The year 2021 was phenomenal for the global crypto markets for a number of reasons. While crypto adoption across the globe grew exponentially, the crypto market capitalization touched new highs. El Salvador accepting Bitcoin as a legal tender might have earmarked the beta phase of future cryptocurrency payment systems.
But the event that guaranteed cryptocurrency’s entry into the mainstream happened in October – the launch of the first cryptocurrency ETF – Proshares Bitcoin Strategy ETF (BITO), on the NYSE (New York Stock Exchange). The Proshares ETF garnered investments worth a billion within two days of its launch.
While ETFs have been quite popular with investors in the traditional stock market, the journey of the first-ever Proshares crypto ETF has been very long, given the regulatory concerns around cryptos. ETFs are becoming a global phenomenon taking up an even larger share of global investments than before. A Bloomberg report states that crypto investments rose from $24 billion in 2020 to $63 billion in 2021, recording a jump of 162%. Let’s discuss what a crypto ETF is, the history behind the first-ever crypto ETF, how to buy crypto ETF, the best crypto ETF in India, and much more.
What is a crypto ETF?
A cryptocurrency exchange-traded fund or crypto ETF is a fund that consists of cryptocurrencies. Conventional ETFs track a particular index or a basket of assets. Similarly, crypto ETFs follow the movement of one or more digital assets.
ETFs are traded on exchanges on a daily basis, just like stocks or cryptos. The value or price of crypto ETF fluctuates daily depending on the changes in investor sales or purchases. ETFs are one of the easiest ways via which investors who are wary of the volatile crypto markets can gain exposure to a selected basket of cryptos. Crypto ETFs are traded on exchanges via a brokerage service.
Kinds of ETF
Crypto ETFs work in a fashion similar to traditional ETFs that are asset-backed. ETFs operate in two ways. Based on their working, ETFs can be of two kinds:
Physical-backed ETF: ETFs backed by physical cryptocurrencies come under this category. The firm that manages the ETF invests in cryptocurrencies. Ownership in this kind of ETF is in the form of shares. When investors purchase shares in this ETF, they indirectly own cryptocurrencies. They get exposure to cryptos without incurring the actual costs or bearing the associated risks.
Futures-backed ETF: This type of ETF synthetically tracks the prices of cryptocurrencies via cryptocurrency derivatives like futures contracts and exchange-traded products (ETPs). Many ETFs proposed to the US SEC track the bitcoin futures contracts listed on the Chicago Mercantile Exchange (CME). For example, the Proshares ETF tracks the price movements of bitcoin futures.
This ETF tracks and mimics the price movements of cryptocurrency derivatives; hence, the price of its shares rises with the price of futures contract prices and vice versa. Futures-backed ETFs are considered less transparent and riskier than physical-backed ETFs.
Timeline: The Regulatory Status of Crypto ETFs
- After approximately five years, when Bitcoin had begun trading on an exchange, the Winklevoss twins filed a proposal for a crypto ETF with the SEC in 2014.
- The application was rejected and was followed by a number of similar applications from investment firms, including another application from the Winklevoss twins. None of the applications was accepted then.
- The flurry of rejections from the SEC had its roots in the concerns elucidated in a letter by the SEC in 2018, which included lack of transparency at exchanges, the scope of market manipulation, and low liquidity in crypto markets.
- The situation has tremendously changed since the SEC’s 2018 letter. With trading volumes multiplied at the exchanges, the market touched the $3 trillion capitalization in 2021.
- Coinbase Global Inc. became a publicly traded entity on NASDAQ.
- The twins filed an application again in 2021 and the SEC recorded receiving at least 12 applications for ETFs seeking to profit from Bitcoin’s price volatility.
- There is hope for a change in the SEC’s stance. Former SEC Chairman Jay Clayton was replaced by CFTC chief Gary Gensler recently. While Clayton was hostile to cryptocurrencies, Gensler used to teach a course in blockchain and cryptocurrencies at MIT.
- The first crypto ETF by Proshares started trading in October 2021.
Benefits of Crypto ETFs
The crypto market is still in its nascence, with Bitcoin entering its first teenage year. Given the regulatory uncertainty and volatile crypto market, Crypto ETFs are considered a nascent asset class. Despite this, they can be one of the best instruments to own cryptocurrencies:
Low costs: Crypto ETFs allow owners to own ETF shares at a fraction of the price of actual crypto. Physical ownership is accompanied by other additional expenses, such as custody charges, annual wallet fees, etc. Whereas other hidden charges, such as network fees and transaction charges, add to the costs of directly owning cryptocurrencies.
Backdoor Entry Route: Besides the low costs of ownership, ETFs provide access to a wide array of cryptocurrencies. The investors can benefit from their price fluctuations without getting exposed to the market volatility as the risk is now spread across the basket of cryptocurrencies.
Easy Access: ETFs being a conventional mode of investment, accord trust among investors, while blockchain and cryptos being fairly new concepts, invite apprehension. Additionally, crypto jargon has a steep learning curve, and the difficulty in understanding the scope and working of cryptocurrencies is a roadblock to their mass adoption. With ETFs, investors can skip the learning curve and easily invest in ETFs via brokers and exchanges.
Infrastructural Roadblocks: The crypto exchanges sell thousands of cryptocurrencies, but the prevailing infrastructure underpinning the security and transparency at these exchanges is still undeveloped. While for buying different cryptocurrencies, the costs incurred for each would be separate. ETFs, help investors to diversify their investments without incurring additional costs.
Best Crypto ETFs to buy in 2022
Besides the Proshares Bitcoin ETF, there are several successful ETF-like products in which investors can put their money, including Grayscale Bitcoin Investment Trust (GBTC), Bitwise Ethereum Fund, Bitwise UniSwap Fund, etc. These ETF-like products invest in cryptocurrencies on behalf of the investors but are available to only investment firms, accredited investors, and high net worth individuals. Mainstream investors have no access to such funds but can buy several crypto ETFs listed on the exchanges worldwide. Here’s a list of the best ETF to buy in March 2022 (Forbes):
- Bitwise Crypto Industry Innovators ETF (BITQ)
- Global X Blockchain ETF (BKCH)
- Siren Nasdaq NexGen Economy ETF (BLCN)
- Amplify Transformational Data Sharing ETF (BLOK)
- First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT)
- VanEck Digital Transformation ETF (DAPP)
- Capital Link Global Fintech Leaders ETF (KOIN)
- First Trust Innovative Transaction & Process ETF (LEGR)
As discussed earlier, since crypto ETFs are still an evolving class, the options available in the market are limited. And since they mimic cryptocurrency prices, they are bound to experience volatility. Investors who are interested in cryptos as an investment but aren’t able to enter the markets directly can place their bets on cryptos via ETFs and revel in the most rewarding and fast-developing asset class on the investment scene currently.
Cryptocurrency has the potential to make you extremely wealthy, and the potential to cause you to lose your money. Crypto assets, like any other investment, come with many risks and potential rewards. Fundamentally, cryptocurrency is an excellent investment, particularly if you want to gain direct exposure to the demand for digital currency.
Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.
Satoshi Nakamoto invented cryptocurrencies and the technology that makes them function in 2009. The presumed pseudonymous individual or persons who invented Bitcoin used this identity. In addition, Nakamoto created the first blockchain database. Even though many people have claimed to be Satoshi Nakamoto, the person's identity remains unknown.
A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.
A cryptocurrency is a digital currency that is secured by the process of cryptography, making counterfeiting and double-spending almost impossible to happen. Blockchain technology is used to produce cryptocurrencies ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are distinct in that a centralized authority does not issue them.