ETFs for Cryptocurrency
Exchange-Traded Funds or ETFs in the regular stock markets track the stock index, commodities, bonds, or even a basket of assets. They trade throughout the day like regular stocks and the price varies greatly because of this. Most ETF trading takes place in-kind and securities are not sold for cash. ETFs always trade close to their fair value and time of the day. ETFs are more tax efficient than mutual funds and don’t have an investment minimum or sales load.
In a very similar way to stock market ETFs, cryptocurrency exchanges also have ETFs but for crypto-assets like digital tokens. Cryptocurrency ETFs are owned by a custodian bank that issues shares to investors. Cryptocurrency ETFs also trade throughout the day on crypto-exchanges and are subject to varying price changes. The ETFs on the crypto-exchange own the digital tokens that they track and people who invest in those ETFs indirectly own part of the tokens as well. When the tokens perform well, investors earn a share in the profits.
The benefits of ETFs for cryptocurrency
More and more people who are interested in investing in cryptocurrency are considering ETFs in light of digital wallets and exchanges being hacked. Investing directly in crypto token always has the risk of tokens being stolen and all funds disappearing. ETFs, on the other hand, are supported by a custodian cryptocurrency bank. Because of the involvement of a bank ETFs are better protected against theft and complete loss of assets.
In the current scenario, anyone who wants to invest in different types of cryptocurrencies needs to invest in each separately, own multiple wallets, and track each type of token individually. ETFs allow investors to own a share of a basket with different types of tokens that can be tracked and traded together. By buying an ETF share, investors can enjoy the profits from multiple tokens with a lot less effort.
Buying and selling of ETF shares give investors the freedom to trade on the crypto-exchange with relatively low risk. The custodian bank keeps the tokens secure, prices don’t fluctuate as widely as individual tokens, and like mutual funds, varied assets always provide a more stable investment.
The biggest challenge being faced by cryptocurrency ETFs eight now is that they are still in the early stages. There are only a few crypto-exchanges that offer ETFs to investors while others are still trying to get approval to launch. Because it is still early days, the theory of risk diversification has not fully been tested yet in the cryptocurrency world. While risk diversification works well in the traditional stock markets, how well this translates to cryptocurrency is yet to be seen.
There are still relatively few tokens that are used to make up ETFs with numbers ranging from six to ten. Small numbers like these don’t offer the types of diversity required to prevent risks as compare to traditional portfolios that give investors access to a much larger pool of securities.
While investing in cryptocurrency ETFs is relatively safer than directly investing in digital tokens, the undertaking is still in the early stages. It might be advisable to wait and watch the crypto markets for a while before diving into the crypto-ETF pool.
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