What is a Cryptocurrency ETF?

Cryptocurrency has been pumping excitement and anticipation in the minds of potential investors all over the world. But some of us are too concerned about the risks to actually take a step forward. If you are one of those, then you might want to consider investing in a cryptocurrency ETF. It is one way of investing in cryptocurrency without actually owning or trading it.

What is an ETF?

An ETF, or Exchange Traded Fund, is an investment fund that holds multiple types of securities like stocks and bonds. ETF groups together assets that have something in common, like stocks representing the pharmaceutical industry or a particular currency and tracks their performance. It has features of both a mutual fund and a stock. 

Just like in a mutual fund, people pool their money to buy stocks, bonds and other securities. Also, it is called an exchange traded fund because it can be bought and sold on a stock exchange just like a regular stock.

What is ETF Cryptocurrency?

People who trade cryptocurrencies cannot do it on a traditional exchange. They have to use exchange platforms specifically meant for trading between different cryptocurrencies. Their cryptocurrency portfolio is separate from other investments.

However, this changes with cryptocurrency ETF. A cryptocurrency ETF allows you to trade funds on a traditional exchange. It is a fund that tracks the prices of digital tokens and fluctuates with their price. A Bitcoin ETF, obviously, tracks the price of Bitcoin.

One advantage of doing so is that you don’t need to create an account on a cryptocurrency exchange and set up your cryptocurrency wallet. You don’t need to learn how cryptocurrency works. You can rely on your knowledge of the ETF for this investment. Also, with an ETF, you can combine Bitcoin with other investments.

However, ETFs charge investment management fees. Also, you cannot trade a Bitcoin ETF for an Ethereum ETF, like you trade the cryptocurrency. It is difficult to say whether all the cryptocurrencies on the market will make it to traditional exchange platforms like Bitcoin. 

Moreover, the changes in the price of cryptocurrencies may not always be accurately reflected in the price of an ETF. Lastly, Bitcoin ETF does not provide advantages that owning Bitcoins does, like anonymity and a hedge against inflation.

What is the best cryptocurrency ETF?

Before proceeding to a list of cryptocurrency ETFs, you might want to familiarise yourself with certain parameters for judging an ETF. You can study ETFs in terms of their total assets under management (AUM), which means the total market value of assets being managed by the financial institution. AUM is measured in the form of cash available for distribution (CAD), which means the cash on hand that is available for distributing shareholder dividends. 

Another important variable is the Management Expense Ratio, which means the total managing fee, operating charges and taxes charged to the fund in a year. It is expressed as a percentage of the fund’s average net assets for that year. Now let’s look at a list of some cryptocurrency ETF options on the market. 

Purpose Bitcoin ETF

Being the first SEC-approved bitcoin ETF in the world, Purpose Bitcoin started running in February 2020. Presently it has an AUM of 1.3 billion CAD and an MER of 1.5%. When the MER falls below that, the savings pass along to investors.

CI Galaxy Bitcoin ETF

This one also invests in Bitcoin and has an AUM of 53 million CAD and an expense ratio of 0.4%. They claim to have the world’s lowest management fee. It is suitable for those who want exposure to bitcoin, can tolerate high risk and want capital growth over the long term.

Reality Shares Nasdaq NexGen Economy ETF (BLCN)

Created in 2018, Reality Shares Nasdaq NexGen has an AUM of $278 million CAD and an MER of 0.5%. A striking feature of this ETF is that they have a diverse range of investors, and all of them have fairly equal stakes, not more than 2%. There are 74 companies in its portfolio. 

Innovation Shares NextGen Protocol ETF

This one has holdings in 45 companies, including giants like Intel and Paypal. It has an AUM of $26.6 million and an expense ratio of 0.95%. It includes stocks from the following four categories- cryptocurrency as payment, solution providers, adapters and mining enablers. 

Wisdom Tree Bitcoin

Wisdom tree bitcoin mimics the performance of a collateralized debt obligation backed by physical holdings of bitcoin. They have an AUD of 173 million Euros and an expense ratio of 0.95%.

How to invest in a cryptocurrency ETF?

The general procedure of investing in an ETF requires you to open a brokerage account. It requires a simple sign-up and KYC process. You need to link the trading account to your bank account. A similar process follows for cryptocurrency or any other ETF. 

In the United States, there are no ETFs that purchase cryptocurrency directly. But there are some cryptocurrency ETFs that own cryptocurrency in Canada and the UK. If you reside in any other country, you will need to check with your brokerage firm on whether they allow buying an ETF on a foreign stock exchange.