Just as the cryptocurrency market is heating up, so is the race to create crypto-based Exchange Traded Funds (ETFs). While several projects are moving forward with their plans, only a handful have managed to snag approval from the United States Securities and Exchange Commission (SEC). In this article, we’ll take a closer look at what sets crypto ETFs apart from traditional ETFs and explore the potential implications of SEC approval for the future of the crypto market.
What are ETFs, and why are they popular recently?
An ETF is an investment fund that tracks the price of an underlying asset, such as a stock, commodity, or currency. They are traded on stock exchanges and can be bought and sold like any other stock. One of the main advantages of ETFs is that they offer investors exposure to a wide range of assets without the need to buy and sell individual stocks or commodities. ETFs have become increasingly popular due to their low costs, flexibility, and tax efficiency. In 2017 global ETF assets under management surpassed $5 trillion for the first time.
What are crypto ETFs?
Crypto ETFs work the same way as traditional ETFs, tracking the price of a basket of cryptocurrencies. If the cost of the underlying assets increases, the value of the ETF will also increase. Conversely, if the price of the underlying assets decreases, the value of the ETF will decrease.
However, crypto ETFs and traditional ETFs have a few critical differences. For one, crypto ETFs are not yet regulated by any central authority, such as the SEC, which means that they are not subject to the same rules and regulations as traditional ETFs. As a result, crypto ETFs are often riskier and more volatile than traditional ETFs.
Another key difference is that crypto ETFs often track a basket of assets that includes significant cryptocurrencies like Bitcoin and Ethereum, as well as smaller altcoins. It exposes investors to a broader range of assets than they would get with a traditional ETF.
Finally, crypto ETFs are often denominated in cryptocurrencies rather than fiat currencies like the US dollar.
What are the benefits of investing in crypto ETFs?
A few key benefits make crypto ETFs an attractive investment option for many people. First, crypto ETFs offer exposure to a wide range of assets, which can help diversify your portfolio and reduce risk.
Because crypto ETFs are traded on stock exchanges, they offer greater liquidity than other types of investments, such as mutual funds. It means you can buy and sell your ETF shares at any time during the ETF trading day.
Another advantage of crypto ETFs is that they can be bought and sold in fractional shares. It means you don’t need much money to invest, and you can buy a small number of shares, making investing in crypto ETFs more affordable than other investments.
Finally, crypto ETFs offer the potential for high returns. While prices can go up and down, the overall trend for cryptocurrencies has been upward for the past few years. It makes crypto ETFs an appealing investment option for those looking to profit from the cryptocurrency market.
What are the risks of investing in crypto ETFs?
Investing in any ETF involves risk, and crypto ETFs are no different. Because they’re not regulated by the SEC, crypto ETFs are considered high-risk investments, which means that you could lose all or most of your investment if the market for cryptocurrencies declines.
Another risk to consider is that crypto ETFs are often denominated in cryptocurrency, which can be volatile. It means that the value of your investment may fluctuate wildly depending on the price of Bitcoin or Ethereum.
Finally, it’s important to remember that the cryptocurrency market is still relatively new and untested. It means there is a greater chance of something going wrong than a more established investment product.
How to choose the right crypto ETF for you
There are a few things to consider when choosing the right crypto ETF. First, you need to decide what type of exposure you want. Do you want to track a basket of major cryptocurrencies like Bitcoin and Ethereum? Or do you want to track a smaller group of altcoins?
Next, you need to consider what level of risk you are comfortable with. Are you willing to take on more risk to potentially earn higher returns?
Finally, it helps if you think about how much money you are willing to invest. Remember, you can buy fractional shares of an ETF, so don’t feel like you need a lot of money to start.