Crypto EFTs (exchange-traded funds) are a valuable tool used by traders to mitigate risk and improve their ROIs. Many people are surprised to learn that the journey to crypto ETFs was a long-fought battle that saw numerous firms, attempts, and fails before regulators finally got on board with the concept. Here’s some valuable insight into what crypto EFTs are and how they can help you to improve your trading strategy.
What is an ETF?
An ETF is a fund set up to track the performance of a group of assets. There are ETFs widely in use in the stock, bonds, and commodities markets. Notably, ETFs are somewhat similar to mutual funds in that they can include a variety of investments. ETF investments can be grouped in any fashion. There are crypto ETFs that track the price of the top 3, 5, 10, 50, and 100 cryptocurrencies.
You can also have ETFs based on a particular industry or sector. For example, there are crypto ETFs that track only smart contract programmable blockchains like EOS, Ethereum, Avalanche, and Polkadot. In the traditional sector, you have ETFs dedicated to strictly banking, healthcare, defense, and more. This flexibility makes ETFs very popular with traders seeking to get exposure to a diversified portfolio of assets.
History of Crypto ETFs
It was a real struggle to get ETFs approved by the SEC (Securities and Exchange Commission). One of the earliest attempts was spearheaded by the Winklevoss Twins in 2017. Notably, the Winklevoss Twins were among the first Bitcoin billionaires. They are also the minds behind the popular Gemini exchange.
Despite their experience and already cozy relationship with regulators, the Winklevoss Bitcoin Trust application was rejected by the SEC. When questioned why the regulatory body responded that the unregulated status of Bitcoin was the primary reason. However, this logic was countered as there are many ETFs based on unregulated businesses.
An Uphill Battle
A year later, the blockchain-based startup VanEck SolidX took a swing at a Bitcoin Trust EFT. The firms decided it was best to make this fund specifically for accredited investors. They hoped this would appease regulators concerned about inexperienced investors taking losses. As part of this strategy, they set the ETF cost at $200,000. The approach was good but did little to convince regulators.
In October 2021, the SEC finally realized the error in its judgment. It was at this time the group approved the first Bitcoin Futures ETF. Futures are contracts that lock in an asset for a particular price. Like ETFs, they are ideal for large trading firms and those who require a regulated trading environment to participate. ProShare’s ETF opened the door for today’s market. Nowadays, you can find crypto ETFs on a variety of platforms.
Why You Should Consider a Crypto ETF
There are a lot of reasons why you should consider trading an ETF. For one, it’s easier. These funds are designed to rebalance daily. Rebalancing is a feature that automatically adjusts your fund to meet certain criteria. For example, if you have top 10 cryptos ETFs and one of the projects on the list drops from the top 10, it’s automatically replaced with a new coin.
Rebalancing helps to reduce trader workload and removes emotion from your trading strategy. As such, ETF traders can see more consistent results versus those who trade cryptocurrencies directly. Notably, ETFs provide a more flexible way to speculate on price movements and offset risk.
Save on Fees
Another reason to think about integrating an EFT into your trading strategy is that these unique assets save you on broker fees. For those who are in very active markets, these fees can be a real challenge. Brokers can charge as they feel and based on your activity. For those who trade a lot, these fees are a burden. For those who rarely trade, the fees can be higher due to inactivity.
Any reasonable trader understands that it is ideal to lower expense ratios. One of the ways that ETF users avoid trading fees is through the rebalance functions. Many ETFs rebalance daily to meet the requirements of their asset. For example, if you have an ETF of the top 10 performing DeFi networks, the ETF will automatically adjust each day to compensate for changes in the market.
A regular trader would need to pay normal fees associated with these trades. However, rebalancing is much cheaper in most instances the cost of an ETF rebalancing is a fraction of the cost of manually changing your holdings. Cutting fees and other avoidable costs are the best methods to improve your ROI without the need to alter your trading strategy or assets. As such, ETFs provide a smart alternative to manual operations.
Diversify Your Portfolio
Diversification is a basic but very effective way to better protect against loss and improve ROI opportunities. The more diverse your portfolio and the less affected you are by single-project failures. ETFs provide the ideal scenario for any trader seeking a healthy diverse portfolio because they come in all shapes and sizes to meet your requirements.
ETFs make it easy to gain exposure to entire markets with a single asset. For example, there are ETFs of the top 10 performing cryptocurrencies. The time saved in research and onboarding is already substantial compared to a person attempting to handle these processes by themselves. Additionally, the rebalance feature makes day to today management easier.
Regulatory Protections
One of the biggest advantages of trading ETFs is that it allows you to gain access to the market without holding any of the assets directly. For large trading firms, these products are one of the only ways for them to offer crypto assets to their clients in a regulated environment. These users can trade crypto ETFs and make purchases and sales from traditional exchanges rather than unregulated and often new crypto exchanges.
More Trading Options
Crypto ETFs also provide traders with more options. Specifically, they gain the ability to short cryptocurrencies. Shorting is an advanced trading strategy that enables users to profit off of market downturns.
A Global Market
ETFs also open up the door for more multi-national funds. It can be a very time-consuming process to get approval to trade on foreign markets. Additionally, the reporting and regulatory processes are complex and require professional assistance. ETFs are an alternative method to gain exposure to these assets without all of the red tape.
ETFs often include companies from various regions of the world. As such, they are a great way to gain international exposure to a particular market or industry. They can be broken down into cities, countries, or even regions. Imagine an ETF of tech companies in Silicon Valley. This structure is ideal for people seeking localized or regional access to digital assets.
Tighter Spread
Studies have shown that ETFs outperform other assets in terms of spread. Since crypto ETFs represent a portfolio of assets with their spread, the liquidity of the portfolio ends up equaling the liquidity of the ETF directly. This structure avoids other issues such as slippage. Slippage is a term that refers to a change in price from your bid to the purchase.
Slippage is a major issue for DEXs at this time. These networks usually don’t leverage an order book to determine the price of traded assets. Instead, most DEXs use AMM protocols to determine the value of assets. These systems leverage smart contracts and sensors called oracles to configure pricing and match traders.
ETF users enjoy lighting fast trades that finalize in seconds. ETFs trade faster than stocks and cryptocurrencies in most instances. For those second speedy and responsive assets that can be traded internationally, ETFs can be a smart solution to add to your finical toolbox.
Low Entry
Another cool feature about ETFs is that they are usually more affordable than buying each of the assets directly. For example, the average price of an ETF is $25 per fund. The main reason for their low denominations is that they are priced to trade. However, it has been reported that some are now turning to ETFs over mutual funds for long-term holding strategies as well.
Tax Efficiency
In many regions of the world, ETFs enjoy better tax benefits than most assets. For example, some countries offer ETF traders access to limited capital gains tax structure. These regions enable users to save on their gains compared to other assets like mutual funds. There are even parts of the world that offer tax-free crypto ETF trading options.
Flexibility
ETFs provide trades with much more flexibility compared to other assets. It can be difficult to find advanced trading features on crypto exchanges. Options like margin or leveraged trading are slowly making their way into the crypto market. However, concerns and regulatory issues have limited these options to users.
ETF users enjoy access to the full range of trading tools available today. They can trade ETFs on margin and even short assets. Shorting is a popular option used by advanced traders. It requires users to take out a leveraged trade and sell it. The goal of the process is to sell the leveraged trade and repurchase it at a later date after the price drops.
Shorting ETF
To complete the shorting process, you repay the loan with the now-costing asset and keep the difference. Shorting is a delicate process but can enable traders to profit during times of economic downturn and market volatility. Some inherent risks make shorting only recommended for expert traders.
One of the biggest issues is if the asset does drop in value. Remember you are taking out a loan in a particular currency and agreeing to pay it back in that currency regardless of the cost. When the asset drops, this process becomes simple and profitable. However, if the asset rises in value, you can find yourself in a sticky situation with near-unlimited loss potential.
Example of Legendary Shorts Failing
One of the most well-known examples of a short turning ugly occurred last year. In this incident, hedge funds were shorting AMC and GameStop stocks by the billions. They never expected that a group of in-the-know traders on Reddit would realize this and begin buying their stocks up at record numbers.
GameStop Losses
The stock prices quickly increased and the hedge funds found that they needed to repurchase these stocks for 20 times more than they paid. Hedge funds lost billions and regular traders began to see massive profits. However, the wins were short lived as the trading brokers and applications such as Robinhood stepped in to protect their main backers by preventing users from purchasing these assets at the time.
These actions caused a major uproar with many representatives calling for criminal investigations in to the matter. The main result of these actions was that traders began to look at decentralized assets like cryptocurrencies as a better alternative due to the inability of brokers to completely block buyers to save projects.
Automated
Another cool aspect to consider about ETFs is their auto-reinvest features. Some firms offer crypto ETFs that automatically introduce your returns into your initial ETF. This structure provides you with access to long-term compounding returns. Users can generate wealth much faster using this strategy. Best of all, there is no workload required as the systems can be set to automatically handle the process.
Current Crypto ETF Market
After many attempts, the US market finally has seen some ETFs approved. These crypto ETFs include a host of top features such as rebalancing to improve the user experience. Here are the top-performing crypto ETFs in the US market today.
- Bitwise Crypto Industry Innovators ETF (BITQ)
- Global X Blockchain ETF (BKCH)
- Siren Nasdaq NexGen Economy ETF (BLCN)
- Amplify Transformational Data Sharing ETF (BLOK)
- First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT)
The Future of Crypto ETFs
The rise of crypto ETFs is sure to continue as there are more major trading firms offering these products to users than ever. The advantages of integrating an ETF into your trading strategy should be more obvious now. As such, you are ready to delve deeper into the use of these assets.