The Crypto ETF Revolution: A Mixed Blessing?

It’s been an amazing year for crypto, with a number of rallies and big names jumping on the bandwagon. So far in 2023, crypto-related ETFs take the lead as the year’s most successful investments. Figures from the ETF database show that 13 of the top 20 ETFs on the market this year investing in crypto. And in classic crypto fashion, they show returns in dazzling numbers.

Some investors have made huge profits investing in Bitcoin and other digital assets. However, not everyone is convinced that cryptocurrencies are here to stay. ETFs give lukewarm investors an opportunity to gain exposure to many cryptocurrency markets without requiring them to own digital tokens.

Of course, these affiliates come with their own pros and cons. And these leave proponents and skeptics alike debating their effectiveness.

What they are and how they work

Crypto ETFs are the newest addition to the financial market, and they come with a lot of buzz. These investment products offer a great opportunity for investors to get involved in the world of cryptocurrencies without having to buy them outright. Instead, investors can buy shares in a trust that holds a portfolio of digital assets. The foundation then issues shares that are traded like all other shares on the stock exchange.

Essentially, a crypto ETF works in the same way as a traditional Exchange-Traded Fund (ETF). Only, instead of tracking traditional assets like stocks or bonds, it tracks a variety of cryptocurrencies and crypto startups.

Benefits of investing in crypto ETFs

Investing in crypto ETFs can bring several benefits to both novice and experienced investors. One of the benefits of investing in crypto ETFs is diversification.

By pooling a variety of cryptocurrencies into a single investment vehicle, investors can reduce the risk associated with owning a single digital asset. In addition, crypto ETFs can offer liquidity, transparency and regulatory oversight, which can be attractive to those looking to invest in the crypto space with more confidence.

They also allow investors to interact with a thriving industry without having to keep up with all the changes. Crypto moves notoriously fast, and can be too turbulent for people to keep up with on a day-to-day basis. Crypto ETFs can do all the work of managing a diverse portfolio on the investor’s behalf.

Finally, buying shares in a crypto ETF can allow investors to avoid the complexities of owning and storing them directly.

Disadvantages of investing in crypto ETFs

Cryptocurrencies such as Bitcoin and Ethereum have captured the imagination of many investors around the world. However, there are potential pitfalls in investing in ETFs that track these digital assets.

The value of cryptocurrencies can be incredibly volatile and prone to sudden, sharp swings. Also, many cryptocurrency exchanges and wallets have already suffered from high-profile hacks and other security breaches. Many politicians and regulators have raised questions about the safety and stability of investing in these assets at all.

Likewise, regulatory hurdles only increase as the year progresses. This may add unease to some of the underlying assets and companies in the ETF. And this can lead to negative effects on the fund’s value.

Sam Callahan, an analyst at Bitcoin financial services firm Swan Bitcoin, told Blockworks that investors like ETFs because they are familiar with the investment. “It allows them to get exposure in retirement accounts like IRAs and 401Ks, given that ETFs are securities that fit into existing regulatory frameworks,” he said.

The downside is that ETFs come with additional costs and various risks. For example, Proshare’s Bitcoin Strategy ETF charges an annual fee of 0.95% plus large futures costs. And given the relatively short history of these ETFs, it’s hard to say how they’ll perform (and whether they’ll even exist) in the long run.

Are crypto ETFs more appealing than crypto?

It seems strange that the stock market should gain a better reputation than crypto in 2023. The traditional financial infrastructure has given rise to many reasons for doubt. Several banks have failed in dramatic ways. Wall Street has posted rather disappointing profits and unattractive losses so far. And the Federal Reserve has proven contagious and slow.

One truth stands out, however, which is that people prefer the devil they know. Investing in cryptocurrency involves a high tolerance for risk and a willingness to learn a new technology. The credo of crypto is to invest only money you are willing to lose. And setting up a crypto wallet is not for everyone. It involves several steps and requires care and vigilance.

The same obstacles that stand in the way of mass adoption also stand in the way of direct investment. And until ease of use and understanding increases, crypto ETFs and crypto investing via Venmo will prevail.

The future of the market

The investment world has gone through a shakeup in recent years with the arrival of cryptocurrency. With the rise of crypto-based ETFs, investors have a new and easy way to explore this innovative asset class.

As the dust settles on the latest regulatory drama surrounding crypto ETFs, many investors are wondering what the future holds for this market. Will the SEC finally approve a Bitcoin ETF, or will it continue to shoot down proposals left and right? And how long will it take for crypto to break free from the difficulties built in by design?

Only time will tell.