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A Beginner’s Guide to Crypto ETFs

Investing in cryptocurrency can seem like a daunting task, especially for newcomers. After you've spent hours learning all the technical jargon, you'll have to worry about the constant volatility that comes with cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).

Fortunately, cryptocurrency exchange-traded funds, or crypto ETFs, offer a safer way to invest in crypto—without the learning curve! These funds are akin to traditional funds, making them a familiar territory for most investors, who find ETFs a favorable means to diversify their portfolios.

But how do crypto ETFs help portfolio diversification? What makes them safer than on-chain crypto purchases? But before we jump on to crypto ETFs, let’s first understand what traditional ETFs are and how they work.

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What are ETFs?

An exchange-traded fund, or ETF, is a collection of assets that users buy or sell on traditional stock markets via a stock broker or brokerage firm. ETFs enable investors to reap various benefits and, when utilized appropriately, provide them an excellent opportunity to meet their financial objectives. When you purchase an ETF, you get a choice of exchanging your  collection of assets during trading hours, potentially reducing your exposure and risk while boosting portfolio diversification.

Almost any asset class imaginable––including conventional funds and alternative assets like cryptocurrency, collectibles, commodities, and real estate––is available as an ETF. There are unique ETF designs that give investors access to leverage, market shorting, and tax-free short-term capital gains.

What are crypto ETFs? 

Cryptocurrency ETFs are similar to traditional ETFs but deal with cryptocurrency and other digital assets instead of fiat currencies, like the U.S. dollar and the euro. They allow investors to buy and sell crypto by accessing a diverse portfolio of digital assets, including dApps (decentralized apps) and NFTs (non-fungible tokens). However, not all crypto ETFs hold cryptocurrencies.

ETFs hold assets that span multiple industries and assets and provide more liquidity and transparency, which is helpful for investors in such a volatile market.

Why do crypto ETFs matter?

Since cryptocurrency ETFs are a new asset class, their market is currently developing due to regulatory ambiguity. Crypto ETFs have the potential to increase investor liquidity significantly. However, investors tend to be on the sideline as they can’t invest in crypto in compliance with the traditional stock market. However, they could prove to be one of the most promising ways to hold cryptocurrencies, which is why people contemplate purchasing crypto ETFs rather than buying coins through cryptocurrency exchanges.

Their strongest advantage is that crypto ETFs offer exposure to various asset classes without the associated ownership costs. Cryptocurrency ownership comes with various additional costs, such as custody and annual fees, to secure crypto wallets that hold cryptocurrency. These fees accumulate throughout the year to a sizable yearly amount. Other unstated costs associated with crypto ownership include network and management fees. Cryptocurrency ETFs outsource these costs to ETF suppliers.

Crypto ETF shares provide access to rapidly expanding asset classes for a fraction of the price of buying regular cryptocurrency. The cost of buying cryptocurrencies such as BTC and ETH has risen recently. For the typical investor, these prices are now virtually unreachable. As a result, an inexpensive alternative for those looking to participate in these digital asset classes is a crypto ETF.

Crypto ETFs also matter because they help alleviate the complications of understanding the scope and operation of cryptocurrencies for average users. Non-tech-savvy investors could also find it challenging to understand the jargon of the cryptocurrency world, such as blockchain technology, sharding, and Web3. However, crypto ETFs provide an opportunity for average investors to invest without undergoing a complex learning curve.

Approval for ETFs

Presently, Australia, Brazil, Canada, and Singapore allow investors and crypto users to invest in crypto ETFs. However, the U.S. Securities and Exchange Commission (SEC) maintains reservations about offering Bitcoin ETF. The SEC has recently turned down more than a dozen petitions and applications. However, there could be hope for Bitcoin ETFs in the near future.

The ProShares Bitcoin Strategy ETF received approval from the SEC in October 2021, while Teucrium's Bitcoin Futures ETF received approval in April 2022. Some crypto investors have renewed optimism because of this development. But nothing is confirmed (at the time of writing), and it doesn't seem like a spot Bitcoin ETF will be approved anytime soon.

Grayscale Investments, a digital assets investment company, wanted to convert its Grayscale Bitcoin Trust (GBTC) into the world’s first Bitcoin ETF. However, the SEC rejected its application, citing many grounds for rejecting the request, including concerns about avoiding price manipulation. Grayscale sued the SEC in retaliation, requesting that the SEC's ruling be reviewed by the U.S. Court of Appeals for the District of Columbia Circuit.

Why do investors acquire crypto ETFs?

Crypto ETFs are an additional way to invest in digital currency, and some people consider them to be an innovative approach to attempting to diversify an investment portfolio. Splitting investments across different asset classes can reduce the risk on any one asset. This approach is known as diversification and is intended to gradually minimize their portfolio's volatility over time.

Diversifying investments is one strategy for achieving risk-reward balance in their portfolio. Although this approach has undergone numerous complicated variations, its core concept remains the same: Spreading the investment portfolio across multiple asset types. Crypto ETFs allow easy access to crypto for both newcomers and experienced individuals. 

Diversification can lessen the quantity and intensity of constant fluctuations in the crypto market by minimizing risk and volatility in a portfolio. It’s beneficial to remember that portfolio diversification doesn’t guarantee profits or losses; instead, it's a tried-and-tested practice that's been in use for years by many investors and recommended by financial experts.

How do crypto ETFs work?

EFTs are accessible for various digital assets covering multiple industries, ranging from coins to collectibles. A crypto ETF would function similarly to a standard ETF, with the value of a single share—or "piece"—of the ETF fluctuating in tandem with the value of a given cryptocurrency. If the price of the coin rises, so will the ETF, and vice versa. However, the ETF will operate on a traditional exchange such as the New York Stock Exchange (NYSE) rather than buying and selling on a crypto exchange.

There are two types of ETFs:

  • Physical-backed: To develop this kind of ETF, an investment firm would have to purchase cryptocurrency coins from the exchange, similar to how a standard ETF would work. The firm would then create a fund representing the price of the crypto assets in its possession and list them on the stock exchange.
  • Futures-backed: Futures contracts are agreements between two parties that facilitate an asset’s buying and selling at a specified price on a fixed future date. Futures-backed ETFs are based on future crypto contracts rather than cryptocurrency. Since there are no tangible coins to safeguard, futures-backed ETFs are safer than physical-backed ETFs. 

Examples of crypto ETFs

Some of the largest ETFs in the world hold assets worth hundreds of millions of dollars. Here’s a list of the top ETFs according to market cap:

  • Amplify Transformational Data Sharing (BLOK): The Amplify Transformational Data Sharing ETF focuses on firms involved in cryptocurrency or companies that provide indirect cryptocurrency price risk. It has a market cap of around $689 million.
  • Bitwise 10 Crypto Index Fund (BITW): With a market cap of $189 million, the Bitwise 10 Crypto Index Fund ETF offers investors an opportunity to invest in the top 10 cryptocurrencies.
  • Siren Nasdaq NexGen Economy (BLCN): At a market cap of $156 million, the Siren Nasdaq NexGen Economy ETF invests in companies that build and use blockchain technology.
  • First Trust Indxx Innovative Transaction & Process (LEGR): The First Trust Indxx Innovative Transaction & Process ETF covers a range of industries, including crypto, banking, technology, and global shares. Its market cap stands at $130 million.
  • Bitwise Crypto Industry Innovators (BITQ): The Bitwise Crypto Industry Innovators ETF focuses on cutting-edge firms that deal with the crypto sector. However, its market cap is unknown. 
  • Global X Blockchain (BKCH): The Global X Blockchain ETF invests in blockchain technology, and its applications are beyond cryptocurrency, like DeFi (decentralized finance), NFTs, and Web3. Its market cap is also not available.

Invest safely with Worldcoin

Crypto ETFs make investing easier for the average citizen as they allow one to bypass the learning curve and technical jargon of the crypto space while still enjoying its financial benefits. This is because crypto ETFs work just like traditional ETFs, although a crypto ETF is not a currency. Instead, it extends to a wide range of underlying assets that allow one to diversify their portfolio.

Another way to diversify your portfolio is by accepting your free share of Worldcoin, which is a new cryptocurrency that you can invest in safely without worrying about your finances or privacy. 

We aim to give away a share of our coins to each individual on the planet for free! To know more about our initiative, visit our website and subscribe to our blog.

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