Cryptocurrency has captured the attention of all sorts of investors – from individual retail investors looking for a home run trade to big institutions launching their own cryptocurrency funds. Some investors have made massive returns from investing early on in crypto, but while there's big potential for gains, there's also potential for big investment losses.
Rather than trying to pick a winning crypto yourself, an ETF can yield investment exposure to a basket of cryptos and the underlying blockchain technology they're built on. Let’s dive into ETF crypto meaning and their exposure to cryptocurrencies!
ETF Crypto Meaning
An exchange traded fund, or ETF, is a financial instrument that tracks the value of a particular asset or a collection of assets. Its main benefit is that it allows investors to diversify their holdings without actually owning any of the assets themselves. For example, a gold ETF would track the value of gold reserves it represents.
Similarly, a crypto ETF would track the value of one or more crypto assets and a Bitcoin ETF would track the value of just bitcoin. Importantly, ETFs are traded on traditional market exchanges rather than crypto exchanges.
How Do Crypto ETFs Work?
The main appeal of crypto ETFs is that they work exactly like ETFs backed by traditional assets. They come in two forms:
Physical-backed: To create this type of crypto ETF, an asset management company must buy some actual coins from the market, just as it would buy shares for a traditional ETF. It can then set up a fund that represents the value of the crypto assets it holds and list it for trading on the stock exchange. If the value of the fund’s digital coins increases, so does the value of your investment.
Futures-backed: In this type of ETF, shares in the fund aren’t based on actual coins but on crypto futures contracts. A futures contract is simply an agreement to buy or sell an asset at a predetermined price at a specified time in the future. These are less risky than physical-backed ETFs because there are no physical assets to be protected. This is the type of Bitcoin ETF the SEC is reportedly set to approve.
Pros And Cons Of Crypto ETFs
Pros of Crypto ETFs
Convenient: When it comes to crypto, the biggest advantage ETFs have over direct investments is that investors don’t have to handle the underlying asset. While crypto exchanges have made it easier to buy and sell cryptocurrency in the past few years, things like setting up digital wallets and understanding how private and public keys work remain hurdles to large-scale crypto adoption. Crypto ETFs let investors benefit from the new asset class with their existing brokerage accounts.
Safe: Since they’re traded to traditional exchanges, all ETFs are highly regulated. This means regulators can monitor and analyze their performance and protect against price manipulation within the ETF markets. Though, the underlying asset’s price can still be manipulated through unregulated crypto exchanges.
Cheap: Buying a large collection of cryptocurrencies is a long and complicated process that involves opening accounts with several crypto exchanges and maintaining numerous digital wallets. Crypto ETFs give you exposure – albeit indirectly – to numerous crypto assets through a single investment. ETF fees are also generally lower than those of traditional managed funds.
Cons of Crypto ETFs
Limited choices: There are few such funds currently available to invest in. But if the SEC were to open the door to crypto ETFs, that could change quickly. Limited choice is a concern at the asset level, too. Traditional ETFs include a wide range of securities to minimize risk. But most crypto ETFs track only a few digital currencies.
Crypto-related risks: While they are in some ways safer than investing directly in cryptocurrencies, crypto ETFs nonETHeless carry over many of the risks of the underlying assets they represent. Cryptocurrencies are volatile and so are crypto ETFs. And physical-backed funds, which buy and store actual cryptocurrencies, need to manage other crypto-related risks, such as hacking.
Controversial: To cryptocurrency purists, these virtual assets represent a hedge against fiat currencies and the central banks and governments that control them. A Bitcoin ETF would by definition be regulated by a government, and investors wouldn’t actually be buying any crypto either.
Crypto ETFs That You Can Consider
Amplify Transformational Data Sharing ETF
With $955 million in assets under management as of spring 2022, the Amplify Transformational Data Sharing ETF is one of the largest funds focused on the cryptocurrency and digital asset economy. It's a good choice to begin a search for the best crypto industry ETFs, although it doesn't directly invest in cryptocurrencies.
The Amplify Transformational Data Sharing ETF contains 47 company stocks. Top holdings in the fund include crypto trading marketplace Coinbase Global (COIN) and semiconductor company Nvidia (NVDA), which designs GPUs, the hardware necessary for crypto mining. Also prominent in this ETF are crypto mining company stocks such as Hut 8 Mining (HUT), HIVE Blockchain Technologies (HIVE), and top Bitcoin owner MicroStrategy (MSTR).
Since these companies hold Bitcoin, having them in the ETF's portfolio gives investors indirect access to potential price increases in the top cryptocurrencies.
Bitwise 10 Crypto Index Fund
The Bitwise 10 Crypto Index Fund is a unique offering on this list. It was originally a private placement fund, but shares can now be bought and sold over the counter. The fund is actively managed, so it has a hefty expense ratio of 2.5% (or $25 in annualized deducted fees from fund performance per $1,000 invested).
The Bitwise 10 Crypto Index Fund invests in the top 10 cryptocurrencies (as measured by market cap) and is rebalanced monthly to account for changes in crypto prices. Bitcoin and ETHereum are far and away the largest cryptocurrencies by size, so they make up a respective 61% and 29% of the underlying portfolio. The next eight cryptos by size – including Solana (SOL), Cardano (ADA), and Avalanche (AVAX) – make up the balance.
Because this fund trades over the counter, it can trade at a severe discount or premium to the underlying crypto prices it owns at times, depending on the demand for shares. Investors should tread cautiously. However, if investing in the largest cryptocurrencies is what you're after, this fund is worth a look.
Siren Nasdaq NexGen Economy ETF
The Siren Nasdaq NexGen Economy ETF is another fund that focuses on companies developing and utilizing blockchain technology. Its assets under management are far smaller than Amplify's similar ETF product, but it does provide a slightly different take on this space.
For one thing, the ETF is composed of 64 stocks. Its focus is broadened to encompass more general technology businesses that might have a crypto or blockchain segment such as IBM (IBM), which is a top holding. It also includes shares of traditional lenders and digital payments networks such as American Express (AXP) and Visa (V) that have started dabbling in the world of crypto. It's a far more diversified way to bet on the growth of the crypto industry. It has an expense ratio of 0.68%.
Closing Thoughts
Cryptocurrencies are still a very new asset class, and ETFs focused on them are even younger. As with any emerging asset class, expect lots of volatility – both in cryptos themselves, as well as the companies focused on their development.
Having read this article would have given you some basic knowledge on ETF crypto meaning, how they work, and their pros and cons. If you decide to invest, bear two important points in mind. Keep any bet small, and stay focused on the long-term potential for cryptocurrency and blockchain technology overall.
