DeFi

·

June 3, 2024

Introduction to crypto ETFs

Jonatan Blum

Crypto exchange-traded funds (ETFs) give regular investors exposure to cryptocurrencies without needing to hold the assets themselves. Are crypto ETFs the right alternative for you?

Cryptocurrencies have gained popularity in recent years, but directly investing and managing such digital assets can be complex, requiring familiarity with exchanges, wallets, and the underlying technologies. Crypto exchange-traded funds (ETFs) offer a way for investors to gain exposure to cryptocurrencies through a regulated and simplified investment vehicle. The recent approval of spot Bitcoin ETFs and Ethereum ETFs by the US Securities and Exchange Commission (SEC) marks a major milestone. 

As speculation mounts around potential ETFs for other cryptocurrencies like Solana, this guide will help you understand what crypto ETFs are and their advantages, drawbacks and impact on the cryptocurrency space.

What is an ETF?

ETFs, short for "exchange-traded funds," are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index or just a specific asset, much like stocks. They offer investors the flexibility to buy and sell shares in real-time throughout the trading day using a qualified broker. 

Understanding crypto ETFs

Crypto ETFs provide exposure to cryptocurrencies such as bitcoin, without the complications of directly owning digital assets. They are ETFs like any other, but they are based on the underlying crypto assets. 

Banner showing which crypto ETFs have been approved for trading.

Only two crypto assets, Bitcoin and Ether, have been approved for spot ETFs in the USA, though futures ETFs already exist. While other jurisdictions have also approved spot crypto ETFs already, the size of the US market is has made these recent approvals especially significant.

Bitcoin ETFs

In January 2024, the SEC gave the green light for Bitcoin spot ETFs, marking a major achievement. It provides a simple, regulated way for everyday investors to get into Bitcoin. A Bitcoin ETF follows the price of Bitcoin, letting investors trade Bitcoin as if they were buying the actual coins, but without the need to manage a digital wallet or worry about security issues.

Bitcoin ETFs
Read more about Bitcoin ETFs.

By investing in a Bitcoin ETF, investors can deal with Bitcoin through their usual investment accounts, avoiding the complex steps usually involved in owning and managing cryptocurrencies directly. As of today, Bitcoin ETFs currently manage around $54B of Bitcoin, around 780,000 BTC, of which most are custodied by Coinbase.

Ethereum ETFs

The SEC recently approved the sale of spot Ethereum ETFs, a development that has surprised many in the crypto market. This move follows the earlier approval of Bitcoin ETFs in January, which notably boosted Bitcoin's price to new highs. However, trading of the newly approved spot Ethereum ETFs will not commence immediately, as issuers are still required to obtain SEC approval for individual ETF registration statements. 

Ethereum ETFs
Read more about Ethereum ETFs.

The industry has reacted positively yet cautiously to the SEC's swift action on Ethereum ETFs, especially given the regulator's historically cautious stance towards cryptocurrency. The recent approval of spot Ethereum ETFs has subtly suggested that Ethereum might be considered a commodity rather than a security. Although the SEC didn't explicitly classify Ethereum as a commodity, the term "commodity-based trust shares" used in the approval documents leans towards settling the ongoing debate about how to categorize unstaked Ethereum.

When will Ethereum ETFs start trading? Although ETH ETFs have already been approved, none are available for trading yet. The general consensus is that it may take a couple of months, but could be much sooner.

Commodities vs Securities

The debate on whether Ethereum or cryptocurrencies, in general, should be classified as securities, like stocks, or commodities, like wheat or gold, is crucial because it determines how they are regulated, sold, and listed, and who has legal standing in case of disputes. 

In the USA, securities and commodities are regulated by two different agencies. The SEC oversees securities, focusing on investor protection and disclosure, while the Commodity Futures Trading Commission (CFTC) regulates commodities, emphasizing market stability and fraud prevention.

The distinction between these categories is significant:

  • Commodities are basic goods used in commerce that can be exchanged with other goods of the same type, including items like gold, oil, and agricultural products.
  • Securities represent either an ownership position in a corporation (stocks), a creditor relationship with a government or corporation (bonds), or ownership rights (options).

The cryptocurrency market's complexity suggests that a one-size-fits-all classification is unlikely and determinations may vary depending on the specific token. Ethereum's classification, for instance, has been particularly contentious. While the CFTC has treated Bitcoin and other cryptocurrencies as commodities since 2018, the SEC has been more cautious.

This distinction is crucial not just for regulatory clarity but also affects other entities and cryptocurrencies that might be concerned about potential litigation with the SEC. 

Which crypto ETF can you expect next?

Even though spot Ethereum ETFs haven't yet received full approval, speculation is already mounting about which cryptocurrency might be next in line. Ripple’s XRP and Solana are frequently mentioned, with a particular focus on Solana, an Ethereum competitor. Solana ranks as the fifth-largest cryptocurrency by market cap, only behind stablecoin Tether (USDT), Binance Coin (BNB), and  Ethereum itself.

Given its technological parallels with Ethereum, some analysts and investors believe that the SEC would find it difficult to reject a spot ETF application for Solana, especially after moving towards approving Ethereum. However, while this development brings excitement to cryptocurrency enthusiasts, there has been no official plan mentioned for a Solana spot ETF at the time of writing.

Considering the status of Bitcoin as a commodity, there are also arguments to be made for Bitcoin forks, which include the memecoin Dogecoin, as potential ETF candidates. While there is probably no legal reason why they couldn't be approved, it would require the exchanges themselves to consider such ETFs as viable offerings before we would see Doge on the NYSE.

Why are crypto ETFs important for adoption?

The introduction of spot Bitcoin ETFs marks a significant milestone in the wider acceptance of cryptocurrencies, enhancing institutional engagement and expanding investor access. The Bitcoin ETFs lower the barriers to entry for investors unfamiliar with the technical and regulatory intricacies of cryptocurrencies, thus paving the way for broader market participation and the mainstream adoption of crypto assets. By providing a straightforward entry point for everyday investors and those skeptical about cryptocurrencies, these ETFs streamline investments in Bitcoin via established financial pathways.

Want the real deal? Trade Ethereum and other crypto directly on Matcha!

This not only shifts the perception of crypto from a speculative asset to a recognized financial instrument but also attracts a broader spectrum of retail and institutional investors, expanding the market. 

Are ETFs right for you?

Bitcoin and Ethereum has become increasingly popular with lots of use cases, but not everyone wants to dive into the complex world of digital wallets and crypto exchanges. For those looking for a simpler entry point, crypto ETFs offer a solution. However, deciding whether crypto ETFs are suitable for your investment strategy requires understanding their advantages and limitations. If you’re already familiar with crypto, it’s highly likely that ETFs are not suitable for you, but rather investing through an exchange or a user friendly DEX like Matcha may provide the better choice. 

ETF Crypto self custody
Assets managed by a third party Full control of your assets
Investments insured under consumer protection laws No insurance against loss or theft
Investors must register Greater financial privacy
Yearly management fees No management fees
Markets open on business days Markets always open

Custodial vs. non-custodial crypto ownership

Bitcoin and Ethereum differ from traditional assets like stocks and bonds, which require a regulated custodian. Cryptocurrencies can be held in self-custody, which means you directly control your Bitcoin and Ether without an intermediary. 

Want to buy crypto? See our guide to low fee crypto exchanges!

Benefits of self-custody

  • Control of your funds: You control your private keys and, by extension, your funds at all times.
  • Security: Self-custody can be akin to having a personal safe that only you can access.
  • Financial privacy: Setting up a self-custody wallet does not require personal information, providing you with greater financial privacy.
  • DeFi participation: You can directly interact with decentralized applications without intermediaries.

Risks of self-custody

  • Complexity: Managing your own crypto requires technical knowledge and strict security measures.
  • Risk of loss: Losing your private keys means losing access to your crypto forever.
  • Sole responsibility: You are solely responsible for the security and management of your assets.

Pros and cons of Crypto ETFs

Advantages of Crypto ETFs

  • Simplicity: Crypto ETFs provide a straightforward way to invest in cryptocurrencies. Unlike direct crypto investments, you don't need to manage digital wallets or navigate crypto exchanges. This can be a major draw for those unfamiliar with the intricacies of cryptocurrency technologies.
  • Security: Investing through ETFs mitigates the risk of losing your investment due to hacking or lost security keys, a common concern with direct crypto holdings.

Disadvantages of Crypto ETFs

  • Higher fees: Crypto ETFs often come with higher expense ratios and trading fees compared to direct cryptocurrency transactions. These fees can add up and affect your investment returns over time.
  • Indirect ownership: When you invest in a crypto ETF, you own shares of a fund, not the actual cryptocurrencies.
  • Limited trading Hours: Unlike cryptocurrencies, which can be traded 24/7 on global markets, ETFs are only tradable during stock market hours, which may limit your ability to respond quickly to market changes.
  • Regulatory oversight: While regulation provides some level of investor protection, it also means that crypto ETFs are subject to changes in regulatory policies, which can impact the performance and availability of these funds.
  • Asset forfeiture concerns: Investing in ETFs involves certain legal and regulatory risks, including asset forfeiture. The US government retains the right to seize assets, including digital assets held within these funds, under certain conditions. The potential for government intervention exists not only with ETFs but with any crypto not held in self-custody.
  • Tax implications: The Internal Revenue Service (IRS) treats cryptocurrencies as digital assets, not as currency. This means that like other investments, profits from crypto ETFs are subject to capital gains tax. If you're considering investing in crypto ETFs, it's essential to understand the tax implications similar to direct cryptocurrency investments. Given the rapidly evolving regulatory environment, consulting with a tax advisor is recommended to ensure compliance and optimize your tax strategy.

ETFs bring crypto closer to consumers

Crypto ETFs represent a significant development in integrating cryptocurrencies into mainstream financial markets. They offer a safer and more accessible means for investors to engage with the dynamic and more complicated assets being cryptocurrencies. As the landscape for these ETFs evolves, they will likely play an increasingly important role in shaping the future of digital asset investing. 

Whether ETFs are the right thing for you depends on your specific investment goals and comfort with associated risks or complexities. To get the full benefits of cryptocurrency as a decentralized and permissionless form of money, you should try to become familiar with the fundamentals of self-custody. If you simply want exposure to price action, ETFs may be a sufficient alternative.

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DeFi

·

June 3, 2024

Introduction to crypto ETFs

An introduction to crypto ETFs

Crypto exchange-traded funds (ETFs) give regular investors exposure to cryptocurrencies without needing to hold the assets themselves. Are crypto ETFs the right alternative for you?

Cryptocurrencies have gained popularity in recent years, but directly investing and managing such digital assets can be complex, requiring familiarity with exchanges, wallets, and the underlying technologies. Crypto exchange-traded funds (ETFs) offer a way for investors to gain exposure to cryptocurrencies through a regulated and simplified investment vehicle. The recent approval of spot Bitcoin ETFs and Ethereum ETFs by the US Securities and Exchange Commission (SEC) marks a major milestone. 

As speculation mounts around potential ETFs for other cryptocurrencies like Solana, this guide will help you understand what crypto ETFs are and their advantages, drawbacks and impact on the cryptocurrency space.

What is an ETF?

ETFs, short for "exchange-traded funds," are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index or just a specific asset, much like stocks. They offer investors the flexibility to buy and sell shares in real-time throughout the trading day using a qualified broker. 

Understanding crypto ETFs

Crypto ETFs provide exposure to cryptocurrencies such as bitcoin, without the complications of directly owning digital assets. They are ETFs like any other, but they are based on the underlying crypto assets. 

Banner showing which crypto ETFs have been approved for trading.

Only two crypto assets, Bitcoin and Ether, have been approved for spot ETFs in the USA, though futures ETFs already exist. While other jurisdictions have also approved spot crypto ETFs already, the size of the US market is has made these recent approvals especially significant.

Bitcoin ETFs

In January 2024, the SEC gave the green light for Bitcoin spot ETFs, marking a major achievement. It provides a simple, regulated way for everyday investors to get into Bitcoin. A Bitcoin ETF follows the price of Bitcoin, letting investors trade Bitcoin as if they were buying the actual coins, but without the need to manage a digital wallet or worry about security issues.

Bitcoin ETFs
Read more about Bitcoin ETFs.

By investing in a Bitcoin ETF, investors can deal with Bitcoin through their usual investment accounts, avoiding the complex steps usually involved in owning and managing cryptocurrencies directly. As of today, Bitcoin ETFs currently manage around $54B of Bitcoin, around 780,000 BTC, of which most are custodied by Coinbase.

Ethereum ETFs

The SEC recently approved the sale of spot Ethereum ETFs, a development that has surprised many in the crypto market. This move follows the earlier approval of Bitcoin ETFs in January, which notably boosted Bitcoin's price to new highs. However, trading of the newly approved spot Ethereum ETFs will not commence immediately, as issuers are still required to obtain SEC approval for individual ETF registration statements. 

Ethereum ETFs
Read more about Ethereum ETFs.

The industry has reacted positively yet cautiously to the SEC's swift action on Ethereum ETFs, especially given the regulator's historically cautious stance towards cryptocurrency. The recent approval of spot Ethereum ETFs has subtly suggested that Ethereum might be considered a commodity rather than a security. Although the SEC didn't explicitly classify Ethereum as a commodity, the term "commodity-based trust shares" used in the approval documents leans towards settling the ongoing debate about how to categorize unstaked Ethereum.

When will Ethereum ETFs start trading? Although ETH ETFs have already been approved, none are available for trading yet. The general consensus is that it may take a couple of months, but could be much sooner.

Commodities vs Securities

The debate on whether Ethereum or cryptocurrencies, in general, should be classified as securities, like stocks, or commodities, like wheat or gold, is crucial because it determines how they are regulated, sold, and listed, and who has legal standing in case of disputes. 

In the USA, securities and commodities are regulated by two different agencies. The SEC oversees securities, focusing on investor protection and disclosure, while the Commodity Futures Trading Commission (CFTC) regulates commodities, emphasizing market stability and fraud prevention.

The distinction between these categories is significant:

  • Commodities are basic goods used in commerce that can be exchanged with other goods of the same type, including items like gold, oil, and agricultural products.
  • Securities represent either an ownership position in a corporation (stocks), a creditor relationship with a government or corporation (bonds), or ownership rights (options).

The cryptocurrency market's complexity suggests that a one-size-fits-all classification is unlikely and determinations may vary depending on the specific token. Ethereum's classification, for instance, has been particularly contentious. While the CFTC has treated Bitcoin and other cryptocurrencies as commodities since 2018, the SEC has been more cautious.

This distinction is crucial not just for regulatory clarity but also affects other entities and cryptocurrencies that might be concerned about potential litigation with the SEC. 

Which crypto ETF can you expect next?

Even though spot Ethereum ETFs haven't yet received full approval, speculation is already mounting about which cryptocurrency might be next in line. Ripple’s XRP and Solana are frequently mentioned, with a particular focus on Solana, an Ethereum competitor. Solana ranks as the fifth-largest cryptocurrency by market cap, only behind stablecoin Tether (USDT), Binance Coin (BNB), and  Ethereum itself.

Given its technological parallels with Ethereum, some analysts and investors believe that the SEC would find it difficult to reject a spot ETF application for Solana, especially after moving towards approving Ethereum. However, while this development brings excitement to cryptocurrency enthusiasts, there has been no official plan mentioned for a Solana spot ETF at the time of writing.

Considering the status of Bitcoin as a commodity, there are also arguments to be made for Bitcoin forks, which include the memecoin Dogecoin, as potential ETF candidates. While there is probably no legal reason why they couldn't be approved, it would require the exchanges themselves to consider such ETFs as viable offerings before we would see Doge on the NYSE.

Why are crypto ETFs important for adoption?

The introduction of spot Bitcoin ETFs marks a significant milestone in the wider acceptance of cryptocurrencies, enhancing institutional engagement and expanding investor access. The Bitcoin ETFs lower the barriers to entry for investors unfamiliar with the technical and regulatory intricacies of cryptocurrencies, thus paving the way for broader market participation and the mainstream adoption of crypto assets. By providing a straightforward entry point for everyday investors and those skeptical about cryptocurrencies, these ETFs streamline investments in Bitcoin via established financial pathways.

Want the real deal? Trade Ethereum and other crypto directly on Matcha!

This not only shifts the perception of crypto from a speculative asset to a recognized financial instrument but also attracts a broader spectrum of retail and institutional investors, expanding the market. 

Are ETFs right for you?

Bitcoin and Ethereum has become increasingly popular with lots of use cases, but not everyone wants to dive into the complex world of digital wallets and crypto exchanges. For those looking for a simpler entry point, crypto ETFs offer a solution. However, deciding whether crypto ETFs are suitable for your investment strategy requires understanding their advantages and limitations. If you’re already familiar with crypto, it’s highly likely that ETFs are not suitable for you, but rather investing through an exchange or a user friendly DEX like Matcha may provide the better choice. 

ETF Crypto self custody
Assets managed by a third party Full control of your assets
Investments insured under consumer protection laws No insurance against loss or theft
Investors must register Greater financial privacy
Yearly management fees No management fees
Markets open on business days Markets always open

Custodial vs. non-custodial crypto ownership

Bitcoin and Ethereum differ from traditional assets like stocks and bonds, which require a regulated custodian. Cryptocurrencies can be held in self-custody, which means you directly control your Bitcoin and Ether without an intermediary. 

Want to buy crypto? See our guide to low fee crypto exchanges!

Benefits of self-custody

  • Control of your funds: You control your private keys and, by extension, your funds at all times.
  • Security: Self-custody can be akin to having a personal safe that only you can access.
  • Financial privacy: Setting up a self-custody wallet does not require personal information, providing you with greater financial privacy.
  • DeFi participation: You can directly interact with decentralized applications without intermediaries.

Risks of self-custody

  • Complexity: Managing your own crypto requires technical knowledge and strict security measures.
  • Risk of loss: Losing your private keys means losing access to your crypto forever.
  • Sole responsibility: You are solely responsible for the security and management of your assets.

Pros and cons of Crypto ETFs

Advantages of Crypto ETFs

  • Simplicity: Crypto ETFs provide a straightforward way to invest in cryptocurrencies. Unlike direct crypto investments, you don't need to manage digital wallets or navigate crypto exchanges. This can be a major draw for those unfamiliar with the intricacies of cryptocurrency technologies.
  • Security: Investing through ETFs mitigates the risk of losing your investment due to hacking or lost security keys, a common concern with direct crypto holdings.

Disadvantages of Crypto ETFs

  • Higher fees: Crypto ETFs often come with higher expense ratios and trading fees compared to direct cryptocurrency transactions. These fees can add up and affect your investment returns over time.
  • Indirect ownership: When you invest in a crypto ETF, you own shares of a fund, not the actual cryptocurrencies.
  • Limited trading Hours: Unlike cryptocurrencies, which can be traded 24/7 on global markets, ETFs are only tradable during stock market hours, which may limit your ability to respond quickly to market changes.
  • Regulatory oversight: While regulation provides some level of investor protection, it also means that crypto ETFs are subject to changes in regulatory policies, which can impact the performance and availability of these funds.
  • Asset forfeiture concerns: Investing in ETFs involves certain legal and regulatory risks, including asset forfeiture. The US government retains the right to seize assets, including digital assets held within these funds, under certain conditions. The potential for government intervention exists not only with ETFs but with any crypto not held in self-custody.
  • Tax implications: The Internal Revenue Service (IRS) treats cryptocurrencies as digital assets, not as currency. This means that like other investments, profits from crypto ETFs are subject to capital gains tax. If you're considering investing in crypto ETFs, it's essential to understand the tax implications similar to direct cryptocurrency investments. Given the rapidly evolving regulatory environment, consulting with a tax advisor is recommended to ensure compliance and optimize your tax strategy.

ETFs bring crypto closer to consumers

Crypto ETFs represent a significant development in integrating cryptocurrencies into mainstream financial markets. They offer a safer and more accessible means for investors to engage with the dynamic and more complicated assets being cryptocurrencies. As the landscape for these ETFs evolves, they will likely play an increasingly important role in shaping the future of digital asset investing. 

Whether ETFs are the right thing for you depends on your specific investment goals and comfort with associated risks or complexities. To get the full benefits of cryptocurrency as a decentralized and permissionless form of money, you should try to become familiar with the fundamentals of self-custody. If you simply want exposure to price action, ETFs may be a sufficient alternative.

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