Cryptocurrency exchange-traded funds (ETFs) follow the price of cryptocurrencies. Like other ETFs, ETFs in cryptocurrency trade on regular stock exchanges, and investors can buy and sell them through standard brokerage accounts.
In early 2024, a new group of ETFs started letting investors invest in Bitcoin without direct ownership. After years of regulatory delays, the Securities and Exchange Commission (SEC) approved the first spot crypto ETFs, prompted by a 2023 court ruling.
These ETFs give retail investors a way to track cryptocurrency prices without owning the assets. This allows people to bet on crypto prices without using a crypto exchange or dealing with the challenges of owning digital assets directly.
Still, crypto ETFs often charge higher fees than other ETFs. While the funds follow regulations, the crypto markets are not regulated.
What Is Bitcoin ETF and How Does Bitcoin ETF Work?
Spot Bitcoin ETFs are exchange-traded products (ETPs) that store Bitcoin in secure digital vaults managed by approved custodians. These ETFs match the value of Bitcoin in the crypto market. To create the fund, the ETF buys Bitcoin from authorized exchanges or private holders. The Bitcoin is kept in a digital wallet with multiple security layers, often offline, to reduce the risk of hacks.
The ETF issues shares based on the amount of Bitcoin it owns. These shares are traded on regular stock exchanges, with prices reflecting Bitcoin's market value. The ETF adjusts its holdings to closely follow Bitcoin’s price, using the CME CF Bitcoin Reference Rate as a guide.
Buying a spot Bitcoin ETF works like buying shares of any stock or ETF. Market makers keep trading active by offering to buy and sell shares, which helps investors trade easily and ensures stable pricing.
Spot Bitcoin ETFs open new doors for both retail and institutional investors. They allow people to invest in Bitcoin without needing a cryptocurrency wallet or worrying about securing private keys. This makes Bitcoin investments simpler and more accessible.
Benefits of Spot Bitcoin ETF
Spot Bitcoin ETFs make investing in Bitcoin simple for more people. Investors do not need to manage wallets, navigate crypto exchanges, or handle private and public keys. This removes technical obstacles and appeals to those more familiar with traditional investments.
Spot Bitcoin ETFs allow easy buying and selling through regular brokerage accounts. Trading works much like traditional stocks or ETFs which offers mainstream investors a smooth entry into the crypto market.
Spot Bitcoin ETFs are regulated. This is why all operations with them are transparent.
Disadvantages of Spot Bitcoin ETFs
The Bitcoin price can change, and thus, the Bitcoin ETF price also can change a lot. This is why you are still risking when investing in BTC ETF.
Bitcoin ETFs exist in a changing regulatory environment. Current rules may lack clarity, and future regulations could impact ETF performance. Risks like fraud, manipulation, or asset loss also remain a concern and inhibit investing in Bitcoin ETF.
Spot Bitcoin ETFs charge fees to cover operational costs, such as Bitcoin storage and transactions. These costs of Bitcoin ETFs reduce your returns and are often higher than fees for traditional ETFs.
What Is Ethereum ETF and How Does Ethereum ETF Work?
A spot Ethereum ETF for investors works like any other ETF. New coins are deposited and then transferred into ETF shares so that the Ethereum ETF’s price is aligned with the value of Ether. When demand for ETF shares goes up, financial institutions deposit more Ethereum. If demand decreases, they redeem shares for ETH.
Investors can buy and sell spot Ether ETFs on stock exchanges during regular market hours, just like stocks or other ETFs.
How Crypto ETFs Work
ETFs trade on major exchanges like the New York Stock Exchange, Nasdaq, and Shanghai Stock Exchange. Their prices change constantly, and this is their difference from mutual funds.
The fund adjusts the cost of crypto ETFs to match the value of the assets they hold. When the price of an ETF starts to differ from its underlying assets, the fund buys or sells the asset to adjust the price.
Like mutual funds, crypto ETFs include a mix of investments, such as stocks, bonds, or other securities. This setup makes both ETFs and mutual funds a popular choice for retail investors who want a simple way to diversify their portfolios with one purchase.
Advantages of Crypto ETFS
The main convenience of investing through ETFs is the possibility to earn on crypto without buying crypto. But like any investment, they have both benefits and drawbacks.
Pros of Crypto ETFs
- Ease of access: Crypto ETFs simplify entry into the cryptocurrency market. Investors can avoid the need for digital wallets or private key management. This is why we can talk about the availability of crypto ETFs for beginners.
- Diversification with ETFs: Some crypto ETFs include a mix of cryptocurrencies or related assets. This spreads risk and reduces the impact of poor performance by any single cryptocurrency.
- Liquidity: Crypto ETFs trade on regular stock exchanges, this is why it is easy to buy and sell shares during standard trading hours. These exchanges are often more accessible and liquid than many cryptocurrency platforms.
- Risk reduction with ETFs: Crypto ETFs remove the need to manage private keys or secure digital wallets. This reduces the risk of theft, loss, or errors associated with handling cryptocurrencies directly.
Disadvantages of ETFs for Crypto Investors
A crypto ETF’s performance might not fully match the performance of the cryptocurrencies it represents. Factors like fees, rebalancing, and tracking adjustments can create small differences.
The counterparty risk of cryptocurrency ETFs is another drawback. Some crypto ETFs rely on financial instruments like derivatives to track cryptocurrency prices. And if something goes wrong with the issuer, investors may have losses.
Regulatory limitations of cryptocurrency ETFs also play a negative role. Rules for cryptocurrencies differ between countries and can change over time. This limits the use of crypto ETFs and can impact negatively their value.
Cryptocurrency market volatility can also have a negative impact on the ETF value.
Limited diversification is another issue. Some crypto ETFs hold a mix of assets but still, they depend on the overall market. And we know that the crypto market is very volatile, which also reduces the diversification possibilities.
How to Invest in Crypto ETFs
Investing in bitcoin ETFs is simple, and you need only a brokerage account. Here is how you start.
- Choose a platform for trading ETFs and register an account. You can do it online.
- Transfer money from your bank or another brokerage account. Be sure to have enough to cover the popular crypto ETF cost, plus any fees or commissions.
- Research Bitcoin ETFs, check such metrics as trading volume, assets under management (AUM), and the reputation of the ETF issuer. Check what other assets the ETF includes.
- Select your Bitcoin ETF. Review fees and check if it is suitable for your budget.
- Place a buy order for your chosen bitcoin ETF. Use a market order for immediate purchase or a limit order to buy at your preferred price.
- Monitor your investment if you want to minimize risks when investing.
The Future of Cryptocurrency ETFs
ETFs make crypto more accessible but at the same time, they come with third-party risks. This is actually the issue that crypto is supposed to solve.
On the other hand, the impact of cryptocurrency ETFs on the market is very high. IT showed that regulators are ready to accept crypto, and major financial players are ready to include crypto in their portfolios.
This is why the prospects of Bitcoin and Ethereum ETFs are promising. With the further development of regulation of cryptocurrency ETFs, this sector will be growing, and new crypto assets will be introduced.