What Is Cryptocurrency ETF?

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by Adedamola Bada · 6 min read
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What Is Cryptocurrency ETF?

Cryptocurrency ETFs are actively discussed within crypto community nowadays. But what do they represent themselves and what benefits do they offer? Check out this guide to find it out.

It’s widely theorized that cryptocurrency ETFs (Exchange-Traded Funds) could expose the cryptocurrency markets to various institutional investors which would help boost the market values of cryptocurrencies.

In this guide, we will give you an insight into what a cryptocurrency ETF is, thereby exploring its features.

What is an Exchange-Traded Fund (ETF)?

An ETF is a fund that provides simplified access to a diversified collection of securities that include bonds, investment strategies, stocks, or commodities. With lower fees, increased liquidity, and transparency of operations, ETF offers individual investors the purchase of shares in the funds.

The size of the shares acquired grants the investor a certain percentage of the profits made from the interest and dividends of the fund. These shares can then be traded on a top-tier stock exchange, like the NASDAQ or New York Stock Exchange daily, just like stocks.

Gaining momentum in the stock markets, ETFs make use of the ‘indexing’ investment strategy to create a cost-effective platform for investors to take part in. There are tax benefits available on ETFs which, when compared, are better than a mutual fund.

The security risks of investing in an ETF are also much lower because of the diversification and passive management through index-tracking of assets.

What is a Cryptocurrency ETF?

A cryptocurrency ETF offers a basket of a diversified portfolio of cryptocurrency tokens/coins for investors to trade in. This is much better than setting up and operating one or multiple digital wallets for the purpose of acquiring and tracking multiple cryptocurrencies.

Cryptocurrency ETFs move away from the main principle of cryptocurrencies which is based on the decentralization of its system, but rather offers a more regulated form of trading. This, however, poses a concern for the cryptocurrency community because of the economic focus on trading and operations.

 The ETFs are more secure because they are less open to hacks and thefts of assets thanks to the existence of a custodian for the safeguarding of the ETF assets.

It’s also believed that crypto ETFs are able to attract the attention of institutional investors to the crypto markets which could result in the growing market values of cryptocurrencies.

History of Crypto ETFs

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Photo: Pixabay

The regulatory approval of cryptocurrency ETFs by the U.S. Securities and Exchange Commission (SEC) has been the main issue, to date, in the deployment of the platforms. The SEC also emphasizes security, market volatility, and manipulation as well as the protection of the investor’s interests as part of the main concerns in green-lighting a cryptocurrency ETFs right now.

The first application of a Bitcoin ETF proposed by the Winklevoss twins in 2017 was rejected on the basis on the lack of regulation for Bitcoin.

Several other ETFs, like NYSE Arca’s SolidX Bitcoin Trust ETF and an ETF from Grayscale Investments, has also been put forth but rejected on the same basis with the SEC stating that:

‘‘It does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices.’’

However, with the SEC still turning down proposals from different applicants, cryptocurrency ETFs have been garnering wide support of the public opinion. The SEC is gradually warming up to the idea of a cryptocurrency ETF, although the approval of one might take some more time up till the time that the cryptocurrency markets demonstrate better stability.

With a notable number of blockchain ETFs being introduced into the markets as well as the Commodities Futures Trading Commission (CFTC) approving trades in Bitcoin futures, it is only a matter of time before the cryptocurrency ETFs are approved by the regulators.

How to Invest in Cryptocurrency ETFs?

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Photo: Pixabay

There are limited options for investors looking to delve into cryptocurrency ETFs due to the disapproval of applications, but there are still other platforms that offer similar functionalities but not quite the same. Each of these platforms offers its own unique set of services.

Bitcoin ETFs like the Bitcoin Investment Trust (GBTC), a Bitcoin trust fund owned by Grayscale, is available for trading by accredited investors. This fund owns a large amount of the Bitcoin asset suitable for professional investors and traders to acquire and sell shares through an existing account on the platform.

GBTC charges a 2% annual management fee for the ownership and security of the funds. Although the fee is higher than most traditional ETFs, the trust fund offers direct access to Bitcoin and runs a very low risk of being hacked or theft.

The main issue of the GBTC is the premium incurred in owning shares of the trust fund, with the price of the shares being relatively higher than that of the actual Bitcoin value. The difference of the shares and Bitcoin value closes at a 42% difference on an average day which can be an eyesore for an investor willing to obtain large shares of the fund.

The blockchain ETFs adopts the blockchain technology in providing cryptocurrency assets or blockchain technology investments to the investors. There are several blockchain ETFs in existence like Amplify Transformational Data Sharing ETF and Reality Shares NASDAQ NextGen Economy ETF.

Amplify Transformational Data Sharing ETF is an actively managed fund with a net assets’ worth of over 100 million USD that provides exposure to investments in several industrial platforms actively involved in the development of the blockchain technology. These platforms include banks, technology, software, commercial services, and several others.

Reality Shares NASDAQ NextGen Economy ETF is a fund that also gives investors access to shares ownership which is being tracked by its own Blockchain Economy Index. The fund’s investment portfolio is also diverse and covers multiple industries for the sole purpose of blockchain development — industries such as commerce, communication services, and information technology, to name a few. The fund has USD 70 million USD worth of assets under its name.

There is also an option of investing in approved international ETFs that offer services similar to those of a cryptocurrency ETF. These options are the only ones available for now until the approval of a digital cryptocurrency ETF is made possible by the U.S. SEC. Such approval would boost the markets and remove the constraints we are bounded by.

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