As cryptocurrency rises in popularity, there have been more terms and concepts to learn, one of them being cryptocurrency exchange traded funds, or cryptocurrency ETFs for short. This refers to a fund filled with one or more digital tokens that are indexed. With these in mind, there are many positive outcomes that may be enabled when coming into this technology.
These things work the same way as stocks; they can be traded anytime and are open to investment. Doing this increases efficiency by lowering costs, making operations work intensively, giving outsourcing knowledge, and many more benefits. Besides that, there are advantages pertaining to its ability for diversification, tax benefits, and even trading flexibility.
Since this may be a relatively new concept, here’s how crypto ETFs work. There will be two types, one that is backed by physical cryptos and one that is a synthetic variant. The first type can be indirectly bought by the managing firm, and the ownership of that crypto is represented by shares.
Therefore, people can benefit from the exposure they get to the crypto while eliminating the risks of owning them in a more outright way. The second type focuses on more derivatives like futures contracts and cryptocurrency exchange-traded products. This may have a more complicated operation process as the implementation may not always be transparent.
The invention of ETFs has been mostly beneficial for crypto enthusiasts as it boosts liquidity and validates this for investment purposes. Investors don’t need to worry about external assets and its management, making it very convenient for its users. There’s also no need to worry about the concepts being complicated to follow as crypto ETFs work using traditional exchanges. Therefore, there would be better security and monitoring as prevention of price manipulation can be done easily. This is something any unregulated cryptos could never offer.
Not to mention, investing in cryptocurrency exchange traded funds would mean that investors’ money would be safer and more effectively used as costs are lower. Investors can also engage in short-selling in order to make the best out of a situation and capitalise on crypto prices that may be low at certain times. These ETFs can hold different types of assets, including derivatives and not the actual crypto, as this medium is still deemed too risky.
The price mechanisms in crypto ETFs also mirror the ones that exist within the real blockchain, e.g., Bitcoin. With this logic, we can see that, for instance, a 10% fluctuation in Bitcoin would mean that the ETF version would also have that same fluctuation. However, this may be inaccurate as cryptos are unregulated, making them prone to errors and mess-ups that need intensive monitoring.
Now that you know the basic knowledge pertaining to crypto ETFs, let’s take a look at the best examples of crypto ETFs.
There are assets worth $47.9 million under the management of this crypto ETF. It is also an advantage that they are an experienced asset manager, both traditional and digital, already trusted within the community and guaranteed to help. Even though Valkyrie had a slow start, it is not an important aspect since demand is already strong. If given time, investors will soon cave in and invest in cryptos that can fit their needs.
This is actually the first U.S. ETF to ever introduce the concept of Bitcoin futures to investors. They provide the contracts with the shortest expiring rates as well as they enable investors to invest in this indirectly.
Another advantage if one wants to invest in this ETF is that the U.S. Treasury Bills and Repurchase Agreements can be used as an investment so it can be used as leverage. Compared to regular crypto markets, BITO promises that it offers better liquidity with a bigger volume than regular crypto markets. Besides that, it also offers lower fees and better opportunities.
Owning assets worth $8.1 million and an expense ratio of 0.65%, this ETF has many advantages. Also known as BITS, this ETF invests in blockchain-related equities like digital asset mining, blockchain, transactions, and many more.
This ETF plans on making the best out of both worlds by finding the middle ground between Bitcoin futures and its related equities. By doing this, Global X can efficiently prevent investors’ concerns from happening and actually implement an effective allocation of resources. If this can be done, prospects of this ETF will skyrocket as well as its performance.
Also known as GTBC, this is not something that is purely an ETF or even a fund; this is something that we call a closed-end grantor trust. This refers to the occurrence of when a fixed number of shares are issued when it does an “initial public offering”. Afterward, those shares go through a process called “over the counter” trading. With this feature in mind, GTBC can trade using a discount or a premium, making their transactions even more convenient. Other information to know is that GTBC currently owns $25.6 million worth of assets.
Finally, this last ETF is passively managed, consisting of stocks that use it for their own businesses. In this, there is a fairly unfamiliar concept called the “blockchain score”. This methodology is implemented onto companies by scoring them based on how able they are to benefit from blockchain technologies.
This ETF’s contents are actually also diversified, with many well-known brands having a holdings account. This is especially popular in the financial, technological, and communications sectors. Being a very global ETF to which many parties can have great access, this may be an ETF with a great prospect.
With all this knowledge, you can finally have some insight into what cryptocurrency exchange traded funds are, their benefits, how they work, and the best examples.