The Pros and Cons of Accessing and Investing Digital Assets through Crypto ETFs
Several types of cryptocurrency-focused exchange-traded funds have been launched globally in recent months. Some focus on investing in virtual assets, while others are geared toward stocks related to blockchain and other crypto-related areas. These funds have attracted higher volumes of investors due to their ability to provide a wider pool of funds. This article shall look into the pros and cons of accessing and investing in digital assets through crypto EFTs. Let's dive in:
What is a Crypto ETF?
An exchange-traded fund, or an ETF, is a financial instrument that allows investors to track the value of various assets. It's beneficial for long-term investors and individuals who merely want to diversify their holdings. A gold ETF, for example, would monitor the value of the gold assets it represents.
On the other hand, a crypto ETF would follow the value of one or more crypto assets, whereas a bitcoin ETF would track the value of only bitcoin. Rather than crypto platforms, ETFs are traded on standard market exchanges.
Pros of Crypto ETFs
1. Exposure to Crypto
The most significant advantage of bitcoin ETFs is that they give exposure to cryptocurrencies without the added costs of ownership. Physical possession of cryptocurrency includes a slew of extra costs. Custody fees, for example, are connected with cryptocurrency.
An annual fee is also charged for secure digital wallets that store acquired bitcoins. These fees add up to a sizable annual bill. Other hidden expenses associated with cryptocurrency ownership include transaction and network fees. Cryptocurrency ETFs pass these costs on to ETF providers.
2. Easier Investment Method
Unlike traditional investments, investors can buy, hold, and sell cryptocurrencies through a standard brokerage account. It eliminates the need to set up a physical wallet and trade on unregulated exchanges.
Most investors already have a bank or brokerage account to trade exchange-traded funds (ETFs). It eliminates the need to set up a separate account for cryptocurrencies.
Despite the various technical features of cryptocurrencies, such as blockchain and halving, it is still hard for average investors to fully grasp their potential. Hence, investing in an exchange-traded fund is beneficial for those not technology experts.
3. Safe(r)
Since ETFs are traded on traditional exchanges, they are highly regulated. It means that regulators can monitor and prevent price manipulation. Despite the various security measures in place, many of the assets in cryptocurrencies are prone to theft and hacking. Hence, this has raised concerns about their safety.
A cryptocurrency ETF is different from a traditional mutual fund as you don't own any crypto. Instead, it uses a security team that the providers contract.
4. No Wallet Password Mishaps
To access your bitcoin wallet, you'll need a password. Because of the industry's decentralized character, no authority or organization controls your account and can assist you in managing your password if you forget it. That implies that if you forget your password, you won't be able to recover it.
When you invest in crypto EFTs, you receive access to the crypto market without remembering an irretrievable password. You log into your brokerage account as usual to access your funds, and if you forget your password, your brokerage can assist you in resetting it.
5. Cheaper
Getting started with cryptocurrency is a complex process involving opening multiple accounts and maintaining multiple digital wallets. One way to start is by investing in exchange-traded funds (ETFs). These are typically lower-cost alternatives to traditional managed funds.
Cons of Crypto ETFs
1. Crypto-related Risks
While crypto ETFs are safer than investing directly in cryptocurrencies in several respects, they still involve many of the risks associated with the underlying assets. Cryptocurrencies, like crypto ETFs, are volatile. Other crypto-related risks, including hacking, must be managed by physical-backed funds, acquiring and storing genuine cryptocurrency.
2. Limited Choice
Currently, there are only a few crypto ETFs available to investors. If the Securities and Exchange Commission approves them, they could quickly become more widely available. However, there are also concerns about the lack of choice and the risk of investing in a new asset class.
If you hold Bitcoin or other cryptocurrencies, you can use them to buy products or make payments just like ordinary cash. Furthermore, any gain in value compared to your native currency will benefit you. You cannot make (or receive) payments with a Crypto ETF; you can only profit from positive price developments.
3. Extra Costs
Investing in cryptocurrencies directly would not incur fees if investors choose to invest in ETFs instead. In addition to transaction costs (the charges for trading shares of the ETF), management fees (the costs associated with holding our shares) also contribute to the overall cost of ownership. Crypto ETF fees can be relatively high - often up to 2% per year. Compared to owning cryptocurrencies directly, these expenses will hinder returns in the long run.
What's Next for Crypto ETFs?
The rapid emergence of the crypto asset class has created a massive opportunity for the ETF industry. Since the sector has only just become a $9 billion industry, it is hard to predict the market's direction. Notably, the first Bitcoin exchange-traded fund (ETF) was launched in Canada in 2021.
With the emergence of more cryptocurrencies in North America, it is expected that more investors will be able to access these assets. It would allow more companies to create differentiated offerings. With the emergence of Active Non-Transparent ETFs, more active managers may be able to step up and create their crypto strategies. Despite the increasing number of products and the complexity of the market, it is still expected that crypto ETFs will remain a significant part of the asset class.