Explaining Crypto ETFs: How They Can Benefit Investors
Exchange-traded funds (ETFs) have gained significant popularity since the mid-1990s due to their combination of mutual fund benefits and the flexibility of trading individual equities. Unlike mutual funds, which can only be traded at the end of the day, ETFs can be traded throughout the day, opening up various opportunities for long-term investors and active traders. This versatility has extended to the digital currency market, resulting in the creation of cryptocurrency ETFs, a new and innovative approach to investing.
Understanding the Concept
In cryptocurrency ETFs, Authorised Participants (APs), typically large financial institutions, purchase and deposit the underlying cryptocurrency in large volumes. The ETF provider issues ETF shares to APs, which can then be traded on traditional stock exchanges, with their value fluctuating alongside the cryptocurrency’s price. This process ensures the ETF’s value closely matches its underlying assets.
The system facilitates the easy creation and redemption of ETF shares, ensuring synchronisation between price and net asset value, enhancing liquidity, and reducing the risk of significant deviations in the net asset value.
How to Start Trading?
Cryptocurrency ETFs utilize a creation and redemption system where Authorised Participants (APs) purchase and deposit cryptocurrencies and the ETF provider issues ETF shares. These shares move in accordance with the price of the cryptocurrency, maintaining alignment with the ETF’s net asset value (NAV), increasing liquidity, and reducing the risk of deviations in NAV.
Crypto ETFs offer accessibility, affordability, and diversification through traditional stock exchanges. They provide exposure to multiple cryptocurrencies and liquidity but also expose investors to market volatility, regulatory uncertainties, potential manipulation, and expense ratios. These risks can impact returns over time, so investors should be aware of these potential risks.
Bottom Line
Cryptocurrency ETFs are bought via established exchanges or brokerages. Investors can open a brokerage account and then use the platform’s search function to find the desired ETF and then place an order to buy shares, which will be executed according to the terms of the order.
