements, crypto ETFs are becoming a key part of the ever changing crypto landscape.
What exactly is a crypto ETF?
Much like traditional ETFs that track with an index, commodity or a basket of assets crypto ETFs function in very much the same way, it is designed to track the price of one or more cryptocurrencies.
Investors are able to buy shares of the ETF through traditional methods, such as a brokerage account. This makes the world of cryptocurrency a lot easier to access for people who don’t have the knowledge or the time to worry about managing multiple wallets or accounts, allowing people who would otherwise have had no way into cryptocurrency a way to enter into the crypto space.
By investing in a crypto ETF, investors avoid the complications of setting up digital wallets, managing private keys and securing their assets against hacks or theft.
The biggest advantage? Regulatory oversight.
One of the biggest advantages of crypto ETFs is that they have regulatory oversight. Unlike purchasing crypto assets yourself, from an exchange or another source, ETFs operate within the framework of financial regulators such as the U.S Securities & Exchange Commission (SEC) in the United States or the Financial Conduct Authority (FCA) in the United Kingdom.
Having regulatory oversight from such organisations provides the investor with an added layer of protection and transparency, ensuring that the ETF follows pre-set guidelines. With the lack of regulation surrounding cryptocurrency, this was a massive step in the right direction to get the “everyday” person involved with cryptocurrency.
By having this added oversight, it allows cryptocurrency to offer a new level of credibility that has always been missing, and off-putting for a large number of people.
What are the different types of ETFs?
There are two different forms of crypto ETFs, they are as follows;
– Spot ETFs: These type of ETFs hold actual cryptocurrency as thei underlying assets. These funds purchase and store digital assets in secure accounts and directly track the price in real-time. This allows investors to buy ETF share in Bitcoin for example that reflect the current price of the cryptocurrency.
– Futures-Based ETFs: These, on the other hand do not hold actual cryptocurrencies. Instead they trade futures contract that speculate on the future price of a certain cryptocurrency. These ETFs are reliant on derivative markets, meaning the performance may not always match up with the actual price movements of the currency. This can potentially lead to increased volatility and differences in returns.
How have ETFs affected the crypto landscape?
There has been a big impact on the financial markets since the introduction of crypto ETFs. Investors who have previously stayed away from investing in cryptocurrency given its unregulated nature now have a secure, approved way to gain expose to this asset class and add it to their ever-growing portfolio.
ETFs also provide retail investors with an easier way to diversify their portfolio with digital assets without the technical obstacles that have long been associated with cryptocurrency.
Maybe the most important factor, outside of the larger investors is that the ETFs are providing a way into the cryptocurrency world for people who aren’t as “tech savvy” as some people. They don’t have to know how to do the complex steps of opening crypto accounts or protecting private keys. Now they are able to buy into the crypto markets the same way as you would buy any other stock or share.
This all sounds great, but what are the downsides?
Despite all the advantages we have listed above, these ETFs are still looking down at quite a few challenges they need to overcome. Getting different cryptocurrencies approved for an ETF is still a steep mountain to climb, with different areas taking different views on their acceptance of the ETFs. In the United States, the SEC has been wary of approving Bitcoin ETFs, due to concerns over market manipulation and and overall lack of transparency from cryptocurrency exchanges.
While this can be said for quite a few countries, Germany and Canada have been a little more open to approving new ETFs. This shows that cryptocurrency is growing around the world, and the everyday persons interest is also growing, putting pressure on governments to react accordingly.
While there are still plenty of issues that need to be resolved and problems to overcome, there is a clear and purposeful effort going to integrating digital assets into the worlds traditional financial systems.
Crypto Analyst’s Final Thoughts.
There is a bright future ahead for crypto ETFs, as more and more financial institutions and governing bodies recognise the growing demand from the public for a simple, secure way to invest in digital assets. Once these regulatory hurdles have been overcome, spot Bitcoin and Ethereum ETFs could very well be the mainstream way of adding cryptocurrency to a investment portfolio.
ETFs are a major step towards the mainstream adoption of cryptocurrency. By providing the public with a secure, regulated way into the market, they are opening the door to a world that is more accepting of cryptocurrency and digital assets in general.
Whatever happens next will play a crucial role in shaping the future of digital assets for everyone, from your average investors to the large hedge funds around the world.