What is a cryptocurrency ETF?
A cryptocurrency ETF is an exchange-traded fund whose price is linked to one or more digital assets. Why do we need it? How does it work? Let’s find out!
Crypto-ETFs make it easier for stock market investors, both institutional and retail, to invest in cryptocurrency.
The Bitcoin ETF is the most promising exchange-traded fund, and it would be traded in the US market. So far, no application to issue such a device has been approved by the regulator.
Exchanges currently trade bitcoin futures ETFs and shares of crypto companies.
What is an ETF?
ETF (exchange-traded fund) is a fund whose shares are traded on the stock exchange. A fund is a legal entity that has an asset or portfolio of assets on its balance sheet that meets certain criteria. Securities, commodities, bonds, currencies, stock indices, and other financial instruments may be included.
Each share of an ETF is backed by a portion of the fund’s assets. In this way, the ETF holder invests in the fund portfolio but does not directly own its assets.
ETFs are created by specialized firms. They also manage them, such as rebalancing their composition as needed and keeping accounts. BlackRock, Vanguard, State Street, Invesco, iShares, and Charles Schwab are the world’s largest ETF operators.
How are ETFs popular?
ETFs are now one of the most popular investment vehicles. According to Informa Financial Intelligence, the total amount of funds in ETFs will exceed $10 trillion in November 2021, up from $5 trillion in 2018.
It is an appropriate way for institutional investors to invest passively. ETFs, unlike active strategies, do not require their holders to hold and trade the assets themselves, have a simple legal structure and produce more stable long-term results.
Because ETFs have a large number of assets at their core, they allow retail investors to diversify their portfolios quickly and efficiently. Finally, unlike investment funds, exchange-traded fund operators charge their holders a much lower management fee.
Why do we need a cryptocurrency ETF?
Because of an incomplete legal framework and the difficulty of storing digital assets, not all large investors are willing to buy them directly. As a result, ETFs would be a familiar and straightforward way to enter the cryptocurrency market.
An ETF is a well-known legal structure that operates within a conventional financial infrastructure. It is also a highly liquid instrument that can be listed on major stock exchanges in a short period of time, allowing both institutional and retail users to invest in cryptocurrency. The exchange-traded fund’s operator is in charge of holding the underlying asset.
Which crypto ETFs are already being traded?
Today, exchange-traded funds (ETFs) are indirectly related to the blockchain industry, such as those whose price is linked to a basket of publicly traded cryptocurrency companies, and are traded in a number of countries. However, ETFs based on cryptocurrencies receive special attention: in this case, the fund operator purchases digital assets for the fund and thus serves as an additional source of demand in the crypto market. The cost of such instruments is determined by the spot price of crypto assets.
The United States is regarded as the most promising market for spot crypto-ETFs. Since 2018, numerous companies have applied to the SEC for the registration of exchange-traded funds. However, no such instrument has been approved by the regulator.
In February 2021, the first North American spot bitcoin ETF was launched in Canada. The Bitcoin ETF is traded on the Toronto Stock Exchange. The fund’s volume exceeds $800 million.
Furthermore, ETFs that are indirectly related to the cryptocurrency market are traded in various countries.
The Bitcoin Strategy ETF (BITO) from ProShares is one of the most well-known. It was approved by the SEC and listed on the New York Stock Exchange at the end of 2021. The underlying asset of BITO is bitcoin futures contracts, which have been traded on the Chicago Mercantile Exchange since 2017. The fund is estimated to be worth $1 billion as of the end of May 2022.
VanEck and Valkyrie Investments both launched similar exchange-traded funds after receiving SEC approval in late 2021. Teucrium was granted permission to launch a bitcoin futures ETF in April 2022 by the regulator.
Grayscale manages the Future of Finance ETF (GFOF), which invests in publicly traded blockchain and cryptocurrency companies. It plans to list a GFOF counterpart on European exchanges in May 2022.
BlackRock has also launched an ETF based on cryptocurrency companies. Samsung Asset Management intends to list a fund based on blockchain companies on the Hong Kong Stock Exchange.
There are also exchange-traded funds based on altcoins. For example, in early 2022, a DeFi token-based ETF began trading in Brazil.
How do we buy a cryptocurrency ETF?
You must have access to the trading floors of the countries where crypto-ETFs are traded to purchase exchange-traded funds. This will almost certainly necessitate the use of a bank account as well as the services of a licensed broker. ETFs have the same legal status as common stocks, so they can be purchased by a wide range of investors.
Another option is to use a trading platform with multiple market access, such as Interactive Brokers or Freedom Finance.
What are the prospects?
Experts predict that spot crypto-ETFs will be available within the next 1–2 years. The SEC is now considering multiple applications at the same time. Grayscale, for example, wishes to convert its bitcoin trust into ETFs. ARK and 21Shares also intend to launch their own cryptocurrency ETF.
Charles Schwab, one of the largest US brokers, filed an application with the SEC in March 2022 to launch an ETF based on its own securities “The cryptocurrency index. According to the company, the underlying asset will be “Companies that profit from mining cryptocurrencies and other digital assets.
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