A Beginner’s Guide to ETFs
I will assume that you already know what cryptocurrencies are. Cryptocurrencies have grown massively over the past decade, and if you would like to speculate on the price of cryptos without actually buying any digital coins, ETFs are the best option.
Cryptocurrency investors find the industry full of uncertainty and plagued by volatility, which makes them wary of joining in on the crypto bandwagon. However, the need for an increase in investments and the price of cryptocurrencies has made crypto ETFs one of the most sought after potential futures of this market. Will ETFs revolutionize cryptocurrency investing? You will only be able to analyze that after reading the text that this article follows!
To further understand ETFs, this piece will be discussing cryptocurrency ETFs, while hammering home on its history.
What is a Cryptocurrency ETF?
An exchange-traded fund (ETF) is a basket of assets that can be bought and sold on a stock market similarly to the way that investors trade ordinary shares in a company. Cryptocurrency ETFs works just like any other ETF, but instead of tracking an index or a basket of assets, it will be monitoring one or more digital tokens. It gives a better alternative to setting up and operating one or multiple digital wallets to acquire and track numerous cryptocurrencies.
As cryptocurrency ETFs track the price of one or more digital tokens, they will also provide exposure to cryptocurrency price movements without some of the risks and drawbacks associated with actually owning any digital currency.
Precisely, crypto ETFs track the price of digital currency by purchasing and storing the coin and then dividing shares in the ownership of those tokens up between shareholders. Additionally, the crypto ETF can own bitcoin futures.
How do Cryptocurrency ETFs Work?
A new cryptocurrency user can be faced with a lot of challenges when buying and selling cryptos. From setting up and maintaining one or more digital wallets, to dealing with the threat of hacking and theft and understanding the difference between private and public keys, these are all significant barriers crypto newbies encounter.
Nevertheless, cryptocurrency ETFs are based on one of two approaches to curb these obstacles:
- Physical-backed crypto EFTs – it owns any digital coins it tracks, and you can buy shares in the ETF. Interestingly, your investment will increase if the value of the digital currencies held by the ETF rises.
- Futures-backed crypto ETFs – this type of ETF doesn’t base its fund in actual coins but on bitcoin futures contracts (an agreement that sets a fixed price and date for buying and selling an asset). It allows investors to profit in either bearish or bullish markets while also eliminating the risk of having their crypto assets stolen or hacked.
Cryptocurrency aficionados believe that the crypto ETF is the answer to the falling crypto market because they provide a way for investors to minimize their risk. Investors will not buy the cryptocurrency itself, but instead, they will purchase the shares of the fund that owns the basket of digital tokens. If the fund owns the cryptocurrencies, it gives better security to investors as compared to one who owns his/her own digital token.
The fact that digital wallets and exchanges are highly susceptible to hacking and theft, cryptocurrency ETFs will have more security in terms of the custodian that supports the ETF. Also, there are cases where the fund insures the held digital tokens; thus, one is able to recover his/her stake in the case of any complications.
Additionally, ETFs allow investors to track multiple cryptocurrencies at once. Currently, if you wanted to own different digital tokens as an individual, you would have to hold multiple digital wallets and accounts across various digital currency exchanges. This would be very cumbersome and expensive. On the flip side, ETFs will allow investors to track multiple cryptocurrencies without having to manage each one of the volatile cryptos.
History of ETFs
Cryptocurrency ETFs have had an issue with the U.S. Securities and Exchange Commission (SEC) to date in the development of the platforms. There’s been a fair bit of media coverage throughout 2017 and 2018 focused on the efforts of multiple ETF providers to get SEC to green-light their proposals for a crypto-based ETF. SEC emphasizes security, market volatility, and manipulation as well as the protection of the investor’s interests as part of the main reasons in approving ETFs.
The first rejection occurred in 2017 when the first application of a Bitcoin ETF proposed by the Winklevoss twins was rejected on the basis of the lack of regulation for Bitcoin. Efforts from SEC Commissioner Hester Pierce ‘Crypto Mum’ to approve it were futile. She had published a letter of dissent disagreeing with her colleagues on the disapproval of the Bitcoin ETF in question.
Several other ETFs have been put forth, including last year’s rejection order for Bitwise Asset Management’s bitcoin ETF proposal, but the SEC rejected them on the same grounds. The SEC is still turning down proposals from different applicants to date.
The most current incident happened in late February, where SEC disapproved of Wilshire Phoenix’s bid for a bitcoin-based exchange-traded fund. Our Crypto mum published yet another letter of dissent to the agency on the matter. Many crypto enthusiasts believe that she could cause the final push that the SEC needs to allow a cryptocurrency ETF to run on a U.S. exchange.
If the SEC decides to launch a crypto ETF in the U.S., it would be a step forward in cryptocurrency’s battle for widespread adoption. Although the approval of one might take some more time, a properly regulated and professionally managed ETF could represent a safer option for investors concerned about the risks of buying digital currency. Also, it could help bridge the gap between the world of crypto exchanges and more traditional investment tools.
Closing Thoughts
Cryptocurrency ETFs have both been controversial throughout its history and has also been popular in the crypto community. Nevertheless, the U.S. Security and Exchange Commission have not given it a second thought. Even a good amount of efforts from several influential people in the industry to get SEC to approve the crypto-based ETF proposals have turned unsuccessful.
The approval of a cryptocurrency ETF would definitely boost the markets and remove the constraints we are bounded by. It could also be a big step towards global adoption, because investors waiting on the sidelines will feel safe to invest with the regulations in place.