What does a cryptocurrency exchange-traded fund (ETF) mean?

What does a cryptocurrency exchange-traded fund (ETF) mean?

Interested in a way to invest in cryptocurrencies through your regular brokerage account? That may soon be a reality with the growing positivity surrounding Bitcoin and cryptocurrency ETFs. However, investors should realize that owning shares in a Bitcoin ETF is not the same as owning Bitcoin.

They do however have some merits of their own to be considered, and in this article, we’ll be giving you a short guide to these new investment vehicles and what they can do for your portfolio. What is a cryptocurrency ETF? How do they work? Let’s find out!

What is a cryptocurrency exchange-traded fund?

An exchange-traded fund is a little different than a normal cryptocurrency investment. By investing in a Bitcoin or other cryptocurrency ETF, you don’t actually own that coin at all!

This investment vehicle simply tracks the price of the underlying asset without the investors in question needing to purchase it at all. This does have some benefits over normal investing, and some disadvantages as well that you may want to consider before proceeding.

How does crypto ETF work?

ETF stands for an exchange-traded fund. This is an investment that is actually managed by a brokerage or firm, which tends to give traditional investors more investing confidence. The firm will invest and hold the assets within the fund themselves, and the investors are simply purchasing shares of this investment.

If the value of the fund goes up, then the investors make money because their shares do as well. Funds are generally seen as an easier way for everyday people to invest without the hassle of needing to learn about every investment.

Example of crypto ETF

While Jimmy is quite experienced with cryptocurrency trading, his father is not. After seeing Jimmy’s success, his father expresses interest in owning crypto as well, but he is intimidated by the process of being a custodian and learning everything there is to know in the market.

Instead, he purchases a cryptocurrency ETF with his brokerage account. The fund contains a basket of the top traded currencies that are fully managed by the investment company, and he uses this to add cryptocurrency exposure to a small percentage of his portfolio.

The fund is well managed, and the price of the shares rise as a result, giving a nice profit to an investor who may not otherwise be confident enough to invest in cryptocurrencies on his own. It also increases his confidence in crypto.

Who owns the ETF?

ETFs are typically owned by an investment firm. This could be comprised of a team of individuals and advisors in the space who know the market. However, the information for the fund should be publically available, and investors who are interested in crypto ETFs should make sure to find out all of the details of who is running the fund before investing.

Storing, buying and managing crypto assets is still not easy for people who are not technically inclined. An ETF allows traditional investors to have cryptocurrency exposure in their portfolios without the need to be custodians of their coins.

Of course, an ETF doesn’t have to focus on just one cryptocurrency like Bitcoin either, these funds can actually contain a basket of various blockchain projects, and then the investors can put their money into an expertly managed portfolio or curated crypto projects. Allowing them to invest with little to no knowledge of the market themselves.

By using a brokerage or firm to make your purchases, investors are also privileged to the kind of buyer protections they have become accustomed to with investment platforms that crypto currently does not provide.

What effect can ETFs have on the crypto market?

Many people are upset with ETFs because it means that these retail investors will not be purchasing cryptocurrencies themselves, driving up the market price in the process.

However, the truth is that investors buying ETFs would likely have never bought coins on their own to start with, and having cryptocurrencies accepted by the SEC as an exchange-traded fund will bring legitimacy to the space. It will also boost the public profile of them as an investment vehicle and will likely have a positive outcome for everyone.

Is it profitable to invest in crypto ETF?

It can be, but that can, of course, depend on many factors. The most important of which is to research the company behind the ETF. If they don’t know what they’re doing, then it could be bad news for you. However, you should keep in mind as well that cryptocurrencies are risky, and you should not devote your entire portfolio to them.

Exchange-traded funds risks

There are risks involved with trading ETFs, and these are not limited to the competency of the funds managers and advisors. There’s also a risk of being stuck in the fund due to low trading liquidity. Fees for trading ETFs can also be higher than using other methods, so you’ll need to make sure every trade is actually profitable for you at the end of the day.

You will also have a loss of control since the fund is being managed by someone else. This is particularly true if there is a basket of cryptocurrencies rather than just a Bitcoin ETF in play. You must take the entire lot whether you like them or not.

Exchange-traded funds and taxes

The buying and selling of Exchange Traded Funds generates taxable events just like with normal cryptocurrency or stock purchases. As soon as you sell your shares, taxes will be due on the profits. The long and short-term capital gains taxes also apply here, so holding for 12 months or more will result in a significant tax break for investors.

Exchange-traded funds good or bad

As with most investment vehicles, ETFs are neither good nor bad. They are simply a tool that offers more options to investors. If you are already skilled with trading and don’t mind the custodial duties that normal cryptocurrency investing entails then just buying coins may be better.

Ready to bring your crypto to the new level?

Bitsgap is an all in one tool to trade and manage your cryptocurrency.

Get started free