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. While direct ownership of cryptocurrencies involves risks like hacking and theft, investing in a crypto ETF can offer enhanced security. This is because the investor doesn't directly hold the digital coins, but rather units in a fund. This transfers the responsibility of securing the assets from the individual to the ETF provider, potentially offering a more secure investment vehicle.
- Limited choice. There's 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. Despite the added security layer for individual investors, it's important to note that the inherent risks associated with cryptocurrencies still exist. The assets held by the ETF are still digital currencies, which means they're subject to the same risks of hacking and theft. The ETF provider manages these risks, but they cannot be entirely eliminated. This means while individual investors might not directly face these risks, the overall value of their investment is still impacted by the security of the underlying assets.
- 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.
