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In January 2024, the US Securities and Exchange Commission (SEC) made history by approving the listing and trading of crypto exchange-traded funds (ETFs) for the first time. The decision was an about-face for the SEC, which had been denying requests for crypto ETF approvals as early as 2018. It was also a decision that, as the SEC succinctly stated, was limited to “one non-security commodity, bitcoin.”
Within days of approving crypto ETFs in general, the SEC had approved 11 unique Bitcoin ETFs, providing investors with several options for gaining access to the new product. Then, in May 2024, the SEC opened the door even wider by amending its rules to allow ETFs involving ether. In July 2024, the first Ethereum ETFs went live.
“For investors to fully take advantage of this new avenue for crypto investing, it’s important to understand exactly what ETFs are and how they operate,” says Patrick Gruhn, founder of Perpetuals.com. The following notes provide some key information for them to consider.
How do crypto ETFs work?
The overriding goal of ETFs is to provide investors with easy access to cryptocurrency. Becoming a crypto owner requires an onboarding process that can be intimidating to the non-initiated because it involves selecting an exchange, establishing an account, obtaining a wallet, and taking ongoing steps to ensure its security.
“With crypto ETFs, crypto is bought, sold, and traded like a stock, which means anyone with a brokerage account can add crypto to their portfolio,” Gruhn says. “The monetary value of the ETF follows the value of the cryptocurrency it contains.”
Are crypto ETFs safe for investors?
The SEC’s long reluctance to approve crypto ETFs was largely due to the perception that crypto was not a safe investment. In an Investor Alert issued in March 2023, the SEC warned investors that “Fraudsters continue to exploit the rising popularity of crypto assets to lure retail investors into scams, often leading to devastating losses.” The fact that the SEC has only approved ETFs for crypto leaders Bitcoin and Ethereum suggests the agency continues to doubt the safety of the crypto universe as a whole.
“The appearance of crypto ETFs gives investors access to the asset in a regulated environment, meaning there is less risk of fraud, yet the SEC’s approval does nothing to address the volatility of crypto markets,” Gruhn explains. “The SEC’s oversight might make crypto ETFs safer than buying crypto directly, but it doesn’t make them less risky in terms of volatility.”
What are the advantages of crypto ETFs?
Ease of management is one of the top advantages that crypto ETFs bring to investors. The asset class can now be bought and sold through an existing brokerage account. By grouping it with other, more conventional investments, tax treatment and disclosures for crypto become much easier to address.
“Crypto ETFs also eliminate the common concern over the security of crypto holdings,” says Gruhn. “Hot wallets put crypto holdings at risk of loss due to security breaches, while cold wallets complicate the process of buying and selling crypto.”
With an ETF, safe storage is the responsibility of the entity offering the fund. For investors uncomfortable with the technical nature of crypto exchanges and the tools they require, ETFs allow investing with more peace of mind.
“While crypto ETFs help investors with security, they also limit investors’ access,” Gruhn remarks. “Crypto can be bought and sold at any time on crypto markets, 24 hours a day, seven days a week.”
However, the crypto in ETFs can only be traded when the market where it is listed is open. Consequently, investors lose the power to respond quickly to fluctuations that occur when markets are closed.
“Crypto ETFs, like any other ETFs, also have counterparty risk, but that is not a new concern for crypto investors,” Gruhn notes. “Those who have used crypto exchanges to engage with the crypto spot market outside of ETFs will be familiar with the cost and counterparty risks that they will experience with ETFs.”
What is the best way to engage with crypto ETFs?
“As with any investing, engaging with crypto ETFs should start with research,” Gruhn says. “Do your homework on the provider’s reputation. Determining how its funds have performed in the past is helpful when assessing how they might perform in the future. You should also explore who manages the fund and what their expertise is with crypto assets. Crypto markets don’t move to the same rhythms that drive traditional market fluctuations, so fund managers should be able to demonstrate some expertise with crypto.”
According to Gruhn, investors should also compare the costs before locking into a particular fund. “Those who have invested directly in crypto will likely find the fees associated with ETFs are higher than those associated with exchanges,” he says. “As more funds receive SEC approval, certain brokers may compete for business by offering lower fee structures.”
It is also advisable to consider ETFs as a vehicle for long-term crypto trading. Those seeking short-term opportunities will find crypto exchanges more efficient and flexible.
The approval of crypto ETFs has ushered in a new season for crypto investors, but the ultimate value they will offer remains to be seen. For now, investors should carefully consider the advantages and disadvantages and, as always, only invest what they are comfortable losing.
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Disclaimer
The information contained above is provided for information purposes only. The contents of this article are not intended to amount to advice and you should not rely on any of the contents of this article. Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article. Sandra Hinshelwood disclaims all liability and responsibility arising from any reliance placed on any of the contents of this article.
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