Cryptocurrencies are becoming increasingly popular, and as a result, there is greater demand for crypto-focused ETFs. However, there are some significant differences between typical and crypto ETFs that investors should be aware of before opening a position.
We’ll look at the key differences between these two types of ETFs. We’ll also review the advantages and disadvantages of purchasing crypto ETFs versus traditional ETFs. By understanding the differences between these two types of ETFs, investors can decide which is the best crypto ETF for them as suggested by home.saxo.
How to Invest in Crypto without Buying Coins
The easiest way to get investment exposure to crypto without buying crypto itself is to purchase stock in a company with a financial stake in the future of cryptocurrency or blockchain technology.
Rather than choosing and investing in individual stocks, experts recommend investors put their money in diversified index funds or ETFs instead, with their proven record of long-term growth in value.
Many of the best index funds — like S&P 500 or total market funds — include publicly traded companies that have some involvement with the industry by either mining crypto, being involved in the development of blockchain technology, or holding significant amounts of crypto on their balance sheets, says Johnson.
For example, Tesla — which holds over a billion dollars in Bitcoinand accepted Bitcoin payments in the past — is included in any funds that track the S&P 500. Since its 2020 inclusion, it’s become one of the most valuable, and therefore influential companies in the index. And Coinbase, the only publicly traded cryptocurrency exchange, is in the ARK Fintech Innovation ETF.
However, if you have some extra cash (and you’re tolerant of the risk), you can choose to allocate a small amount of your portfolio to specific mutual funds. “An investor bullish on the future of cryptocurrency could invest in the stocks of companies working on that technology,” says Jeremy Schneider, the personal finance expert behind Personal Finance Club.
Experts generally recommend keeping these speculative investments — whether a single company’s stock, specialized index funds, or cryptocurrency itself — to less than 5% of your total investing portfolio.
Differences between regular and crypto ETFs
What are the critical differences between regular and crypto ETFs?
Specific ETFs primarily invest in stocks and other traditional asset classes, such as bonds or commodities. On the other hand, Crypto ETFs invest in digital assets such as Bitcoin or Ethereum.
Regular ETFs are subject to strict regulations and oversight as other investment products, such as mutual funds. On the other hand, Crypto ETFs are not currently subject to the same level of regulatory scrutiny, and it means a greater degree of risk (or freedom, depending on how you view it) when investing in crypto ETFs.
Typical ETFs tend to be relatively low-risk investments. On the other hand, Crypto ETFs can be pretty volatile and risky.
Regular ETFs typically offer modest returns. On the other hand, Crypto ETFs have the potential to generate much higher returns when traded correctly.
Pros and cons of ETFs
We’ve examined some of the main pros and cons of investing in regular ETFs.
Some of the pros of regular ETFs include.
1. Lower fees
One of the most compelling advantages of ETFs is that they tend to have lower fees than traditional mutual funds. ETFs are generally index funds that track a specific market benchmark or index. Index funds generally have lesser expense ratios than actively-managed funds since they don’t require the same research and management level. Investors attain more money in their pockets when investing in ETFs.
Another advantage of ETFs is that they can be more tax-efficient than traditional mutual funds. ETFs are often structured as pass-through entities, meaning that they don’t pay corporate taxes on their earnings. Instead, the taxes are passed to the shareholders, who pay taxes on their dividends and capital gains. It can result in a reduced overall tax bill for investors in ETFs.
Some of the cons of regular ETFs include.
1. Tracking error
One is that ETFs can be subject to tracking errors when the fund deviates from its target index or benchmark. While this isn’t necessarily negative, predicting an ETF’s performance might be complex.
Additionally, ETFs may also be less liquid than traditional mutual funds, meaning that it may be challenging to sell your shares in times of market turbulence.
Pros and cons of investing in crypto ETFs
Let’s discuss the pros and cons of investing in crypto ETFs.
We’ve highlighted the two key advantages of crypto ETFs.
One significant advantage of crypto ETFs is that they offer diversification benefits by spreading risk across various digital assets. It can help reduce volatility and improve overall returns over time. Additionally, some experts believe that investing in the best crypto ETFs could mitigate some of the risks associated with bitcoin’s highly-volatile price movements.
Another critical advantage of crypto ETFs is that they offer greater liquidity than buying and selling individual cryptocurrencies, making it easier to enter or exit positions quickly. They also eliminate the need for investors to manage their portfolios, as this is done by the fund manager instead.
Now let’s consider the two main cons of investing in crypto ETFs.
The main disadvantage of crypto ETFs is that they can be more expensive than other investment options since they typically require additional management fees on top of trading costs. Additionally, many experts point out that standard investor protections offered by other types of funds, such as capital guarantees and insurance policies against losses, are not available with cryptocurrency assets. It could leave investors vulnerable to price fluctuations and fraud.
2. Tracking problems
Another potential downside of crypto ETFs is that they may not always accurately track the underlying digital assets they represent. For example, if a fund invests in multiple cryptocurrencies, ensuring that they are equally represented may be challenging. Additionally, the value of digital assets can change rapidly and unexpectedly, which could cause losses for investors even if the overall market is growing.