What are the Benefits & Risks of Crypto ETFs?
Like any investment, crypto ETFs have their benefits, as well as their risks. Understanding both helps you ensure it not only meets your financial goals but also matches your risk profile.
Benefits include:
- Indirect investment in cryptocurrency may offer lower risk than holding directly, which means as there is no need for wallet storage, you do not need to worry about losing your private key to access your wallet and thus, your crypto holdings.
- Diversification by purchasing ETFs that span multiple cryptos.
- Less hassle and expense than owning and storing actual cryptos.
- Tax breaks as you can buy crypto ETFs in your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) through brokerages in Canada.
- No need to place your trust in a crypto exchange, which are relatively new and not as regulated as a discount brokerage or asset manager offering an ETF.
Risks include:
- Administration fees associated with ETFs.
- Potential for lack of transparency or inaccurate reflection of actual crypto prices.
- No actual ownership of crypto.
When considering your options, also recognize that there are other indirect ways of investing in the crypto market, such as:
- Investing in companies that hold crypto or offer a crypto product or service, like exchange payments
- Companies that produce hardware related to the crypto industry, such as graphics processors or computers to store or mine crypto
How to invest in Crypto ETFs?
If you’re looking to invest in crypto ETFs, you can purchase them through your discount brokerage firm. Many online brokers such as TD Direct Investing allow you to filter, research, buy and sell Crypto ETFs, just like the traditional ETFs.
Canadian investors can also hold crypto ETFs in registered accounts includingRegistered Retirement Savings Plan (RRSP) andTax-Free Savings Account (TFSA).
It’s important to note that investing in Crypto is considered highly risky and speculative, hence you must exercise caution when investing in such volatile securities.
FAQs related to Crypto ETFs
What is a bitcoin ETF?
A bitcoin ETF is an investment fund that seeks to track the price of bitcoin. These are further divided into spot bitcoin ETFs and Bitcoin futures ETFs. Spot bitcoin ETFs hold actual bitcoin which means it holds bitcoins equivalent to the market capitalization of the fund. On the other hand, the bitcoin futures ETFs operate by using derivatives, or contracts, that speculate on the future price of the underlying asset, bitcoin. Hence, a spot bitcoin ETF enables investors to gain exposure to the current price of bitcoin without having to hold the asset itself.
What are Ethereum ETFs?
An Ethereum ETF isan exchange traded fund designed to track the price of Ether, which is a cryptocurrency based on Ethereum blockchain. This offers a convenient way for investors to gain exposure to Ether without directly holding the digital asset. Ether futures ETFs hold derivative contracts tied to the Ether's (cryptocurrency) token value and trade on regulated stock exchanges. Spot Ether ETFs, on the other hand, hold crypto directly.
Are Ethereum ETFs approved by the SEC?
Ether futures ETF that invest in Ether futures contracts are regulated and traded on traditional stock exchanges. Additionally, applications for Spot ETFs that hold Ethereum's ether (ETH) were approved by the SEC in July 2024. This means you can now trade Spot Ether ETFs through any discount brokerage firm that supports crypto ETFs such as TD Direct Investing.
Is it safe investing in Crypto ETFs?
With any investment there are risks, and crypto is no different. It can pose risks if a significant amount of your portfolio is invested in futures markets, or even if your ETF indirectly invests in crypto held by an investment firm. It’s important to thoroughly research all your potential investments, while considering your own personal risk profile along the way.
Are Crypto ETFs a good investment?
Crypto is generally seen as a high-risk, high-reward opportunity. While crypto ETF margins may not be as large as owning your own crypto tokens, the option to invest in crypto indirectly through ETFs is something that some investors may find appealing.
Is the Management fee on crypto ETFs higher than regular ETFs?
The management fee, or management expense ratio (MER), refer to the costs to cover the expenses of running the ETF and can impact overall investment returns, especially over the long term. The management fee for crypto ETFs is generally higher than the regular ETFs and can range widely. It can fall anywhere between 0.5 to 2%.
Is there a Crypto Index fund?
Investing in a crypto index fund is an option that allows you to invest in a specific index of crypto. It does offer the potential for reduced risks and diversification; however, it comes with the same risks of investing in a volatile market.
Conclusion
As investors look to diversify their portfolios and capitalize on the potential growth of the digital currency market, the introduction of crypto ETFs has gained traction. Crypto ETFs can offer investors a convenient and regulated way to invest in crypto, with the added benefit of diversification and risk management. As with any investment, it’s important to understand the risks and benefits of crypto ETFs to see if they work for you.
