Decoding Crypto ETFs: Your Gateway to Diversified Crypto Investment

Cryptocurrency ETFs are one of the hotly discussed and debated topics in today’s day and age of cryptocurrency. People have seen and are still seeing a highly charged battle between billion-dollar companies who want to register their ETFs and the U.S regulatory authority SEC, whose chairman Gary Gensler is still resisting the push of registering several ETF applications as he is very sceptical about cryptocurrency in general and doesn’t want the SEC to approve the registration of ETFs so easily until more strict and clear crypto regulations are in place.

However, the main thing to understand is what exactly Crypto ETFs are and why the industry is hopeful that once the ETF applications are approved, the market will see more upward bullish momentum, and people will see it as a desirable commodity to hold.

ETF, or Exchange Traded Fund, is an investment tool that holds an underlying asset, which in this case is a cryptocurrency like Bitcoin or Ethereum. Just like any other stock options, Crypto ETFs are traded on an exchange as a stock. It allows investors to gain exposure to cryptocurrency without purchasing and managing individual assets directly.

In simpler terms, a person can avoid learning the technical of the Self-Custody of a cryptocurrency and so can have a simpler of gaining exposure to the world of crypto. Now that we have a working understanding of what Crypto ETFs are let’s look at how exactly they work. 

How Cryptocurrency ETFs work

If you want to invest in Crypto ETFs, then you should have some understanding of how exactly they work. How will you gain a return on your investment, and what are the fundamentals you should familiarize yourself with before thinking about investing any sum in the ETFs? When someone buys shares in Crypto ETFs, they buy a small piece of the overall crypto portfolio of assets held by the ETF.

Once you have made such a purchase, the value of your ETF will increase or decrease depending on the performance of the underlying asset. For example, you have purchased a Bitcoin ETF. If the price of Bitcoin in the market increases, then the price of your ETF will also increase in value and vice versa.

Another variant of Crypto ETF is the one in which derivates like Future Contracts are tracked. The share price of your ETF will depend on the performance of the derivates rather than the actual crypto itself.

Professional investment managers manage the underlying assets held by a cryptocurrency ETF. They are responsible for monitoring the assets and making adjustments as necessary to optimize returns. This can include buying and selling assets, rebalancing the portfolio, and adjusting the overall investment strategy.

It’s important to note that not all cryptocurrency ETFs are identical. Some ETFs may hold various cryptocurrencies, while others may focus on a specific subset of assets. Additionally, some ETFs may use leverage or other advanced investment strategies to generate higher returns. Investors must understand the ETF’s underlying assets, management, and investment strategies before investing.

Are there Bitcoin ETFs available to buy?

Currently, there are only seven Bitcoin ETFs approved by the SEC, whereas 20 additional Bitcoin ETF filings are awaiting approval from the SEC. The list of Bitcoin ETFs that are available to buy do not own actual Bitcoin. Instead, they hold a Bitcoin futures contract which is the second variant that we had discussed earlier.

The reason why the current available Bitcoin ETFs don’t own a Bitcoin is because the SEC has been very vocal in their concern about Bitcoin being traded in an unregulated environment. SEC’s chair Gary Gensler has stated on different occasions that tighter regulations should be set into place before allowing firms to register their ETFs with the SEC.

The futures market is a proven and regulated market which the SEC chair believes is the safest approach for Bitcoin ETFs. That’s why the companies that are currently allowing the purchase of Bitcoin ETFs gained approval from the SEC because they are working on the principle in which they track Bitcoin Future Prices, rather than owning actual Bitcoin. 

Here are some examples of Bitcoin ETFs currently available for trading.  

1. Proshares Bitcoin ETF (BITO): This is the largest Cryptocurrency Bitcoin ETF available to trade in terms of Assets Under Management which amounts to nearly $1.1 Billion. The investing strategy for this ETF is Bitcoin Futures.
2. Proshares Short Bitcoin ETF (BITI): This ETF’s investing strategy is the Decline in Bitcoin Futures; it has $80 Million in assets under management.
3. VanEck Bitcoin Strategy ETF (XBTF): XBTF uses U.S. Treasury bills as collateral to manage risk, gain exposure to Bitcoin futures contracts, and adjust its position over time to track the performance of Bitcoin. This strategy helps balance potential gains and losses in the ETF’s Bitcoin investments. 

List of Bitcoin ETFs available for trading

The expense ratio in a Bitcoin ETF refers to the annual fee or cost associated with managing and operating the ETF. It represents the percentage of the ETF’s assets that are deducted each year to cover various expenses, including management fees, administrative costs, custodial fees, marketing expenses, and other operational costs. So, for example, if a Bitcoin ETF has an expense ratio of 0.75%, it means that for every $10,000 invested in the ETF, you would pay $75 in annual fees.

Benefits of investing in a Cryptocurrency ETF

A lot of debate is currently going on about whether investing in Bitcoin ETF is going to be useful. We haven’t even taken into consideration the reluctance the SEC is showing in delaying the approval of so many upcoming ETF projects that are backed by companies that have billions and trillions of dollars in assets.

The general belief in the market is that once those Spot Bitcoin ETF applications are approved, the crypto market will see a huge pump in the price of Bitcoin tokens and with that, the rest of the crypto tokens will rally as well. But, keeping these predictions and sentiments aside, let’s see what advantage anyone holds who wishes to invest in crypto ETFs.

The first thing that comes to the top of the mind, and which we have discussed earlier, is that ETF investors will be able to Gain Exposure to the cryptocurrency market without directly investing or managing any crypto asset.

You need to have a very good understanding of the workings of the crypto market, not to mention being able to read charts, do technical analysis, keep up with all the current news and trends of the crypto market, judge the bullish and bearish sentiment of the market and then making your trade decisions accordingly. There are so many variables involved that this is not the cup of tea for everyone.

To save you from going into so many technicalities, crypto ETFs offer you a straightforward way to invest in the asset class. Also, crypto ETFs do have some checks and balances on them through regulations defined by the relevant authorities. This gives the investors some level of protection and assurance as opposed to investing in nonregulated commodities.

Also, keep into account that ETFs regularly disclose their holdings which allows investors to see which cryptocurrencies are in the fund. The transparency allows investors to make informed decisions. Investing in crypto ETFs may offer tax advantages compared to trading cryptocurrencies directly, as gains in ETFs may be subject to different tax treatment.

Some Final Advice

Investing money in any cryptocurrency token, ETF, or stock is a risky endeavour. Don’t go blindly into investing in a commodity that you know nothing about. Remember to do your Due Diligence whenever you are about to undertake such actions that can make or break your financial portfolio. Avoid taking unnecessary risks and always stay up to date with the current trends of the market.