If you want to invest in crypto, then you have many options to do so. Of course, you can just buy Bitcoin or another cryptocurrency and sell it at a later date, hopefully at a higher price. However, there are other options that allow for a different blend of risk and reward that could be more suitable for some traders. Crypto ETFs are among the most recent such assets, and they could be right for you.
What is an ETF?
ETF stands for exchange-traded fund. In many ways, they’re similar to other types of funds, like mutual funds. However, there are a few key differences. Both types of funds are a collected pool of various assets that investors own some share of. As the value of the fund increases or decreases, so does the value of any investor’s individual shares.
A mutual fund is managed by financial analysts at a bank or brokerage. They make trades with the assets in the funds in an attempt to meet their goals. Each fund will have certain risk and reward ratios that they attempt to maintain. They can vary widely, with options for both conservative and ambitious investors.
An exchange-traded fund is instead guided by an index. An index is a list of stocks put out by some financial institution or analyst. In general, they’re intended to represent some sector of the economy or other criteria in order to capture overall growth while mitigating the risk of individual company failures. You can find indexes to make investments based on ESG ratings or the top 500 companies. There are also indexes that track cryptocurrency and blockchain exposure.
Another key difference is that an exchange-traded fund is traded on an exchange. That means instead of going to your bank and sitting down with a financial advisor or broker, you can simply buy ETFs online like any other individual stock. Whatever app or platform you use to invest now can almost surely be used to buy ETFs.
It’s also worth pointing out that there are some services such as Immediate Edge that are sometimes promoted as legitimate exchanges. However, this is contested by certain websites like ScamCryptoRobots.com.
What Makes Crypto ETFs Different?
Crypto ETFs are a specific type of ETF that seeks to capture the momentum and growth of the cryptocurrency market and blochckain technology while limiting risk. Today, cryptocurrencies have been down nearly 75% since the start of the year. However, most crypto ETFs aren’t down nearly that much, staying more in line with the current trend in the stock market.
Most cryptocurrency ETFs are primarily made up of stocks in established companies that are also exploring blockchain technology. Microsoft, Square, PayPal, and other tech and payment companies are common in crypto ETFs. These companies provide significant stability due to their established nature and other sources of revenue while also benefiting from the advancement of crypto.
Any ETF will contain a wide range of stocks in different percentages. Established companies typically make up the majority percentage of a crypto ETF, but they also contain smaller percentages of companies that are more closely tied to cryptocurrency.
Nividia is one of the most widely selected stocks in crypto ETFs. This leading graphics card manufacturer has seen massive increases in revenue as crypto miners around the world have flocked to buy their graphics cards. These cards are the best off-the-shelf solution for Bitcoin mining, with the GPU architecture perfectly suited to mining.
Other common holdings in crypto ETFs include crypto exchange stocks like Coinbase and crypto mining company stocks like HIVE and Bitfarms. The value of these stocks is more closely tied to the price of Bitcoin and other cryptocurrencies, capturing their growth but also volatility as well.
Are Crypto ETFs Right for You?
Crypto ETFs are a great way for new traders to invest in cryptocurrencies and blockchain technology. They greatly reduce the risk and volatility involved. Most financial advisors will tell you that you should only have 5% of your portfolio invested in cryptocurrency at most. By investing in crypto ETFs that contain stocks in both established companies and ambitious blockchain ventures, you’re leveling out the risk associated with cryptocurrencies.
However, there’s another side to consider. While crypto EFTs mitigate risk, they could reduce your reward as well. While sharp drops don’t affect crypto ETFs dramatically, neither do sharp rises. If Bitcoin does recover and happens to increase tenfold one more time, you won’t gain the full benefit by holding crypto ETFs.
The Risks of Investing in Crypto ETFs
Crypto ETFs are a new and growing investment vehicle that are quickly becoming a popular way for investors to get exposure to the cryptocurrency market. While they may seem like a safe and easy way to get into the crypto market, there are a number of risks associated with investing in crypto ETFs. Here is a look at some of the biggest ones:
- Lack of transparency: Cryptocurrency markets are still relatively new and complex, so it can be difficult to track prices and determine the validity of holdings. This makes it difficult for investors to know if they’re getting a fair return on their investment.
- Risk of volatility: Cryptocurrencies are highly volatile, which means that the value of your investment could go up or down very rapidly. This could potentially lead to big losses if you invest in an ETF that tracks a volatile cryptocurrency.
- Lack of liquidity: Crypto ETFs are not widely available, which means that they may not be able to meet all investor needs. If there is too much demand for a given crypto ETF, prices may rise significantly above the underlying asset’s true value. This can lead to significant losses for investors who buy into these products without knowing enough about them first.