A beginner’s guide to cryptocurrency ETF

ETFs or exchange-traded funds refer to a basket of stocks traded on the stock exchange like shares. Crypto ETFs are similar to traditional ETFs, but the underlying asset isn’t company stocks but crypto. Crypto EFTs either directly invest in cryptocurrency assets or derivative products that track the price of one or more cryptocurrencies or digital tokens. The issuer of the crypto ETF holds the underlying asset divided into shares that can be traded on the stock exchange.

By purchasing shares of these funds, crypto investors could benefit from indirectly owning crypto assets without bearing any expenses or risks of owning these assets outright. 

Like any investment, there are some pros to investing in cryptocurrency ETFs. Here are a few:

• ETF investments trade as regular stocks, allowing investors exposure to the underlying cryptocurrency without buying actual cryptocurrency coins. This may help investors avoid some of the costs and risks associated with cryptocurrency trading, such as signing up for a cryptocurrency exchange and managing a cryptocurrency wallet.
• A crypto ETF may track the price of multiple digital currencies, which could make it seem like a safer investment option due to risk diversification.
• Unlike cryptocurrency investments, crypto ETFs are regulated by the ASIC, offering investors a relatively higher level of transparency and authenticity. However, the underlying asset of a crypto ETF may or may not be regulated in Australia or elsewhere.
• Retail investors who don’t know much about cryptocurrencies but still want to dip their toes in the cryptocurrency market may find cryptocurrency ETFs a relatively cheaper and more secure way of participating in cryptocurrency-based investments without gaining expertise in the field.

Just like all other investments, there are risks that come with investing in cryptocurrency ETFs and it’s best to understand these before you put any money in. Here are some to consider:

• Cryptocurrency ETFs are quite new on the market, with no previous operating history. It’s difficult to predict their behaviour in the long run and the level of risk they pose to investors over time.
• Even though cryptocurrency ETFs mitigate some of the pitfalls around owning crypto coins directly, it doesn’t mean they’re entirely safe as an investment. Cryptocurrencies are subject to high price volatility, and the value of your investment could change dramatically when the markets are closed for trading.
• If you choose to invest in crypto ETFs rather than directly in cryptocurrency coins you’ll not be able to use the coins or tokens to pay for goods and services.
• You won’t be able to exchange the coins for other cryptocurrencies because crypto ETFs can only be traded as stocks.
• As crypto ETFs are managed funds, you may be charged ETF management fees that could quickly add up depending on the level of stock you hold.

The process of buying and selling crypto ETFs is similar to the process of buying and selling traditional ETFs on ASX through a share trading platform.

A cryptocurrency ETF may be an option for investors who want exposure to cryptocurrency markets but don’t want to own cryptocurrency directly or don’t have the time to actively manage their cryptocurrency investments but still want to diversify their portfolio. 

However, it’s important to remember that cryptocurrency ETFs are also not entirely safe as an investment because they’re still linked to cryptocurrencies which are highly volatile and largely unregulated.  

Any crypto-based investment is highly speculative, offering potentially significant returns and losses. If the crypto market moves as predicted, you could see your investments jump in a short span, but they could also fall down as quickly. 

If you want to invest in cryptocurrency, consider investing only a small portion of your portfolio to limit your losses. Building a well-diversified investment portfolio could help you reduce your investment risk rather than putting all your money in a singular highly volatile and speculative asset like crypto. You could also read about these 10 popular investment options that may suit your financial goals.