Crypto is becoming more accessible to average investors through ETFs, but is it worth the risk and your money?
Small investors are seeking to get exposure to cryptocurrencies via exchange traded funds.
Dubai: Although cryptocurrencies have gained a lot of traction in recent years, they have been getting a lot more attention nowadays as it has become comparatively more accessible to investors.
With cryptocurrencies like Bitcoin and Ether hitting fresh highs, new investors are being drawn into the digital space via what is called cryptocurrency-focussed exchange traded funds (ETFs), or crypto ETFs.
The question remains, however, whether an ETF is an appropriate vehicle for playing the crypto game. Let’s find out!
What are crypto ETFs exactly?
Similar to how an ETF is a security designed to track the price of anything ranging from an individual stock, an index, sector, commodity or other types of assets, in the case a crypto-linked ETF, it tracks the performance of any cryptocurrency.
So unlike the regular cryptocurrencies that are traded on crypto exchanges, crypto ETFs are bought and sold on stock exchanges like regular stocks.
The first impression investors have of crypto ETFs is that it combines the best parts of two popular investments: The ease of investing in an ETF and exposure to an otherwise out-of-reach cryptocurrency.
The products operate much like any other ETF, but instead of tracking a market exchange, crypto ETFs will track the price of a certain cryptocurrency like Bitcoin, Ether, Tether, among others.
How do Bitcoin and other crypto ETFs work?
One important takeaway to keep in mind is that the Bitcoin or cryptocurrency ETFs are ‘futures’ ETFs that don’t directly own Bitcoin or any cryptocurrency.
They instead buy ‘futures’ contracts, which are agreements to buy or sell the asset later for an agreed-upon price. Such funds will generally track Bitcoin or other cryptocurrency prices.
It’s a similar concept to oil and gold futures, for example. Such investors don’t own the physical gold or barrels of oil. In short, it has indirect exposure to crypto prices, so the impact is limited. But that’s not the only reason to invest in crypto ETFs. Let’s find out more.
Why do investors want to invest in a Bitcoin ETF?
Investing in Bitcoin itself can be complicated, but investing in a Bitcoin ETF would give investors easy access to the world of cryptocurrency. There are several reasons why a Bitcoin ETF could make it simpler to invest in cryptocurrency.
First, Bitcoin itself can be tricky to store and secure. There have been several instances of investors being blocked from accessing their Bitcoin because they forgot their passwords.
According to data from global cryptocurrency research and software firms, about 20 per cent of the world’s Bitcoin may be lost or stuck in inaccessible wallets.
Another consideration is the fact that ETFs can be traded right from investors’ existing brokerage accounts. Though mainstream crypto exchanges have made buying and selling digital assets more accessible, ETFs are available through more conventional avenues used by investors.
Why the sudden craze in crypto ETFs?
US-based ETF issuer ProShares debuted the country’s first Bitcoin futures exchange-traded fund (ETF) in mid-October, another milestone for cryptocurrency enthusiasts. This drove a number of other crypto ETFs to launch both in the US and elsewhere in the world.
But experts have been debating worldwide whether crypto ETFs are truly worth the cost for average investors and whether it was worth pursuing instead of buying cryptocurrencies directly.
The US ProShares ETF, and most other crypto-themed ETFs, carry a 0.95 per cent annual expense ratio, which is high relative to other ETFs, according to financial advisors. (Annual expense ratio is the asset manager’s fund fee, meaning for every Dh10,000 someone invests, the managers keep Dh95 a year.)
Although that amount won’t sound like much, but costs can add up over decades of saving. The investor loses out on the fee, earnings on those fees and compound interest. Here’s why.
An investor who saves Dh100,000, earns 4 per cent per year and pays about 0.25 per cent as annual fee, would have Dh30,000 more after two decades than the same person who pays a 1 per cent fee (which is about the annual cost of crypto futures ETFs).
Do experts recommend investing in crypto ETFs?
In other words, if crypto ETFs will be part of your portfolio for one, five, 10 years or longer, 1 per cent is a big fee to pay for a mutual fund or an ETF, experts add.
Long-term investors who want crypto exposure can likely do so more cheaply by buying directly, some crypto experts opine.
However, fund fees may not matter much to short-term investors, or those worried about security or access risk. Short-term investors might not mind a 1 per cent fee as they plan to sell the ETF within days or weeks, so the consolidated charges are then nominal.
However, buying Bitcoin or other cryptocurrencies directly (not via an ETF) often isn’t free. Crypto platforms and exchanges typically charge a one-time fee that varies by provider. But like experts suggest, it would be much less costly for buy-and-hold investors relative to the annual fund fee.
Moreover, fees aren’t the only consideration. Investors may feel safer getting crypto access through a professionally managed ETF if they’re worried about hackers or losing passwords or private keys needed to access the funds.
Crypto ETFs may not be for everyone: experts
Investors tempted to utilise ETFs to access the cryptocurrency market are not necessarily getting what they might expect.
After the US Securities and Exchange Commission approved the first US Bitcoin-linked ETF in October, investors poured more than $1 billion (Dh3.67 billion) into the ProShares Bitcoin Strategy fund, boosting cryptocurrencies across the board.
Despite this, the market remains a mystery to many investment experts and investors alike and the massive fluctuations in value that can occur in a short time span remain a trap for the unwary, analysts agree.
A month ago a popular cryptocurrency named after the popular show Squid Game collapsed from a high of $2,800 (Dh10,284) as the currency’s anonymous creators pulled out $3.3 million (Dh12.12 million), leaving ordinary investors empty handed.
Verdict? Consider the alternatives before taking on any product that puts your money risk
For those who are afraid to hold Bitcoin outright, or whose investment mandate does not allow them to hold cryptocurrency, some experts recommend crypto-linked ETFs as a great way to get exposure to crypto. Other crypto experts, however, believe there may be other, more appropriate routes.
This is considering the fact that many of the best index funds include publicly traded companies that have some involvement with the industry by either mining crypto, being involved in the development of blockchain technology, or holding significant amounts of crypto on their balance sheets.
For example, Tesla — which holds over a billion dollars in Bitcoin and accepted Bitcoin payments in the past — is included in most funds. Or if you want to altogether avoid any volatility risk associated with cryptocurrency prices there is also the option of opting for blockchain ETFs.
There are several ETFs made up of those companies, called blockchain ETFs, which can give investors exposure to crypto technology without investing directly in the currencies themselves.
So does that mean don’t invest in crypto ETFs? No.
However, if you have some extra cash (and you’re tolerant of the risk), you can choose to allocate a small amount of your portfolio to specific companies or more specialised index funds like crypto ETFs.
These ETFs have large premiums and discounts to the actual values of whatever cryptocurrency they invest in, because they do so through futures, not through holding the cryptocurrency directly. Futures correlate strongly to their underlying asset, but can trade rich or cheap.
There is no risk in the investment vehicles themselves, since they trade on regulated exchanges and liquidity is provided by firms who fully comply with regular procedures. The added risk comes from any futures component.
Taking on the added risk of some crypto ETFs and the relatively high fees are not necessary to access cryptocurrency these days, especially for non-US investors.
Even in the US, brokers recently offered a way to trade Bitcoin directly, with transaction fees of 0.2 per cent, compared to the annual charges of 0.95 per cent on the new ETFs.
Moreover, crypto exchange traded funds track Bitcoin or Bitcoin futures, so their performance and volatility should be closely matching those of Bitcoin.
Therefore, they don’t help with concerns on volatility or risk of cryptocurrencies. However, like all ETFs, they provide a different and potentially convenient way to access the cryptocurrency for certain types of investors.