Introduction
If you have a basic idea of the crypto market and have been following the news for a while now, you might already know about exchange-traded funds or ETFs. Getting a spot ETF approved in the US and other countries is the holy grail of the crypto market, as it will help the industry in mainstream adoption.
Crypto enthusiasts have been pushing for the approval of a spot Bitcoin ETF in the US, but it is yet to be approved by regulators. The SEC has approved some Bitcoin futures ETFs.
The difference between spot and futures Bitcoin ETFs is great, as spot ETFs trade on the spot price of Bitcoin, while the futures ETFs trade on the price of Bitcoin determined by the index.
If Bitcoin spot ETF gets approved in the US, it’ll help the cryptocurrency shed its perception of being an unregulated asset to an original and trustworthy asset. The Bitcoin ETF will make the cryptocurrency equal to gold and silver as an investment vehicle. This is due to the proper market analysis and strict regulation applied by the authorities and ETF users in the traditional market.
Some crypto experts also believe that the approval of Bitcoin spot ETF will increase Bitcoin’s price as well. That’s because the ETF will open the cryptocurrency to a huge investor market and will help the investors buy and hold Bitcoin to solidify their crypto investments. This will drive up the demand for Bitcoin and will possibly increase its value as well.
During the crypto bull run in 2021, everyone was hoping to see the BTC spot ETF approved by the SEC in 2022.
However, certain factors, like weak BTC futures ETFs, a new SEC chairman who strongly opposes cryptocurrencies, a continued bear crypto market in 2022, and others caused multiple BTC spot ETF rejections, and stores still have no hope of approval.
In this guide, we will learn more about Crypto ETFs and will understand when an ETF will be approved by the US authorities.
What is an Exchange-Traded Fund (ETF)?
ETFs are used as investment funds. These include a collection of stocks, currencies, commodities, and bonds listed on stock exchanges. These funds work by keeping a track record of the price fluctuations in the underlying asset. Although utility tokens are only virtual currencies, they might also be included in ETFs.
Although ETFs are exactly like mutual funds, the shares in ETFs stay available for trading 24/7. This is just like buying and selling company shares directly on the stock exchange. On the other hand, mutual funds can only be traded during trading hours and can’t be traded after the market closes.
Introduction to Crypto ETFs
Crypto ETFs actively track the price movements of the included cryptocurrencies. These ETFs work exactly like a common ETF and can be traded like any other share on the exchange.
If they’re approved, crypto ETFs will help investors around the globe to invest in a safe asset that complies with all the regulations of the stock market.
This will provide the investors with a simple investment solution, as owning cryptocurrency is usually tricky due to all the scams and fake cryptocurrency exchanges out there. Between January and June of 2022, users lost around $2 billion in crypto investments. This is why a reliable and traditional investment vehicle is needed by investors sitting in the traditional market.
Any company issuing the crypto ETF and listing it on an exchange is first needed to buy and hold the underlying cryptocurrency. They can then introduce an exchange-traded fund for investors to invest in. This is how investors can remain in the traditional market while also benefiting from the volatility of the underlying cryptocurrency.
Blockchain ETFs
ETFs provide investors with a secure way to invest in cryptocurrencies and blockchain projects. Blockchain investments might need users to invest in blockchain ETFs. When investors invest in ETFs, they work just like holding shares of a blockchain company in the stock market.
There are a few blockchain ETFs already doing well in the market. For example, BLOK, a blockchain ETF, was launched in 2018. Around 80% of all the funds in BLOK are centered around companies waiting in the blockchain industry.
Another crypto ETF, named Schwab Crypto ETF, was launched by Schwab (An Asset Management Company) in 2022. The ETF provides its investors with exposure to the companies which invest in crypto projects.
However, since the ETF doesn’t provide investors with direct exposure to crypto investments, it can’t be termed a crypto ETF. This type of ETF is called crypto-themed ETF, and there are lots of them in the market.
If crypto ETFs are to become commonly listed on exchanges, they’ll need approval from relevant financial authorities in the targeted jurisdiction. For example, crypto ETFs that need approval in the US must go through a strict regulatory check by the SEC (Securities and Exchange Commission).
All of the ETFs, including traditional assets, can be conveniently bought from trading applications like Robinhood, Fidelity, Ameritrade, and others.
The main difference between ETFs and mutual funds is that the former trades throughout the day (24/7), while mutual funds can’t be traded when the market shuts down at night.
Bitcoin Spot ETFs
Simply put, Bitcoin spot exchange-traded funds, or Bitcoin Spot ETF, tracks the price of Bitcoin on conventional exchanges and let the investors invest in Bitcoin through conventional means. If Bitcoin Spot ETF gets approved for trading in the US, it will be openly available for trade on stock exchanges like the New York Stock Exchange (NYSE).
However, because of the absence of approval by the SEC, Bitcoin still can’t be traded on stock exchanges, and investors have to use crypto exchanges to buy, hold, and trade Bitcoin instead. So, Bitcoin can’t be traded in the form of an ETF just yet.
Since professional money managers can make Bitcoin ETFs available in the market, this is how investors can easily hold Bitcoin ETFs and benefit from the cryptocurrency without actually holding the cryptocurrency directly.
Whenever the price of the underlying cryptocurrency (Bitcoin, in this case) fluctuates, the ETF price fluctuates with it. For example, whenever the price of Bitcoin rises in the crypto market, the corresponding Bitcoin ETFs value will also replicate the same price increase, and the investors will benefit from the positive price change.
Bitcoin Futures ETFs
Bitcoin futures ETFs can be listed as securities. These ETFs can be used by investors to benefit from price fluctuations in the BTC futures contracts. These ETFs don’t reflect the current value of BTC in the spot market.
This is regarded as speculative trading, as traders are buying and selling the cryptocurrency according to an estimated future price.
Since futures ETFs provide high amounts of leverage, traders can start with a small investment amount as well.
Some of the most popular BTC futures ETFs include XBTF, BITO, and BTF.
Regulatory Hurdles
Despite its huge potential, Bitcoin ETF has still not received regulatory approval from any regulatory body around the globe. Even the applications are often rejected, and most of them are still under review by the authorities.
For example, the SEC has already rejected the listing of Bitcoin ETFs twice. The last rejection was in 2018. Ever since then, the crypto market has shifted its focus to countries like Australia and Canada, which are more likely to approve the Bitcoin ETF.
The Bitcoin ETF approval application has recently gotten some hope from the Canadian authorities. The country is already the first one to approve a crypto ETF. Upon approval in 2021, BTC ETF attracted over $420 million in investments in just under 48 hours.
The ETF was listed on the Toronto Exchange (TSX) and had the BTCC symbol. Another Bitcoin ETF named EBIT was also listed on TSX shortly after BTCC. EBIT follows the price of Bitcoin against the US dollar in real time.
By now, Canada has approved and listed around 40 crypto ETFs, including Bitcoin and Ethereum. The value of these 40 ETFs is currently sitting at around $4.3 billion.
Crypto ETFs: Benefits and Drawbacks
Have you ever wondered why are these crypto ETFs so desirable for investors? Well, that’s because the approval of crypto ETFs will provide the crypto industry with more authenticity in the eyes of potential investors, eliminate security concerns, and will make cryptocurrencies like Bitcoin and Ethereum available for investors who aren’t crypto enthusiasts but are just looking to invest in reliable assets.
Let’s take a brief look at some of the most prominent benefits of crypto ETFs.
Benefits
Bridge Between Traditional Finance and Crypto Markets
Although the crypto market hit the $2 trillion mark in market cap in 2021, it is still very small as compared to the traditional finance market, which has trillions of dollars sitting in various investment vehicles.
For example, BlackRock, which is just one of the many investment funds in the traditional finance market, has over $10 trillion worth of assets under its name.
Crypto ETFs can serve as a bridge between the traditional finance market and the crypto market. This will open both markets for one another, and increased participation from investors is likely to benefit both of these markets, especially the crypto market.
Enhanced Convenience
Logging into an unknown cryptocurrency exchange, getting the account approved, and then buying virtual currencies and holding them safely in your crypto wallet can be a hassle.
Cryptocurrency ETFs help the investor dodge all of the steps mentioned above and directly invest in the cryptocurrency from their stock exchange’s dashboard. This also eliminates the need to obtain technical knowledge for investors.
So, crypto ETFs can make investing in cryptocurrency a lot easier and can gather mainstream investments for the betterment of the crypto economy.
Better Confidence
Investors who have reservations about the decentralized and unregulated nature of cryptocurrencies can securely and confidently invest in crypto ETFs. That is because they are created and controlled by highly regulated companies.
So, investors who only prefer traditional financial tools and marketplaces can finally get the chance to invest in cryptocurrencies by using the conventional means they already use every day.
Diversification
As you might already know, ETFs contain more than one asset. For example, if you are investing in Bitcoin ETF, it might contain Ethereum or even traditional stocks like Google, Apple, and Facebook stocks in it.
Crypto ETFs are just like index funds with a few key differences. That is why they are one of the best investment choices investors can make to diversify their portfolios.
With the help of diversification, investors can minimize the risk of losing money by only investing in volatile cryptocurrencies. Since crypto ETFs also contain traditional stocks, they can balance out the volatility factor and make the investment worthwhile.
Moreover, since crypto ETFs are available on traditional stock exchanges, investors can easily use their existing portfolios without signing up and getting approved on any new platform.
Easy Tax Filing
Since cryptocurrencies are still unregulated, some financial institutions do not allow direct investments in digital currencies. On the other hand, since crypto ETFs are listed on regulated stock exchanges, you can directly invest in them, and this makes the tax filing process a lot easier.
Drawbacks
Although crypto ETFs have lots of benefits for investors, there are some drawbacks as well. Let’s take a brief look at some of the drawbacks of investing in crypto ETFs.
Centralization
With the invention of cryptocurrencies, the reliance on conventional banks has drastically reduced. Moreover, cryptocurrencies provide their users with privacy, which is not usually present in fiat currencies.
Decentralization is one of the key reasons why many people invest in cryptocurrencies. However, when crypto ETFs are listed on traditional stock exchanges, they lose the decentralization factor.
A third party acts as the custodian to hold your funds when you invest in crypto ETFs. Since this removes privacy from the equation, the benefits attached to the decentralization of digital currencies are watered down.
Decreased Liquidity and Fungibility
Whenever you invest in any cryptocurrency like Bitcoin or Ethereum, you can exchange them for one another quite easily. Moreover, almost every crypto exchange now lets you pay for goods and services with your cryptocurrency holdings.
However, as soon as you invest in crypto ETFs, you lose that fungibility and liquidity. Crypto ETFs can’t be traded for other cryptocurrencies, and you cannot pay for goods and services with your crypto ETF, which is easily possible with cryptocurrencies held in crypto exchanges.
So, investing in crypto ETFs comes at the cost of losing liquidity and fungibility.
Less Accuracy
As we have already discussed, crypto ETFs can contain more than one asset and even some non-crypto ones. Whenever you invest in a crypto ETF, various crypto and non-crypto assets are added to your portfolio. This makes tracking accuracy considerably low.
For example, if the price of Bitcoin increases by 5% in a week, the ETF might only show a 3% increase. This is why direct investments in cryptocurrencies are always better if you want to cash out with an accurate price whenever you need the funds.
Since crypto ETFs might have a slight delay in price tracking, the price of cryptocurrency might come back down before you can cash out the profit.
High Management Costs
While crypto ETFs are convenient to invest in, they come with a management fee. The fee is calculated as a percentage of your total investment. So, crypto ETFs can cost you a lot in terms of management fees in the long run.
How to Invest in Crypto ETFs?
Crypto ETFs are great for conventional investors who don’t want to make crypto wallets and manage their crypto investments directly but still want to invest in the crypto market to diversify their portfolios.
Here are a few simple steps you can follow to invest in crypto ETFs.
Choose a good traditional stock broker like Robinhood or TD Ameritrade. Sign up with them, and complete all the verification steps to get ready for trading.
If you’ve already invested in traditional stocks, you’ll have to decide how much you want to invest in crypto ETFs to make them a part of your portfolio.
Once your account is sufficiently funded, you can choose the ETFs you want to invest in and proceed to invest.
Your broker might also have an automatic investment plan available if you want to invest continuously in crypto ETFs on an ongoing basis.
Takeaway
Crypto ETFs are just like index funds but contain cryptocurrencies instead of traditional stocks. However, crypto ETFs are still not approved by the SEC and are still under review. Countries like Canada have already started to accept crypto ETFs.
Once crypto ETFs get accepted by traditional financial institutions, they’ll bridge the gap between the crypto market and the traditional finance market. It’ll further improve the exposure of investors in the crypto market and will drive lots of investment.
