How do cryptocurrency exchange-traded funds (ETFs) work

While most ETFs track an index or basket of assets, a cryptocurrency ETF tracks the value of one or more digital tokens. Share prices of cryptocurrency ETFs fluctuate on a daily basis, based on investors' sales or purchases. Just like ordinary stocks, they are traded on a daily basis.

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How does a cryptocurrency ETF work?

Cryptocurrency ETFs provide investors with a number of benefits, such as significantly reducing the cost of owning cryptocurrencies and outsourcing the learning curve required to trade cryptocurrencies.ETF share prices mimic the price movements of derivatives, rather than the prices of actual cryptocurrencies. Therefore, the value of shares in a given cryptocurrency ETF increases with the increase in futures contract prices. It decreases with the same decrease. Like other derivatives, synthetic cryptocurrency ETFs carry additional risk because their operations may not always be transparent.

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Regulatory Status of Cryptocurrency ETFs

For cryptocurrency enthusiasts, ETFs are the holy grail that will promote the adoption of cryptocurrencies for liquidity and investment purposes. As of 2014, nearly five years after Bitcoin (BTCUSD) first began trading on exchanges, the Winklevoss twins filed an ETF proposal for the cryptocurrency with the SEC.

The agency rejected his request. Since then, there has been a flurry of applications from various investment firms—including those founded by the Winklevoss twins, who applied again this year—trying to take advantage of bitcoin's price volatility.

The SEC clarified its concerns and explained its rationale for rejecting ETF applications. His concerns include the lack of transparency in cryptocurrency exchanges (which determine the value of individual tokens), the potential for market manipulation, and low levels of liquidity in cryptocurrency markets.

The trading volume in the exchanges has increased manifold. As of April 2022, the total market cap for cryptocurrencies exceeded $2 trillion.(it had peaked at $800 billion when the SEC published its letter.) The largest cryptocurrency exchange in North America, Coinbase Global Inc. (COIN), is now. The publicly traded entity, and as mentioned above, the first cryptocurrency ETF began trading in October 2021.

There has also been a changing of the guard at the helm of the agency. Former SEC Chairman Jay Clayton was an old hand who was considered an opponent of cryptocurrencies. In 2021, he was replaced by Gary Gensler, former head of the Commodity Futures Trading Commission (CFTC), who taught a course on blockchain and cryptocurrency at the Massachusetts Institute of Technology. Gensler's appointment has rekindled hopes for approval of a Bitcoin ETF, but he has said he agrees with his predecessor's assessment and views on crypto markets.

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Advantages of Cryptocurrency ETFs

Cryptocurrency ETFs are a nascent asset class, and given regulatory uncertainty, their market is still being defined. But they can be one of the best tools to own cryptocurrencies. Following are some of the benefits of holding shares in cryptocurrency ETFs:

Perhaps the biggest advantage of cryptocurrency ETFs is that they provide exposure to crypto without the added costs of ownership. Physical ownership of cryptocurrencies involves many additional costs. These charges add up to a net annual amount. Owning cryptocurrency also comes with other hidden charges, such as transaction and network fees. Cryptocurrency ETFs outsource these costs to ETF providers.

Shares in cryptocurrency ETFs offer a fast-growing asset class at a fraction of the original cost of buying crypto. Over the past few years, the prices of cryptocurrencies, especially Bitcoin, have been skyrocketing. They have become largely inaccessible to the average investor. A cryptocurrency ETF is an affordable alternative for investors looking to put money into the asset class. Consider the following scenario: Bitcoin started 2021 at $29,405.12 and peaked at $63,569 in April, before retracing its gains to $35,045 by the end of June. Shares in Bitcoin (ETF) BTCC-B.TO) ranged from $10.09 to $6.44. A substantial investment in an ETF would have yielded significant gains for the trader.

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