ETFs are one of the many ways to make money in financial markets. Unlike classic trading assets that entail buying or selling a product itself, trading ETFs involves multiple products in one tradable basket.
An Exchange-traded fund may include a collection of stocks, bonds or the latest introduction to financial markets – cryptocurrencies.
ETFs are usually confused with mutual funds, which are capital pools that gather investors’ money to trade in different products and must be executed on the business day.
However, investing in ETF means buying a share of a basket that includes several products. The exchange fund’s share price is the result of the real market value changes of the products in question.
Cryptocurrencies added a whole new dimension to ETF trading, which can be very lucrative, and we will explain it in more detail as follows.
Defining Crypto ETFs
Let’s start by explaining an ETF: a tradable basket that combines several bonds and stocks, facilitated by the ETF provider and traded via large financial corporations and investment firms.
Exchange funds work using something called the creation and adoption mechanism, which means buying assets for selling shares mirroring the collective ETF value. Large financial companies (authorised participants) buy massive amounts of products and assets and combine them together at the ETF provider.
Then, APs sell shares of these ETFs in stock exchanges where several market participants trade them based on the market performance of the associated products.
Crypto ETFs work the same way. However, these baskets include a collection of multiple cryptocurrencies, and the individual currency’s performance and price action mirrors the ETF share price.
A Crypto ETF may include only one digital coin like BTC or ETH, which makes it easier for traders to track the ETF price based on a single crypto. These markets were found to facilitate an easier way to trade cryptocurrencies.
Large financial players in the US, like Grayscale Investments, Fidelity and Bitwise, have applied to list Bitcoin spot ETF on their trading desks. At the same time, Ethereum futures ETFs were approved by the SEC to be traded on a number of investment firms like ProShares.
Why Trade Crypto ETFs?
Cryptocurrencies are highly volatile, and some of them fluctuate multiple times a day, rendering various gaining opportunities. Crypto ETFs enable traders to get involved in the crypto market without actually owning any digital coin.
Trading ETFs of cryptocurrencies is an easier way to benefit from this lucrative market without going into the details of storing and transferring real crypto coins between wallets.
ETF traders prefer Crypto-based exchange funds because they are easier to get around. This way, traders do not have to deal with the security repercussions of worrying about managing a crypto wallet or paying gas fees every time they send cryptos.
Disadvantages of Crypto ETFs
Despite the various gain opportunities and advantages of crypto ETFs, they come with some disadvantages that challenge investors.
- High volatility means higher risks, and the cryptocurrency market can dramatically fluctuate without prior notice.
- ETFs are managed by large investment banks and corporations that may impose high handling fees, especially if the positions remain active for a long period of time.
Investing in Crypto ETFs
Trading cryptocurrencies ETFs is similar to other asset classes. All you need to do is find a trading broker that offers them and register your account.
Investing in these exchange funds means buying shares of them, while the share price represents the collective value of the basket and any price fluctuation copies of each asset’s price change in its respective market.
You can trade spot, futures and options ETFs. Spot ETF is done through CFDs, where you buy and sell a product based on price speculation without physically owning the asset.
Futures trading allows you to buy/sell a specific product at a given price on a predetermined date, while options give you the right to sell/buy at an agreed price without obliging you.
Cryptocurrencies revolutionised financial markets and added more trading options to the investor’s strategy. Investing in a crypto ETF is a great approach to diversify your portfolio.
These exchange funds offer multiple gain opportunities stemming from the highly fluctuating prices and liquid market. ETH ETFs are currently traded as futures contracts. However, if BTC spot ETFs get approved, it is more likely to pick up the overall market price higher.