For many years, institutional investors have sought to introduce exchange-traded funds (ETFs) into cryptocurrency assets. These applications frequently fail and are denied by the SEC for a variety of reasons, including potential market manipulation and a lack of regulatory oversight. However, on January 10, 2024, the SEC approved bitcoin exchange-traded funds (ETFs), marking a significant milestone for the cryptocurrency markets.
Crypto ETFs are a bridge between the cryptocurrency world and traditional markets. It allows investors who do not want to take on the risk of crypto assets to invest in funds that are more regulated and less volatile.
What is an ETF, and how does it work?
“Exchange-traded funds,” or ETFs, refer to funds that trade on exchanges and typically track an index. Buying and selling a collection of assets during market hours through an exchange-traded fund (ETF) can help diversify your portfolio and potentially reduce risk.
ETF trading typically involves different parties: the shareholders and fund provider who own the underlying assets create a fund to track their performance and also offer investors shares of that fund. Contrary to certain public opinions, an ETF’s underlying assets are not owned by shareholders; rather, they own a portion of the fund. However, dividend payments for any dividend stocks in the index may be made to investors who track the stock market.
ETFs trade at market-determined prices that typically diverge from the value of the underlying asset or index, which could be anything like stocks or even gold. This means an ETF’s longer-term returns may differ from those of its underlying assets due to factors like expenses.
What are Cryptocurrency Exchange-Traded Funds (ETFs) and How Do They Work?
Any exchange-traded fund (ETF) that offers exposure to cryptocurrencies or related assets is referred to as a cryptocurrency ETF. Cryptocurrency ETFs can hold a variety of assets, including stocks of companies in the cryptocurrency industry, futures contracts, and actual cryptocurrencies. They can also provide exposure to a single cryptocurrency, like Bitcoin, or various cryptocurrencies, like Ethereum.
Crypto ETFs are traded on conventional stock exchanges, just like other funds of this type, and investors can hold them in traditional brokerage accounts. The fees for crypto ETFs are typically higher than those of other ETFs, and although the funds are regulated, the crypto markets in which the funds are invested are not. To prevent fraudulent activities and ensure fair trading practices in the cryptocurrency markets, the U.S. SEC has demanded proper regulation.
Types of Cryptocurrency ETFs
Cryptocurrency ETFs can be categorized into two major types: futures and spot cryptocurrency ETFs.
Futures Cryptocurrency ETFs
Crypto futures exchange-traded funds (ETFs) are collections of assets linked to cryptocurrency tokens that brokerages offer on conventional exchanges for trading as ETFs. These exchange-traded funds (ETFs) aim to provide retail and other investors with exposure to cryptocurrencies without actually owning them. In this case, investors forecast future values of the cryptocurrency rather than its current market value.
Crypto futures exchange-traded funds (ETFs) operate on futures contracts, which are standardized, time-limited agreements that allow investors to purchase or dispose of the underlying asset at a set date. Ownership is not transferred by the contracts, and existing futures contracts must be settled or exchanged for new ones before expiration. Examples arw iShares Bitcoin Trust (ticker: IBIT), Grayscale Ethereum Trust (ETHE), Cyber Hornet S&P 500 and Bitcoin 75/25 Strategy ETF (ZZZ).
Spot Cryptocurrency ETFs
Spot cryptocurrency ETFs allow investors to follow the price of cryptocurrencies within a financial market. Using their brokerage accounts, cryptocurrency investors can invest in crypto thanks to spot cryptocurrency ETFs. However, investors are responsible for paying brokerage and management fees. A spot crypto ETF, as opposed to a crypto futures ETF, allows for direct investments in crypto (as the underlying asset). Examples include Franklin Templeton Digital Holdings Trust (EZBC), VanEck Bitcoin Trust (HODL), VanEck Ethereum ETF (ETHV), and Franklin Ethereum ETF (EZET).
How Cryptocurrency ETFs Will Influence the Crypto Payment
Legitimacy of cryptocurrency
The presence of crypto ETFs is predicted to influence the cryptocurrency’s legitimacy in different ways. First, the approval of cryptocurrency ETFs is bound to enhance the regulatory framework and market that support the legitimacy of cryptocurrency as a publicly traded asset.
Also, it provided much-needed transparency and investor protection that was previously a cause for concern by prospective investors. This legalization will lead to the public acceptance of cryptocurrency; inadvertently, improving crypto payments among local business owners and individuals.
Improved liquidity of crypto assets
Cryptocurrency ETFs will enable investors to take up positions and liquidate those positions through regular brokerage accounts, retirement accounts like IRAs and 401(k), and other similar channels. This would result in increasing the liquidity of the cryptocurrency market, attracting not just investors but small and medium-scale businesses looking to liquidate their crypto payments to fiat currencies.
Increase in cryptocurrency price and reduction in cost
The prices of cryptocurrencies will see an upward trajectory accordingly, due to the increased demand and limited supply. Since ETFs offer investors cheaper ways to get cryptocurrencies, the trading fees charged by these ETFs are typically lower than what cryptocurrency exchanges charge. Business owners with crypto payments will take advantage of the positive ripple effect and earn more revenue.
Conclusion
Following the approval and introduction of the spot Bitcoin ETF, daily ETF volumes have increased. In March, they achieved $10 billion in daily volume and have been steadily trading in the billions. Key players and participants are enforcing constant communication between authorities, financial institutions, and market players to promote the continuous development of cryptocurrency ETFs.
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