How Do Exchange-Traded Funds (ETFs) for Cryptocurrencies Work?

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What Is Cryptocurrency ETFs?

An exchange traded fund (ETF) for cryptocurrencies is a fund made out of cryptocurrencies. A cryptocurrency ETF measures the price of one or more digital tokens, whereas the majority of ETFs track an index or a basket of assets. The share price of bitcoin ETFs varies every day based on investor sales and purchases. They are also exchanged every day, just as conventional stocks.

How Does an ETF for Cryptocurrencies Work?

Cryptocurrency ETFs offer investors various advantages, including much cheaper cryptocurrency ownership costs and the outsourcing of the steep learning curve necessary to trade cryptocurrencies.

Two different types of bitcoin ETFs exist:

  • The first type is supported by actual cryptocurrency. The cryptocurrency purchases are made by the investment company running the fund, and shares are used to indicate ownership of the coins. Investors who purchase shares in the ETF will subsequently acquire cryptocurrencies. Owners can therefore become exposed to cryptocurrencies without the cost and danger of outright ownership.
  • The second type is a synthetic variation that follows derivatives for cryptocurrencies, such as futures contracts and cryptocurrency exchange traded products (ETPs). For instance, several ETFs were suggested to the US. The Chicago Mercantile Exchange (CME) bitcoin futures contracts prices are monitored by the Securities and Exchange Commission (SEC).

Instead of reflecting the values of actual cryptocurrencies, the ETF share price imitates the price fluctuations of derivatives. As a result, the cost of shares in a particular cryptocurrency ETF increases in tandem with rising futures contract values. It decreases in step with the reduction. Synthetic bitcoin ETFs pose additional risk, much like other derivatives, because it’s possible that they don’t always operate in a transparent manner.

Cryptocurrency ETFs’ Regulatory Status

ETFs are seen by supporters of cryptocurrencies as the holy grail that will increase crypto acceptance and liquidity. The Winklevoss twins submitted an ETF proposal for bitcoin (BTCUSD) to the SEC as early as 2014, or almost five years after the cryptocurrency first started trading at an exchange.
CoinDesk. “In a new SEC filing, Winklevoss Twins plan to list a Bitcoin ETF on the Nasdaq.”

The organization turned down their application. Since then, there have been a rush of applications from different financial organizations looking to capitalize on the price fluctuation of bitcoin, including one founded by the Winklevoss twins who reapplied this year. The SEC noted receiving at least 12 petitions in 2021 alone.

In a letter from January 2018 outlining its concerns, the SEC also provided a justification for the denial of ETF applications. The lack of transparency at cryptocurrency exchanges, which determine the price of individual tokens, the possibility of market manipulation, and the low liquidity levels in cryptocurrency markets are some of its main worries.

In the time since the agency’s letter was issued, the situation in the cryptocurrency markets has altered. Exchange trading volumes have increased. The total market value of cryptocurrencies has topped $2 trillion as of April 2022. The largest cryptocurrency exchange in North America, Coinbase Global Inc. (COIN), is now a publicly listed company, and as was previously reported, the first cryptocurrency ETF began trading in October 2021 (it had hit a height of $800 billion at that time).

Additionally, the agency’s leadership has undergone a change. Jay Clayton, a former SEC chairman, was a veteran and was seen negatively by the cryptocurrency community. Gary Gensler, a former head of the Commodity Futures Trading Commission (CFTC), who instructed a course on blockchain technology and cryptocurrencies at the Massachusetts Institute of Technology, took his position as his successor in 2021. The arrival of Gensler has revived expectations for the establishment of a Bitcoin ETF, however he has stated that his evaluation and opinions on the cryptocurrency markets are consistent with those of his predecessor.

Cryptocurrency ETFs’ advantages

Since cryptocurrency ETFs are a new asset class, their market is currently developing due to legal ambiguity. However, they could be among the finest methods for acquiring cryptocurrency. The following are some advantages of buying shares in cryptocurrency ETFs:

  • The fact that bitcoin ETFs offer exposure to the asset class without the associated ownership costs is arguably their largest advantage. Cryptocurrency physical ownership comes with a lot of additional costs. Custody fees, for instance, are related to cryptocurrency. Additionally, there is an annual fee for secure digital wallets used to hold cryptocurrency purchases. These fees add up to a sizable annual total. Other unstated costs associated with cryptocurrency ownership include network and transaction fees. These costs are outsourced by cryptocurrency ETFs to ETF suppliers.
  • Shares in cryptocurrency ETFs provide exposure to a rapidly expanding asset class for a fraction of the price of buying genuine crypto. The cost of cryptocurrencies, particularly bitcoin, has risen in recent years. For the typical investor, they are now essentially unreachable. An inexpensive alternative for those looking to participate in the asset class is a cryptocurrency ETF. Think about the following scenario: In April 2021, the price of bitcoin reached a high of $63,569 before retracing its gains to $35,045 by the end of June. Shares of Canada’s Purpose Bitcoin ETF (BTCC-B.TO) traded for between $10.09 and $6.44 throughout this period. A trader would have made large gains on a sizeable investment in the ETF.
  • An ongoing barrier to the acceptance of cryptocurrencies is the technical language associated with them. Average investors find it challenging to understand the scope and operation of cryptocurrencies. Investors who are not tech-savvy could find understanding the jargon of the cryptocurrency world, such blockchain and halving, to be a challenging process. The learning curve is outsourced to analysts while investing in a bitcoin ETF.
  • Since they were first introduced, cryptocurrencies have been breached on several occasions, raising serious concerns about their security. Individual investors who may not be conversant with the inner workings of cryptocurrencies may find it difficult to ensure security. Security operations are outsourced by a bitcoin ETF to the companies that make these ETFs.
  • The number of cryptocurrencies accessible on trading exchanges exceeds 1,800. The infrastructure needed to acquire and trade these tokens has not yet been created. For instance, certain tokens may be found on specific cryptocurrency exchanges while others cannot. The purchase of these tokens comes at a substantial expense as well. With the aid of cryptocurrency ETFs, investors may diversify without having to pay for each coin individually.


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