Cryptocurrency ETFs are still relatively new. Yet, they have gained so much attention among crypto investors in recent times. They come with various benefits that most traders cannot ignore. Before dabbling into cryptocurrency ETFs, it is imperative that you know what they are and how they work.
To lend you a hand, this guide will provide an insight into all you should know about cryptocurrency ETFs. Keep on reading to learn more!
What Are Cryptocurrency ETFs
Cryptocurrency ETFs are exchange-traded funds that are used to track the price of digital currencies. Generally, crypto ETFs do not hold cryptocurrency directly. Rather, they are backed by physical cryptocurrencies or may hold derivatives, including futures contracts, which can ensure that the fund can be exposed to crypto prices without necessarily having the digital currency in possession.
While crypto ETFs can track a single cryptocurrency, they can also be used to track a variety of digital currencies. Investors enjoy several benefits by embracing ETFs. Some of these include diversification and low cost of ownership, among others.
How Cryptocurrency ETFs Work
As mentioned earlier, cryptocurrency ETFs provide several benefits for investors. There are basically two types of cryptocurrency ETFs.
The first one is backed by physical cryptocurrencies. The cryptocurrencies are bought by the investment firm that manages the fund and ownership is represented in the form of shares. Investors indirectly own cryptocurrencies when shares in the ETF are bought.
Owners can then become exposed to cryptocurrencies without the associated expenses, as well as the risks, of holding them directly.
Another type of ETFs that investors consider is a synthetic variant that monitors crypto derivatives, including cryptocurrency exchange traded products and futures contracts.
The first cryptocurrency ETF is the ProShares Bitcoin Strategy ETF (BITO), which started trading in October 2021. This ETF can track bitcoin futures prices. Rather than the prices of actual cryptocurrencies, the ETF share price mimics the fluctuation in the price of derivatives.
With this in mind, the price of shares for a cryptocurrency ETF can increase when there is an rise in the price of futures contract. Much like other derivatives, added risk comes with synthetic cryptocurrency ETFs since their operations may not often be transparent.
It encourages diversification
There are almost 1,900 cryptocurrencies available in trading markets, including Teslacoin. The infrastructure that can ensure the purchase and sales of the tokens are undeveloped. While some tokens are available on certain exchanges, others are not.
There are also specific costs that come with the purchase of these tokens. By embracing crypto ETFs, investors can diversify their portfolios without being exposed to the costs of these tokens.
No need for outright ownership
ith cryptocurrency ETFs, investors can gain exposure to cryptocurrencies without incurring the extra expenses that are associated with ownership. Generally, physical ownership of cryptocurrencies comes with additional expenses.
Owning cryptocurrencies also comes with custodian charges. By using digital wallets to store cryptocurrencies, you are also charged an annual fee. All these charges can add up to a significant sum eventually.
Instances of cryptocurrency hacks have been reported since the inception of these nascent assets. For those who are not familiar with how cryptocurrency works, ensuring the security of their cryptocurrency can prove a bit difficult. Cryptocurrency ETFs can offer security functions to the providers of these ETFs.
Investors are fascinated by cryptocurrency ETFs since they can diversify their portfolio, gaining exposure to various cryptocurrencies without necessarily holding these digital assets. However, it is important to understand how crypto ETFs work before embracing them.
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