What Is a Crypto ETF? How it works

The news that the US Securities Commission (SEC) was likely to implement one or more trading platform traded funds (ETFs) generated a lot of discussion over the last week.

The SEC gets expected to approve the very first US futures contracts ETF to start trading next week, according to reports, in what would be a “defining moment” for the cryptocurrency community.

The SEC’s investor relations division posted the next day, “Before actually participating in a company that holds Bitcoin derivative contracts, ensure you thoroughly consider the potential dangers and benefits.”

For the first moment in six months, just 20 phrases propelled bitcoin above $60,000, putting it close to an all-time peak of $64,895.

But what exactly are cryptocurrency exchange-traded funds (ETFs), and why are they so famous? Here’s the comprehensive guide to crypto ETF along with its pros and cons.

What is the definition of a crypto exchange-traded fund (ETF)?

We’ll need to take a step back to answer that. An exchange-traded fund (ETF) is a financial instrument that tracks the value of a single asset or a group of assets.

The main benefit is that it allows investors to diversify their portfolios without owning any of the assets. A gold ETF, for example, would keep track of the value of the gold assets it represents.

A crypto ETF will track the value of one or more crypto assets, whereas a bitcoin ETF will track the value of bitcoin. Unlike crypto exchanges, ETFs get traded on traditional stock exchanges.

Bitcoin ETFs are already available in some countries. This year alone, multiple such funds have to get launched in Canada, Brazil, Europe, and Dubai.

SEC accreditation is the holy grail for cryptocurrency enthusiasts, as it would encourage the global adoption of crypto ETFs while also adding credibility to cryptocurrencies.

Because the United States possesses the world’s largest and most sophisticated financial market, SEC approval is essential. Since May, when China began tightening down on cryptocurrency miners and traders, it now accounts for the worldwide bitcoin mining.

The benefit of crypto ETF is that they function precisely like standard ETFs. They’re available in two varieties:

  • Physical backed

To develop a crypto ETF like this, an asset management firm must purchase actual coins from the market, just as it would for a standard ETF.

It can then create a fund to represent the value of the crypto assets on the stock exchange for trading. The value of your investment rises in lockstep with the value of the fund’s digital currency.

 

  • Future backed

Rather than actual currencies, the fund’s shares get based on crypto futures contracts. A futures contract is a contract to buy or sell something at a later date.

They are less dangerous than physical-backed ETFs because no physical assets must get protected. According to reports, the SEC is considering authorizing this type of bitcoin ETF.

The Benefits of Crypto ETFs

Here’s the rundown of the benefits of crypto ETF. Let’s take a look.

  • Convenient

The main advantage of ETFs over direct investing is that investors do not have to handle the underlying asset.

Cryptocurrency exchanges have made it easier to purchase and trade cryptocurrency in recent years. But issues like setting up digital wallets and knowing private and public keys are barriers to widespread crypto adoption.

Crypto ETFs enable investors to benefit from the new asset class while continuing their old brokerage accounts.

  • Safe(r)

ETFs are all highly regulated because they’re traded on established exchanges. As a result, authorities can analyze their performance while guarding against price manipulation in ETF markets.

Unregulated crypto exchanges can, however, affect the price of the underlying asset. Hacking and theft of cryptocurrency exchanges and wallets are also a possibility.

Because you don’t own any crypto, crypto ETFs shield you from these dangers. The fund also does not own any crypto in a futures-backed crypto ETF.

Crypto ETFs’ drawbacks

Everything has pros and cons and crypto ETF is no different. Check the drawbacks here.

  • There are only a few options.

Currently, there are only a handful of such funds to choose from it. However, if the SEC allows crypto ETFs, things might swiftly change.

At the asset level, too, a lack of options is an issue. To reduce risk, traditional ETFs hold a diverse range of assets.

However, the majority of cryptocurrency exchange-traded funds (ETFs) exclusively track a few digital currencies.

  • The dangers of cryptocurrencies

While crypto ETFs are safer in certain respects than investing directly in cryptocurrencies, they still carry many dangers associated with the assets they represent.

Cryptocurrencies, like cryptocurrency exchange-traded funds (ETFs), are volatile. Physical-backed funds, which buy and keep cryptocurrency, must manage other crypto-related risks, such as hacking.

Conclusion

This is all about crypto ETF. We hope you have found this guide helpful and informative. Stay connected for more updates. Also, feel free to share your feedback in the comment section below.

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