Benefits vs risks of cryptocurrency ETFs
Just like any other type of investment, cryptocurrency ETFs have a range of pros and cons. It's essential that you weigh up the potential benefits against the risks involved before deciding whether you should invest.
- Simplicity. Learning how to buy and store cryptocurrency can be a difficult or nerve-racking process for some. ETFs make it simple to gain exposure to digital currencies without going through the hassle of owning any coins.
- Accessibility. An increasing number of cryptocurrency ETFs are available through traditional stockbrokers and exchanges. In addition to making them easy to access, they also come with the legal and regulatory protections associated with such services.
- Diversification. Some ETFs offer a basket of various cryptocurrencies that streamlines the process of building a diverse portfolio. It prevents the need to purchase several currencies, which could involve multiple exchange accounts, wallets and technical understanding.
- Security. Cryptocurrency exchanges and wallets are susceptible to hacking attacks and theft. Buying units in a crypto ETF protects investors against these risks as they don't actually own any digital coins.
- Limited choice. There's currently limited choice available for anyone wanting to invest in cryptocurrency-related ETFs, although this is changing on a monthly basis. The world's most accessible ETF market, the United States, finally approved cryptocurrency-related ETFs in late 2021. It is likely that more ETF options will follow.
- Volatility. Cryptocurrencies are famous for their volatility and can experience substantial price fluctuations in a short space of time. If the market moves against you, the value of your crypto ETF units could take a sharp dive.
- Lack of risk diversification. Traditional ETFs often include an extensive range of securities to help achieve diversification. They sometimes include government bonds and debt to mitigate market risk. However, most versions of crypto ETFs only provide access to a limited range of digital currencies.
- Crypto-specific risks still apply. Just because an investor doesn't have to deal with any of the risks of owning digital currency, that doesn't mean these risks cease to exist. Issues such as hacking will still need to be managed by the ETF provider.
- Fees apply. On top of an annual management fee, investors will need to consider brokerage fees that apply when buying or selling ETF units.
- International taxes. If an investor buys ETF units located in another country they need to be aware that foreign tax may apply.
