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The Crypto ETF Revolution: A Mixed Blessing?

4 mins
Updated by Ali Martinez
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In Brief

  • What is a crypto ETF and why are they rising in popularity?
  • Here are the pros and cons of investing in this asset instead of crypto.
  • The long term benefits remain to be seen, but the ease of use is a plus for the crypto curious.
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It’s been an amazing year for crypto, with a series of rallies and big names jumping on the bandwagon. So far in 2023, crypto-related ETFs are taking the lead as the most successful investments of the year. ETF database figures show that 13 of the 20 top-performing ETFs on the market this year invest in crypto. And in classic crypto fashion, they are showing returns in dazzling numbers.

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

Of course, these linked funds come with their own advantages and disadvantages. And these leave both 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 cryptocurrency without the need to purchase them directly. Instead, investors can purchase shares in a trust that holds a portfolio of digital assets. The trust then issues shares that are traded like any other stock on the stock exchange. 

Essentially, a crypto ETF operates similarly to a traditional Exchange-Traded Fund (ETF). Only, instead of tracking traditional assets such as stocks or bonds, it tracks an array of cryptocurrencies and crypto startups.

Pros of Investing in Crypto ETFs

Investing in crypto ETFs can provide several benefits for novice and experienced investors alike. One of the advantages of investing in crypto ETFs is diversification. 

By pooling a variety of cryptocurrencies into a single investment vehicle, investors can mitigate the risks associated with holding a single digital asset. Additionally, crypto ETFs can offer liquidity, transparency, and regulatory oversight, which can be appealing for those who want to invest in the crypto space with more confidence.

They also allow investors to interact with a booming industry without having to keep up with all the changes. Crypto moves notoriously fast, and can be too turbulent for people to follow day to day. 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.

Cons of Investing in Crypto ETFs

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

The value of cryptocurrencies can be incredibly volatile and subject to sudden, sharp fluctuations. Moreover, 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. 

Similarly, regulatory hurdles are only increasing as the year goes on. This might add turmoil to some of the underlying assets and companies within the ETF. And this could lead to negative impacts on the value of the fund.

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 gain exposure in retirement accounts like IRAs and 401K’s given that ETFs are securities that fit into existing regulatory frameworks,” he said.

The downside is that ETFs come with additional costs and different risks. For example, the Proshares Bitcoin Strategy ETF charges a 0.95% annual fee plus hefty futures costs. And given the relatively short history these ETFs have, it is hard to say how they will perform (and if they will even exist) in the long run.

Are Crypto ETFs More Appealing Than Crypto?

It seems strange that the stock market would garner a better reputation than crypto in 2023. The traditional economic infrastructure has bred many reasons for doubt. Several banks have failed in dramatic ways. Wall Street has turned pretty disappointing profits, and unattractive losses, thus far. And the Federal Reserve has proven itself infective and slow.

Yet, one truth stands out, which is that people prefer the devil they know. Investing in cryptocurrency entails a high tolerance for risk and a willingness to learn a new technology. The credo of crypto is to invest only money you’re willing to lose. And setting up a crypto wallet is not for everyone. It does involve multiple 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 ease of understanding increase, crypto ETFs and crypto investing via Venmo will prevail.

The Future of the Market

The world of investing 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 avenue 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 eventually 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. 

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Virginia Valenzuela
An award-winning arts writer with expertise in crypto journalism, web3 marketing, and community development, Virginia Valenzuela boasts over 6 years of experience managing editorial teams and contributors. With a keen eye for refining content strategies, she has successfully developed and executed storytelling and thought leadership. Her work consistently encourages curiosity and engagement across various platforms. A sought-after speaker at numerous NFT conferences, Virginia regularly...