Blockchain ETFs - An Overview

  • Ashesh Anand
  • Nov 11, 2021
  • Cryptocurrency
Blockchain ETFs - An Overview title banner

What Is a Cryptocurrency Exchange-Traded Fund (ETF)?


An ETF that invests in cryptocurrencies is known as a cryptocurrency exchange-traded fund (ETF). A cryptocurrency ETF measures the price of one or more digital tokens, whereas other ETFs track an index or a basket of assets. 


The share price of cryptocurrency ETFs swings on a daily basis based on investor sales and purchases. They are traded on a daily basis, just like conventional stocks. 


Exchange-traded funds (ETFs) that track cryptocurrencies monitor a single cryptocurrency or a basket of different digital tokens and currencies. The ProShares Bitcoin Strategy ETF was the first cryptocurrency ETF to begin trading in October 2021.

( Also Read: Characteristics, Types and Applications of Cryptography )



What Is a Cryptocurrency ETF and How Does It Work?


Cryptocurrency ETFs offer investors a number of advantages, including decreased cryptocurrency ownership fees and the elimination of the steep learning curve required to trade cryptocurrencies.


( Suggested Blog: ETF Dividends: Types, Working, and Examples )


There are two types of bitcoin exchange-traded funds (ETFs):


  1. The first is a cryptocurrency that is backed by actual coins. The fund's investment firm performs cryptocurrency purchases, and the coins' ownership is represented by shares. Investors will indirectly own bitcoins if they purchase shares in the ETF. 


As a result, owners can obtain exposure to cryptocurrencies without incurring the cost and risk of outright ownership.


  1. The second type is a synthetic variant that tracks bitcoin derivatives such as futures contracts and cryptocurrency ETPs (ETPs). Many ETFs presented to the Securities and Exchange Commission (SEC) in the United States, for example, follow the prices of bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). 


The ProShares Bitcoin Strategy ETF (BITO), the first cryptocurrency ETF, began trading in October 2021. This is an exchange-traded fund that tracks the price of bitcoin futures.

( Must Read: Bitcoin Future ETF - All you need to know )

The price of an ETF share is based on derivatives rather than actual cryptocurrency prices. As a result, as the price of futures contracts rises, so does the price of shares in a given cryptocurrency ETF. It decreases as a result of the decrease. Synthetic cryptocurrency ETFs, like other derivatives, pose an additional risk because their activities are not necessarily transparent.


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Watch this: Bitcoin ETF 2021 (Bitcoin ETF explained)

Regulatory Status of Cryptocurrency ETFs


ETFs are the holy grail for cryptocurrency aficionados since they will increase liquidity and the adoption of cryptocurrencies for financial purposes. The Winklevoss twins submitted an ETF proposal for bitcoin (BTCUSD) with the SEC in 2014, around five years after the cryptocurrency first began trading on an exchange. 


Their application was turned down by the agency. Since then, a flurry of applications has been filed by various investment businesses, including one founded by the Winklevoss twins, who applied again this year, in order to profit from bitcoin's price volatility. At least 12 applications were received by the SEC in 2021 alone.


In a January 2018 letter, the SEC clarified its concerns and stated why ETF applications were denied. The lack of transparency at cryptocurrency exchanges (which establish the price of individual tokens), the possibility of market manipulation, and the low liquidity levels in cryptocurrency marketplaces are among its worries.


( Also Read: Everything About Bitcoin Futures ETFs )


Since the agency's letter was published, the situation in bitcoin markets has altered. The amount of trading on exchanges has increased dramatically. The total market capitalization of cryptocurrencies now exceeds $2 trillion


(At the time the SEC issued its letter, it had reached a high of $800 billion.) Coinbase Global Inc. (COIN), North America's largest cryptocurrency exchange, is now a publicly-traded company, and, as previously indicated, the first cryptocurrency ETF began trading in October 2021. 


At the top of the agency, there has also been a change of guard. Jay Clayton, the former chairman of the Securities and Exchange Commission, was a seasoned veteran who was known to be anti-cryptocurrency. 


He was replaced in 2021 by Gary Gensler, the former chairman of the Commodity Futures Trading Commission (CFTC), who taught a course on blockchain and cryptocurrencies at the Massachusetts Institute of Technology. 


The appointment of Gensler has reignited hopes for the approval of a Bitcoin ETF, however, he has stated that he agrees with his predecessor's evaluation and opinions on the cryptocurrency markets.


( Also Read: Centralized and Decentralized Cryptocurrency Exchanges )


Perks of Cryptocurrency ETFs


Cryptocurrency ETFs are a new asset class, and their market is still being established due to regulatory uncertainty. However, they may be one of the greatest ways to invest in cryptocurrencies. The following are some of the advantages of owning shares in bitcoin ETFs:


  1. The most significant advantage of bitcoin ETFs is that they provide exposure to cryptocurrencies without the added costs of ownership. Cryptocurrency ownership comes with a slew of additional costs. 


Custody fees, for example, are connected with cryptocurrency. An annual fee is also charged by secure digital wallets for storing cryptocurrency purchases. These fees add up to a substantial annual sum. 


Cryptocurrency ownership also comes with other hidden charges, such as transaction and network fees. Cryptocurrency ETFs outsource these expenses onto ETF providers.


  1. Cryptocurrency ETFs provide exposure to a rapidly growing asset class at a fraction of the expense of buying crypto. The price of cryptocurrencies, particularly bitcoin, has soared in recent years. 


They are mostly out of reach for the average investor. A cryptocurrency exchange-traded fund (ETF) is a cost-effective way for investors to invest in the asset class. 


Think about the following scenario: Bitcoin's price began in 2021 at $29,405.12 and climbed to a high of $62,986 in April before falling to $35,045 by the end of June. 


The price of shares in Canada's Purpose Bitcoin ETF (BTCC-B.TO) fluctuated between $10.55 and $6.44 throughout this time. For a trader, a major investment in the ETF would have resulted in significant profits.


( Also Read: A Guide to Trading and Investing in Bitcoin )


  1. Cryptocurrency language, which is deep in its technological roots, has remained a stumbling obstacle to widespread adoption. The scale and operation of cryptocurrencies are tough for typical investors to comprehend. 


Crypto-speak, such as halving and blockchain, may be a difficult learning curve for investors who are unfamiliar with technology. Investing in a cryptocurrency exchange-traded fund (ETF) delegated the learning curve to analysts.


  1. In trading exchanges, around 1,800 cryptocurrencies are available. The infrastructure for buying and selling these tokens has yet to be established. Some tokens, for example, are available on some cryptocurrency exchanges but not others. 


The acquisition of these tokens also comes with a considerable price tag. Cryptocurrency ETFs allow investors to diversify their holdings without having to pay for each coin individually.


( Must Read: Digital Currency and Cryptocurrency: Types and Benefits )



Watch this: Global X Blockchain ETF (BKCH) Overview

Bottom Line: Should You Invest in Blockchain Exchange Traded Funds (ETFs)?


Speculative investments in blockchain technology should be viewed in the same way that you should never invest in bitcoin at the risk of not fulfilling other financial goals. If you're interested in cryptocurrencies and blockchain technology, understand and accept the risks, and have money to invest, blockchain ETFs can provide you with exposure without having to invest directly in bitcoin.


For the most part, another advantage of investing in a blockchain ETF rather than cryptocurrencies is that "it is available in the traditional legacy market." It can be deposited into an IRA, a Roth, or a taxable account. It's a fantastic approach to gain awareness," says the author. 


( Also Read: What is the Future of Cryptocurrency? )


The BITO Bitcoin ETF, which was recently launched, allows you to invest in cryptocurrency through standard accounts, although it's the first of its type and remains very speculative.


In general, you'll need to buy a blockchain ETF if you want to acquire crypto in your tax-advantaged retirement funds. Even if you're investing in a tax-advantaged account like a Roth IRA, confine speculative assets like blockchain or crypto ETFs to less than 5% of your total portfolio.