ETF for investing in digital assets

What is understood by cryptocurrency ETF

Exchange-traded funds specializing in digital currencies are an important tool for those looking to access the crypto market through traditional financial channels. Unlike directly purchasing coins, such funds allow investors to trade through regular exchange platforms without taking on the technical complexities associated with the direct storage and management of digital assets.

How Cryptocurrency ETFs Differ from Equity Funds

Despite the fact that both types of funds track the movement of the underlying asset values, there are significant differences between them. Traditional equity ETFs track portfolios of companies, while cryptocurrency ETFs monitor the quotes of various digital currencies.

The main difference lies in the nature of the assets themselves. Cryptocurrencies are characterized by higher volatility compared to regular stocks, which creates specific risks for investors. In addition, the regulatory environment for this segment is still in the process of formation – many national financial authorities are actively developing norms and requirements for this class of instruments.

The technical side is also different. Managing digital assets requires special security measures, including cold storage to protect against cyber attacks, while traditional securities require different approaches to storage.

Two main formats: spot and derivative funds

Physically-backed cryptocurrency spot ETFs

The first type is funds with direct ownership of cryptocurrencies. Management companies buy and hold digital currencies, and investors, having purchased shares of such a fund, indirectly own the actual coins without the need to deal with their storage.

A significant milestone was August 15, 2023, when the first spot Bitcoin ETF was approved in Europe. A number of similar funds are awaiting approval in other geographical regions.

Advantages of this approach:

• Easy access to digital assets through a familiar platform
• Compliance with current legislation
• The specialized company is responsible for the preservation, security, and accurate tracking of value.

Disadvantages:

• Management costs money, which reduces investors' profits.
• Possibility of errors in index tracking
• Limited selection of such products on the market

Synthetic Funds Based on Derivatives

The second type is based on derivative instruments – futures and exchange-traded products. Bitcoin Futures ETF is a typical example of such a structure. The price of shares in synthetic funds moves with changes in the derivative contract, rather than the actual value of the coin, although as the settlement date approaches, it tends towards the spot price.

These funds carry their risks due to reliance on derivative instruments and lower operational transparency.

Who is it useful for

Cryptocurrency ETFs are attractive to various categories of investors. They solve the problem of technical complexity – no longer is there a need to study the nuances of blockchain or manage private keys.

Such funds easily integrate into traditional portfolios through pension plans and custodial accounts, allowing for asset diversification without leaving the familiar ecosystem. Investors gain the opportunity to participate in the potential growth of the crypto market without getting stuck in a steep learning curve. Analysts and fund specialists take on professional management, enabling newcomers to avoid common pitfalls.

Thus, cryptocurrency ETFs are a bridge between the traditional economy and the world of digital currencies, making investment in this sphere more accessible and manageable.