Understanding Cryptocurrency Exchange Traded Funds or Crypto ETFs | Concepts & Benefits Explained

Cryptocurrency trading has emerged as one of the most potent and widespread applications of cryptocurrencies in the recent past. And, crypto ETFs are an extremely lucrative avenue for professional cryptocurrency traders. In this blog post, we will look at the concept of crypto ETFs in detail. However, before delving into those concepts, it is important to have a fundamental understanding of ETFs in general.

ETF stands for Exchange Traded Funds. It is a kind of security that aligns itself and tracks a specific commodity, index, or any other asset for that matter. It is also important to note that, just like a regular stock, ETFs can also be traded on any stock exchange and be used to monitor or track the prices of a diverse range of assets. Additionally, ETFs are also often used to track various investment strategies as it often comprises stocks and bonds. All in all, Exchange Traded Funds can be considered as a gamut of securities.

Now that we have a fundamental understanding of ETFs, let us look at cryptocurrency ETFs in specific.

What are Crypto ETFs?

Cryptocurrency Exchange Traded Funds are nothing but baskets or funds made of cryptocurrencies. Similar to general ETFs which track the price of specific commodities or indexes, crypto ETFs track the price of specific digital assets or a wide array of digital assets. For example, a certain crypto ETF might consist of the ModiCoin taken along with two other tokens, and interested investors might be willing to use this to track the prices of all three tokens in real-time

It is important to visualize Crypto ETFs as a single entity consisting of an underlying cryptocurrency or a range of tokens and digital assets. These single entities in the form of crypto ETFs are traded regularly on crypt exchanges, and their share prices fluctuate depending upon the overall market scenario and the sales, supply & demand of the tokens in consideration.

One of the key benefits of crypto ETFs is the low cost of ownership as compared to other crypto funds. Additionally, these are a great avenue for investors to diversify their portfolio of investment without spending on different tokens individually. This is because crypto ETFs allow access to a range of assets under one umbrella.

Types of Crypto ETFs

Crypto ETFs can largely be categorized into two types. Having an understanding of the types of Crypto ETFs will give you a better vision of how to invest in them. Let us have a look.

Some crypto ETFs are backed by physical cryptocurrencies. This essentially means that the ETF owner or the ETF investment firm purchases cryptocurrencies baskets them into multiple funds, and allows investors to buy shares in desired funds without the requirement to buy the tokens individually. In other words, this type of ETF offers indirect ownership of cryptocurrencies through ETF shares. Hence, investors get access to a gamut of digital assets without bearing the expense or risk associated with them.

The other kind of crypto ETF is associated with crypto derivatives like futures contracts and not directly the cryptocurrency itself. Here, the ETF tracks and replicates the price trends of the derivatives instead of the cryptocurrency price itself.

Summing Up | The Benefits & Prospects of Crypto ETFs

The concept of Crypto ETF is an evolving market and there are a lot of regulatory frameworks being developed in this space. However, from an investment perspective, it offers a bunch of benefits. Let us summarize those.

• Crypto ETFs provide indirect ownership of a wide range of cryptocurrencies and digital assets without necessarily bearing the expense of individual assets.
• Crypto ETFs help investors diversify their risk portfolio as the cost of ETF ownership is considerably less as compared to investing in individual assets, one at a time.
• Crypto ETFs make it fairly seamless for investors to track their ROI. Unlike making individual investments in different cryptocurrencies and then monitoring them in silos, crypto ETFs make the job far easier, as it only requires the investors to monitor the price movements of the fund as a whole. In fact, in most cases, the ETF firm or the ETF provider itself handles the entire process of regular monitoring.

All in all, crypto ETFs are an extremely lucrative avenue for traders and investors looking to invest in a wide range of digital assets without necessarily spending a lot of money and enduring a lot of risks. Having said that, these funds do not offer guaranteed returns just like any other fund in the crypto or traditional finance space. So, it is advised to conduct adequate research and due diligence before investing in any cryptocurrency exchange-traded fund.