Crypto ETFs: Are They Worth Considering?
There is sure to be a lot of excitement when Crypto ETFs was introduced to the space as it was deemed that the first time cryptocurrencies and Wall Street teamed up. It was a watershed moment that cryptocurrencies could be accepted by the general public but it also has garnered a lot of criticism for going against the creation of bitcoin and other cryptocurrency. So what is this Crypto ETFs anyway and how does it actually work? Should you prefer it over the spot assets?
What are Crypto ETFs and how do they work?
ETFs is a concept that has been adopted into the crypto space because of its popularity in Wall Street and it is essentially marketed as combining the benefits of spot assets and mutual funds. ETFs basically get their value from a basket of assets or an index just like the S&P 500 but they are traded in the primary and secondary markets just like a spot asset hence the name Exchange Traded Fund.
ETFs gain popularity in Wall Street from the high demand for mutual funds such as Vanguard 500 Index and the First Index Investment Trust which was born in 1975. Unfortunately, although they were popular, they were often expensive, complicated, illiquid, and many required minimum investment amounts which are not accessible for the general public. Then ETFs was born in 1993 with S&P 500 trust ETS (ticker: SPDR) which are highly liquid because it is actively traded and were cheap because they can be divided into smaller parts just like its spot assets. It is still actively traded today even after 29 years and currently holds more than $300 billion assets. With this the industry grew to more 7,100 ETFs worldwide and found its way obviously on the hottest asset in the market which is cryptocurrency in 2014.
Crypto ETFs was pitched upon originally by the Winklevoss Twins in 2014 aiming to take advantage of the huge upsurge in hype and the price of the crypto market since 2011. Unfortunately their applications and a hundred of others are rejected by the SEC due to the absence of transparency at cryptocurrency exchanges (which set the price of individual tokens), the potential for market manipulation, and low liquidity levels in cryptocurrency markets. Until 2021 where the first cryptocurrency ETFs called ProShares Bitcoin Strategy ETF (BITO) was approved and started trading in October.
So How does it actually work? We all are familiar with the classic mutual funds where the unit price or as what we called Net Asset Value are usually calculated by the average value of assets and liabilities present in the mutual funds with putting in the consideration of the ratio of each asset, number of unit holders and the amount of asset it is holding per unit. Spot Assets on the other hand get their value from basically their demand and supply in their market and ETFs is basically the Net Asset Value of an ordinary Mutual Fund that is traded in the exchanges.
Of course Crypto ETFs comes in different variations depending on the assets they are tracking and two of the most mentioned are Spot Crypto ETFs and Futures Crypto ETFs. From the name itself you can directly guess that Spot Crypto ETFs are tracking the price of Spot Assets or Index for example Bitwise 10 Index Crypto Fund while Futures Crypto ETFs are tracking the price of derivatives or futures contract for example Proshares Bitcoin Strategy ETFs or Valkyrie Bitcoin Strategy ETFs.
Crypto ETFs are moving at a rapid pace after the approval of Proshares and it is currently regulated by the SEC. It is predicted to double its inflows from its 2021 numbers at $2.7 Billion this year but with a dipping market entering a bearish state, are you better off holding the crypto assets?
Is it worth considering?
Crypto ETFs might be a safer way for the general public who don’t have the full knowledge of the cryptocurrency market but it is still prone to a lot of risk that is there in the normal spot assets. Well the most visible risk is because it is traded actively in the secondary market, what makes people think it cannot be manipulated just like the cryptocurrency itself? Obviously it is much more diverse and governed by the SEC but from what we learn from the gamestop incident is anything can be tampered with and if we pair that with crypto volatility, then the ETF Holder will be up for a wild ride.
Which actually brings me to my next point “Divergence”, divergence will hit the hardest for Futures ETF like Proshares which is comprised of futures contract. Futures Contract are contracts that are based upon the future value of a price and unlike their spot assets, futures can somehow be very risky because there is no certainty that the price of an asset on the futures contract will be the same and this is what you called by Divergence. In that sense, trading futures ETFs is more about betting on the price of the futures itself than on the underlying asset, and would you want to rely your investment on a bet?
Not only sometimes it’s a bet but you also incur hefty fees just to maintain your ETF position like the normal Trading fees to open and close positions, arbitrage fees to maintain the price of the futures contract, expense ratio charges annually by the asset manager to maintain your portfolio and you get a small cut from the profits made. A simple way to avoid all this is to buy the crypto on its own — you are then able to avoid all these fees of course except trading fees but you own and control the assets so you can maximize your own profit by setting your own open and close positions.
Which brings me to my last point and that is ETFs sometimes really go against the idea behind why cryptocurrency is created. Cryptocurrency in general (obviously we are not talking about the memecoins) is created to be a deflationary system that help drive value because of its limited supply and ETFs are something you can churn out more and more because there is no limit to the number of unit. Of course it is a much diversified portfolio but in the long run no ETFs or Mutual Funds can consistently outperform the market so if it still bears the same risk, you are really much better off holding the crypto asset on its own.
We in Nagaya Technologies Pte. Ltd are excited to see the development that is going on in the crypto space and we hope that our hybrid crypto asset Nagaya could provide the benefits to all our holders worldwide. For more information regarding on the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial
