ETFs will make investing in cryptocurrencies easier, but at what cost?

By Hermione Daguin


An Exchange-traded fund (ETF) is a type of fund that tracks an asset or commodity like an index fund but can be traded like a common stock on a stock exchange. They have become more attractive to investors, especially individual investors, due to their low-fees and high liquidity. They’re also used in a broad range of markets, so investors can participate in a variety of markets ranging from energy to pharmaceuticals and everything in between.

Participation in markets through ETFs is done by proxy which means that someone else is representing the investors. The person or company that holds the funds is the one that makes the decision about which markets to invest in or not. When investors buy shares of a ETF, they don’t actually own the funds, but they receive a share of the profits that are made.

Currently, there are no ETFs in the cryptocurrency world. This makes it so that people have to own their own coins and this requires more knowledge about the market than if an ETF were to be used.

While cryptocurrencies are experiencing increasing profits, the market is yet to be fully established in the mainstream world. Many investors continue to have doubts and are looking for a path that would allow them to invest while lowering the risk of having their coins stolen. Currently, cryptocurrency investors require extensive knowledge to make sure that they’re coins are safe and this is a daunting task. An ETF may prove to be the vehicle to drive investors who don’t want to worry about securing their coins into this new market because an ETF would be able to hold coins on the behalf of investors.

Characteristics of ETFs

To structure a cryptocurrency ETF, the company has to divide a proportional number of digital tokens to be bought out as shares. These shares are the assets that the ETF will track. By using this system, investors can take advantage of opportunities relating to cryptocurrencies without actually owning any of them. This would protect them against scammers and the fragile state of the cryptocurrency market.

Currently, different cryptocurrencies have to be stored separately which means that cryptocurrency holders have to manage multiple accounts in order to hold several digital currencies. That can become a hassle for investors and traders. A cryptocurrency ETF could track multiple different cryptocurrencies at once. This would reduce the frustration that comes with managing multiple accounts simultaneously. With a better structure, investors would be more ready to invest in different cryptocurrencies.

While there are currently no cryptocurrency ETFs approved by the Securities and Exchange Commission (SEC), rumors have been swirling that one may be approved soon. Interestingly, Bitcoin already has a fund that’s often mistaken for an ETF. The Grayscale Bitcoin Investment Trust (GBTC) is a Bitcoin fund managed by Grayscale that allows investors to trade Bitcoin in shares. GBTC is not an ETF because it doesn’t trade like an ETF. It also charges a 2% annual management fee which is more expensive than most ETFs charge.

A Double-Edged Sword

The debate over whether or not to proceed with a Bitcoin ETF continues to be a heated one. Supporters believe that this move would encourage institutional investors to become more involved and commit to the market. The added security that comes with an ETF would bring in more money from retail traders and individual accredited investors in the US market. Critics believe that a Bitcoin ETF goes against everything Bitcoin and other cryptocurrencies stand for. It would add a centralized account and would rely too much on proof of ownership. It cannot be considered as a medium of exchange. They also argue that ETFs could be subject to the fluctuation in price that the GBTC has experienced which hasn’t always correlated with the price of Bitcoin.

For now, both critics and supporters agree that the debate is nowhere near finished and even if a Bitcoin ETF were to be approved, it would not be available in the immediate future.