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If you want to speculate on the price of bitcoin and other cryptocurrencies without actually buying any digital coins, cryptocurrency ETFs offer one way to do this. ETFs allow you to track the price of an underlying asset or index.
However, cryptocurrency ETFs not only come with a certain level of risk attached, they’re also yet to receive the official seal of approval from important global regulators like the US Securities and Exchange Commission (SEC). Keep reading to find out why.
Disclaimer: This information should not be interpreted as either an endorsement or recommendation of managed investment schemes, cryptocurrency or any specific provider, service or offering. Consider your own circumstances and obtain independent advice before acting on this information.
ETF Name | Offered By | Symbol | Type | Retail or Wholesale? | Minimum Investment | SEC-approved? |
---|---|---|---|---|---|---|
Bitcoin Tracker One | XBT Provider | COINXBT | Exchange-traded note | Retail | 1 share | No |
Bitcoin Tracker Euro | XBT Provider | COINXBE | Exchange-traded note | Retail | 1 share | No |
Ether Tracker One | XBT Provider | COINETH | Exchange-traded note | Retail | 1 share | No |
Ether Tracker Euro | XBT Provider | COINETHE | Exchange-traded note | Retail | 1 share | No |
HB10 | Huobi Global | HB10 | Index fund | Retail | ~US$100 | No |
OK06ETT | OKEx | OK06ETT | Index fund | Retail | ~US$100 | No |
CoinJar Digital Currency Fund - Bitcoin Class | CoinJar | - | Index fund | Wholesale | AU$50,000 | No |
CoinJar Digital Currency Fund - Mixed Class | CoinJar | - | Index fund | Wholesale | AU$50,000 | No |
Coinbase Index Fund | Coinbase | CBIFS | Index fund | Wholesale | US$250,000 | No |
Bitcoin Investment Trust | Grayscale Investments | GBTC | Investment trust | Wholesale | US$50,000 | No |
Bitcoin Cash Investment Trust | Grayscale Investments | BCHFUND | Investment trust | Wholesale | US$25,000 | No |
Ethereum Investment Trust | Grayscale Investments | ETHFUND | Investment trust | Wholesale | US$25,000 | No |
Ethereum Classic Investment Trust | Grayscale Investments | ETCG | Investment trust | Wholesale | US$25,000 | No |
Litecoin Investment Trust | Grayscale Investments | LTCFUND | Investment trust | Wholesale | US$25,000 | No |
XRP Investment Trust | Grayscale Investments | XRPFUND | Investment trust | Wholesale | US$25,000 | No |
Zcash Investment Trust | Grayscale Investments | ZECFUND | Investment trust | Wholesale | US$25,000 | No |
Digital Large Cap Fund | Grayscale Investments | DLCFUND | Investment trust | Wholesale | US$50,000 | No |
Find out more about cryptocurrency funds in our 101 guide.
An ETF is a collection (often called a "basket") of assets that can be bought and sold on a stock market in much the same way that investors trade ordinary shares in a company. ETFs are investment funds designed to track the performance of a particular index, such as the ASX200, or a specific commodity or asset.
For example, a gold ETF allows you to invest in the value of gold without ever having to own any gold or find somewhere to store it.
As you might have already predicted, then, a cryptocurrency ETF is an ETF designed to give investors exposure to the cryptocurrency market. Commonly referred to as bitcoin ETFs, they track the price of one or more digital coins or tokens, providing exposure to cryptocurrency price movements without some of the risks and drawbacks associated with actually owning any digital currency.
The most basic way for a crypto ETF to track the price of a digital currency is to purchase and store that currency, and then divide shares in the ownership of those coins up between stakeholders. However, another model is for the ETF to own bitcoin futures.
Back to topWhile buying and selling cryptocurrency is a lot easier today than it was just a couple of years ago, it’s still complicated and confusing for most new users. Setting up and maintaining one or more digital wallets, understanding the difference between public and private keys, and dealing with the threats of hacking and theft are all significant barriers that crypto newcomers are faced with.
But cryptocurrency ETFs offer a way around these obstacles. When you invest in a crypto ETF, you don’t actually buy any cryptocurrency – instead, the ETF will be based on one of two approaches:
ETF units can be bought and sold on securities exchange markets, but brokerage fees apply. Just like shares traded on an exchange, the price of an ETF fluctuates throughout the day as investors buy and sell units.
You’ll also need to pay a management fee to the ETF issuer, but ETFs generally have lower fees compared to traditional managed funds. To help you understand ETFs a little better, let’s take a look at a hypothetical example. The XYZ ETF is designed to track the performance of the world’s five biggest cryptocurrencies by market cap – bitcoin, Ethereum, XRP, Bitcoin Cash and EOS. The company that issues the ETF owns a specified amount of each of the five currencies, and the ownership of these coins and tokens is divided into shares. Investors then buy and sell those ETF shares on stock exchanges in the hope of benefiting from price increases to the underlying digital currencies. Let’s assume that the value of 1 unit of XYZ ETF is $50, so you decide to purchase 10 units for a total of $500. After 12 months of growth for global crypto markets, the XYZ ETF unit price has risen to $100, meaning your total investment is now valued at $1,000. Had you taken a more traditional approach and decided to buy each of the five cryptocurrencies individually, you would have needed to create one or more wallets, register for an account on a crypto exchange, pay brokerage fees to purchase each individual crypto, and then track the price movements of each coin across the past year. But with a cryptocurrency ETF, it’s easier and far less time-consuming to gain access to a diverse portfolio of crypto assets.How crypto ETFs work
The history of cryptocurrency ETFs has been brief but controversial. Throughout 2017 and 2018, there’s been a fair bit of media coverage focused on the efforts of multiple ETF providers to get the U.S. Securities and Exchange Commission (SEC) to approve their proposals for a crypto-based ETF.
As of August 2018, the SEC is yet to approve any bitcoin or cryptocurrency ETFs, citing security concerns. It has rejected several crypto ETF proposals in the past, most notably shutting down applications from the Winklevoss twins in 2017 and 2018.
In late August, the SEC rejected nine further applications for bitcoin ETFs because the proposals did not meet the necessary legal requirements. Specifically, the following statement was included in all nine rejections:
...the Commission is disapproving this proposed rule change because, as discussed below, the exchange has not met its burden under the Exchange Act and the Commission's Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange's rules be designed to prevent fraudulent and manipulative acts and practices.
The SEC will rule on one further crypto ETF application, a joint venture between investment firm VanEck and fintech company SolidX, on 29 December 2018. Whether it gives the green light or not will be watched with much interest by crypto enthusiasts around the world.
If crypto ETFs can receive approval from the SEC and are launched in the US, this could mean a step forward in cryptocurrency’s battle for widespread adoption. Properly regulated and professionally managed ETFs could represent a safer option for investors concerned about the risks of buying digital currency, plus help bridge the gap between the world of crypto exchanges and more traditional investment tools.
At time of writing, there are no cryptocurrency ETFs listed on the Australian Securities Exchange (ASX). But if approval is granted in the US, there’s a good chance Australian ETF providers will follow suit and launch their own products.
Back to topJust because there are no ETFs listed on the ASX doesn’t mean Australian investors can’t gain access to cryptocurrency-related exchange-traded products and index funds. There are several options available in Australia and around the world from the following providers:
ETFs are traditionally designed to be bought and sold on securities exchanges, which means you can trade them via your regular online brokerage account. You may wish to sign up for an online trading account through your regular financial institution, or open an account with a specialist broker.
However, with exchanges like Huobi and OKEx now launching their own index funds, you may need to register for an account on the relevant crypto exchange in order to trade these funds.
Finally, if you’re interested in the potential of the technology behind blockchain, you may also want to consider ETFs focused on blockchain companies. Blockchain technology is one of the key innovations introduced by bitcoin and closely associated with the wider cryptocurrency industry, so it may be worth researching tech-focused ETFs and whether they provide any exposure to blockchain-related investments.
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 in any crypto ETF.
Disclosure: At the time of writing the author holds ADA, ICX, IOTA and XLM.
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