A cryptocurrency ETF is an exchange-traded fund whose price is tied to one or more digital assets. Crypto ETFs allow for easier access to cryptocurrency investments for stock market investors, both institutional and retail.
The most promising exchange-traded fund is a Bitcoin ETF that would be traded on the US market. So far, the regulator has not approved any application for the issue of such an instrument.
ETF for bitcoin futures and shares of crypto companies are currently traded on exchanges.
What is an ETF?
An ETF (exchange-traded fund) is a fund whose shares are traded on an exchange. The fund is a legal organization on whose balance sheet there is an asset or a portfolio of assets formed according to certain criteria. It may include securities, valuable commodities, bonds, currencies, stock indices, etc.
Each ETF share is backed by a certain percentage of the fund’s assets. Thus, the owner of an ETF invests in the fund’s portfolio but does not directly own its assets.
Specialized companies create funds. They manage them, for example, if necessary, rebalance their composition and maintain reporting. The largest ETF operators in the world are BlackRock, Vanguard, State Street, Invesco, iShares and Charles Schwab.
Popularity of ETF
Exchange-traded funds are one of the main investment vehicles today. According to Informa Financial Intelligence, in November 2021, the total volume of funds in ETF funds exceeded $10 trillion, although in 2018 this figure was $5 trillion.
For institutional investors, this is a suitable method of passive investing. Unlike active strategies, ETFs do not require their holders to hold and trade the assets themselves. They have a simple legal structure and provide more stable results in the long term.
For a retail investor, an ETF allows you to quickly and effectively diversify your portfolio by having a large number of assets underlying the fund. Finally, exchange-traded fund operators charge their holders much lower management fees than mutual funds.
Why do you need a cryptocurrency ETF?
Not all large investors are ready to directly purchase digital assets due to an inadequate legal framework and difficulties with their storage. In turn, ETF would become a common and easy way to enter the cryptocurrency market.
An ETF is a familiar legal structure that operates within traditional financial infrastructure. It is also a highly liquid instrument that can be placed on the largest stock exchanges in a short time, providing the opportunity to invest in cryptocurrency for both institutional and retail users. The exchange-traded fund operator is responsible for the custody of the underlying asset.
Which crypto ETFs are already trading?
Today, exchange-traded funds indirectly related to the blockchain industry are traded in different countries. For example, those whose price is tied to a basket of shares of public crypto companies. But particular attention is focused on ETF based on the cryptocurrencies themselves. In this case, the fund operator purchases digital assets for it, therefore serving as a source of additional demand in the crypto market. The price of such instruments depends on the spot prices of crypto assets.
The United States is considered the main potential market for spot crypto ETF. Numerous companies have filed applications with the SEC to register an exchange-traded fund since 2018. However, the regulator has not yet approved any such instrument.
ETF yesterday and today
North America’s first spot Bitcoin ETF was released in Canada in February 2021. It’s called the Purpose Bitcoin ETF and is traded on the Toronto Exchange. The volume of funds in the fund exceeds $800 million.
In addition, ETFs indirectly related to the crypto market are traded in different countries.
Among the most famous is Bitcoin Strategy ETF (BITO) from ProShares. At the end of 2021, it received SEC approval and was listed on the New York Stock Exchange. BITO’s underlying asset is Bitcoin futures contracts, which have been traded on the Chicago Mercantile Exchange since 2017. As of the end of May 2022, the volume of the fund is about $1 billion.
Similar exchange-traded funds were issued by VanEck and Valkyrie Investments after SEC approval at the end of 2021. In April 2022, the regulator allowed the launch of a Bitcoin futures ETF from Teucrium.
Grayscale operates an ETF called Future of Finance (GFOF), which contains shares of publicly traded companies in the blockchain and cryptocurrency space. In May 2022, it listed its GFOF counterpart on European exchanges.
BlackRock also launched an ETF based on companies in the crypto industry. Samsung Asset Management plans to launch a fund based on blockchain companies on the Hong Kong Stock Exchange.
In addition, there are exchange-traded funds based on altcoins. For example, at the beginning of 2022, trading in an ETF began in Brazil, which is built on DeFi token indices.
How to buy cryptocurrency ETF?
To purchase exchange-traded funds, you need access to the trading platforms of those countries in which crypto-ETFs are traded. To do this, you will most likely need a bank account and the services of a licensed broker. In terms of their status, ETFs correspond to ordinary shares, so a wide range of investors can buy them.
Another option is to use a trading platform that provides access to multiple markets, such as Interactive Brokers or Freedom Finance.
What are the prospects for cryptocurrency ETFs?
Experts expect the launch of spot crypto ETFs in the next 1-2 years. The SEC is currently reviewing several applications at once. For example, from Grayscale. It wants to convert her Bitcoin trust into an ETF. ARK and 21Shares also want to release their own cryptocurrency exchange-traded fund.
In March 2022, one of the largest US brokers, Charles Schwab, filed an application with the SEC to launch an ETF based on its own “cryptoeconomics index.” The underlying assets, the company says, will be “companies that benefit from the mining or use of cryptocurrencies and other digital assets.”
Disclaimer: This information is not investment advice. Assess the risks yourself before making any investment decisions.
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