Financial markets offer plenty of trading opportunities and instruments that traders use to make money, including almost all preferences like stocks, bonds, currencies, commodities and the latest addition of cryptos.
ETFs – Exchange-traded funds are another lucrative trading instrument that involves multiple stocks and bonds and other trading assets that provide various gaining opportunities.
Cryptocurrencies are the latest addition to the market that made its way to traders’ portfolios, which have been used in conjunction with classic instruments such as ETFs.
This innovative trading approach holds many gaining opportunities in its ties that we will explore in the following.
Understanding Crypto ETFs
Traditionally, ETFs include different stocks and bonds in one basket that investors buy and sell according to the market value and performance of the stocks in question. When it comes to crypto ETFs, they involve multiple cryptocurrencies in one basket based on the performance of these currencies.
This way, traders can get started with crypto trading without actually owning any currency in their crypto wallet. At the same time, investors can explore the gaining opportunities driven by these volatile assets.
An ETF for cryptocurrencies can include one coin like Bitcoin or Ethereum, where investors can trade and speculate without actually owning the coin and dealing with storing and transferring it.
On the other hand, an ETF basket can include more than currency when the ETF value mimics the price changes of currencies included.
This approach is easier to understand and manage since it does not require storing cryptos in light of the security risks of transferring between wallets and paying transaction or gas fees for receiving or sending cryptos.
How Do ETFs Work?
In general, ETFs are regulated based on the creation and redemption process that ensures the value of assets in the ETF is close to the real market price. This way, ETF value and shares are seamlessly flowing with minimum intervention.
Creation happens when large financial corporations buy the assets in question, for example, cryptocurrencies, in huge amounts and transfer them to the ETF provider in exchange for shares. Redemption happens when the Authorised Participants (APs) sell those shares (ETF shares) in secondary markets or regular stock exchange marketplaces.
This mechanism pegs the ETF share price with the price of cryptocurrency included in the basket, including price fluctuations and volatility levels.
Crypto ETFs – Advantages and Disadvantages
After understanding ETFs and how crypto ETF trading works, let’s take a look at their pros and cons and whether you should invest in them.
- More affordable option than buying a whole Bitcoin or multiple currencies because ETFs include fractional prices of cryptos.
- A much more simplified approach to trading cryptocurrencies without dealing with advanced terms like crypto wallets, gas fees and blockchain.
- Access to a highly volatile market that can bring high gains.
- An excellent way to diversify your portfolio in a highly liquid market.
- Exposure to high volatility is not always good because prices can change dramatically and unexpectedly.
- Various ETF management fees can be expensive sometimes.
Start Investing in Crypto ETFs
Spot, options and futures contracts are a few ways to trade ETFs with cryptocurrencies according to your trading strategy, risk and experience.
Spot trading, or using contracts for differences (CFDs), is a common way to speculate on the ETF price without actually owning the product(s) itself.
Futures contracts are one way to sell or buy ETFs at an agreed price between participants. Lastly, options trading is the right to sell or buy an ETF at a given price on an agreed-upon date, where the trader is not obliged to trade but has the right to.
There are several ways to trade crypto ETFs depending on an investor’s skill level, risk tolerance, and market preferences. For instance, CFDs allow traders to speculate on the price of crypto ETFs without owning the underlying assets.
ProShares is an investment firm that started offering Ethereum futures ETF products in October 2023, while Bitcoin spot ETF is still pending the Securities and Exchange Commission’s approval.
Crypto ETFs are the latest addition to the popular exchange-traded funds trading in the financial market. This asset class allows traders to indulge in crypto trading in an easier manner and without owning the coin itself.
This approach presents an excellent portfolio diversification strategy, minimising the risk of purchasing an actual cryptocurrency and storing it in a digital wallet. Despite the few disadvantages this approach entails, like relatively high managerial fees and volatility risks, this can be a lucrative strategy with potentially high returns.