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How do cryptocurrency ETFs work?


Jane Goodwin

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ETFs are some of the hottest investments for both traders and long-term investors. Given the huge popularity of cryptocurrency, it was only a matter of time before the ETF model turned up in the crypto world. A crypto ETF can be based on a single cryptocurrency, or on a basket of different digital coins. The fund can take one of two approaches:
  • It can own the digital currency itself, and each investor owns a share of the value of the coins held by the fund, or,
  • It can buy cryptocurrency futures contracts, which actually allows the fund to profit in both bearish and bullish markets.
  From a trader’s point of view, there are a lot of advantages to trading cryptocurrency ETFs as opposed to the currency itself. For one thing, they are exchange-traded, which means you can trade them using your brokerage account. For another, you don’t need to deal with several different digital wallets if you want exposure to several different currencies; storage is handled by the fund itself. Perhaps even more importantly, there’s an extra layer of security against hackers and other cyber-attacks. The fund acts as the currency custodian, so it is responsible for securing the coins. There’s also the simplicity factor with ETFs. If you’re new to crypto, it’s overwhelming at first, but with ETFs, you can gain exposure to the market without digging too deep into all the crypto details. With simplicity also comes lower fees; ETFs are known for their low trading costs and expense ratios. That doesn’t mean, however, there aren’t any disadvantages or concerns to trading cryptocurrency ETFs. Right now, there aren’t very many crypto ETFs to choose from, and the SEC hasn’t approved any for trading in the U.S. That may change soon, though. As of February 2019, the SEC was considering two new proposals for Bitcoin ETFs. If approved, the market should begin to open up. Crypto ETFs are extremely volatile, because the underlying asset is extremely volatile. This makes them good instruments for day traders and swing traders, but they are definitely assets to keep a careful eye on. Finally, just because you don’t own the coins and don’t deal with the risk of hacking, those risks do still exist. It’s worth checking into the security protocols employed by your fund.
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