How Cryptocurrency ETFs Challenge the Legacy of $257 Billion Gold ETFs

What should you consider when weighing the options between investing in cryptocurrency ETFs versus the mature gold ETF market?

Cryptocurrency ETFs put up a fight

2024 marks a key milestone in the world of cryptocurrencies with the launch of the first Bitcoin spot (Bitcoin) ETF on January 10, closely followed by the debut of spot Ethereum (Ethnicity) ETF on July 23.

These launches, which come after years of struggles and numerous rejected applications, have finally brought mainstream financial products to the cryptocurrency market.

To appreciate the significance of these events, consider the first gold ETFs introduced in 2003. They generated a great deal of buzz and interest by making it easier for investors to gain exposure to gold without physically owning it, thereby democratising gold investment practices.

According to the World Gold Council, as of August 2024, there have been new inflows pushed Total assets under management (AUM) of gold ETFs stand at $257 billion, although collective holdings remain near their lowest levels since 2020.

Now, a similar wave of enthusiasm is surrounding cryptocurrency ETFs. As of September 13, spot Bitcoin ETFs have seen impressive growth. reached over $61 billion, approximately 25% of the AUM of gold ETFs in just six months since their inception.

Meanwhile, Ethereum spot ETFs have seen substantial inflows, with the exception of Grayscale’s Ethereum Trust (ETHE), which has seen large outflows due to its high expense ratio.

Given these developments, you may be wondering whether you should invest in spot cryptocurrency ETFs for Bitcoin and Ethereum. What are the pros and cons? What factors should you consider before making an investment?

Let’s dive in to explore these questions and help you make an informed decision.

What are cryptocurrency ETFs?

Cryptocurrency ETFs, or cryptocurrency exchange-traded funds, are financial products that allow you to gain exposure to cryptocurrencies without purchasing them directly.

Much like stock ETFs, which pool a group of stocks, cryptocurrency ETFs pool cryptocurrencies, making it easier for you to participate in the cryptocurrency market without having to deal with the complexities of buying, storing, and protecting digital assets.

Cryptocurrency ETFs work by holding a portfolio of crypto assets, often reflecting the performance of a particular crypto asset or group of assets.

When you invest in a cryptocurrency ETF, you are essentially buying shares of a fund that owns the cryptocurrency. The value of your shares will rise and fall with the value of the underlying assets.

For example, a Bitcoin Spot ETF owns Bitcoin directly. When the price of Bitcoin rises, the value of the ETF shares increases. If the price of Bitcoin falls, so does the value of the ETF shares.

Several major players have emerged in the cryptocurrency ETF market. These include financial institutions and well-known cryptocurrency companies such as Grayscale, BlackRock, Fidelity, and others.

Pros and cons of cryptocurrency ETFs

Investing in cryptocurrency ETFs can be a great way to get into the world of cryptocurrencies, but it is essential to weigh the pros and cons before making a decision. Here are some key points to keep in mind:

Advantages of Cryptocurrency ETFs

1. SimplicityCryptocurrency ETFs make it easy to invest in cryptocurrencies. You don’t need to worry about setting up a digital wallet, protecting your private keys, or trading with cryptocurrency exchanges. You can buy and sell ETF shares just like any other stock.
2. Regulation:Cryptocurrency ETFs are usually regulated by financial authorities, such as the SECONDwhich provides an additional layer of security and confidence for investors. This can be especially reassuring for those wary of the often unregulated nature of the cryptocurrency market.
3. Liquidity:ETFs can be bought and sold on stock exchanges during market hours, offering high liquidity. This means you can quickly convert your investment into cash if needed, unlike direct investments in certain crypto assets which may have lower liquidity.
4. AccessibilityCryptocurrency ETFs can be purchased through traditional brokerage accounts, making them accessible to a wider range of investors who might not be comfortable dealing with cryptocurrency exchanges.

Disadvantages of Cryptocurrency ETFs

1. FeeCryptocurrency ETFs carry management fees that can eat into your returns over time. In some cases, these fees are higher than those charged for holding the crypto assets directly.
2. Indirect ownership:When you invest in a cryptocurrency ETF, you don’t actually own the underlying crypto assets. This means you don’t have the same benefits, such as using your assets in decentralized finance (DeFi) applications or participate in network governance.
3. Limited options:While the number of cryptocurrency ETFs is growing, the selection is still relatively limited compared to the wide range of cryptocurrencies available on the market. This could limit your investment options.
4. Tax implications:The tax treatment of cryptocurrency ETFs can be complex and vary by country. You may face different tax consequences than if you held cryptocurrency directly, which could complicate your tax situation.

How to choose a cryptocurrency ETF

Choosing the right cryptocurrency ETF can be challenging, but here are some tips to help you make an informed decision.

1. Research the ETF provider: Look for well-established companies with a solid track record. For example, providers like BlackRock, Fidelity, and VanEck have a track record of managing successful ETFs in the past, which enhances their credibility.
2. Understanding the fund’s strategy:Some ETFs may simply track the price of Bitcoin or Ethereum, while others may use more complex strategies such as futures or derivatives. Make sure you understand how the ETF works and its investment approach.
3. Expense ratios:Pay attention to fees. Higher fees can eat into your returns over time. Compare the expense ratios of different ETFs to find a cost-effective option.
4. Performance History:Look at the ETF’s historical performance. While past performance is no guarantee of future results, it can give you an idea of ​​how the ETF has handled market fluctuations.
5. Liquidity:Make sure the ETF has sufficient trading volume. Greater liquidity means you can buy and sell shares more easily without affecting the price too much.

Should You Invest in Cryptocurrency Spot ETFs and How Much Should You Allocate?

Deciding whether to invest in spot cryptocurrency ETFs and determining how much to invest requires careful thought. Here are some key points to consider:

1. Evaluate your risk toleranceCryptocurrency ETFs can be volatile. Only allocate what you don’t mind losing. A general rule of thumb is to keep high-risk investments, like crypto ETFs, in a small portion of your portfolio, such as 5-10%.
2. DiversifyDon’t put all your eggs in one basket. Diversify your investments across different asset classes to spread risk. Cryptocurrency ETFs should be just one part of a broader investment strategy.
3. Consider your investment horizon:If you have a long-term investment horizon, you may be able to withstand higher volatility. Short-term investors might want to invest less in cryptocurrency ETFs due to their price swings.
4. Stay informed:The cryptocurrency market is constantly evolving. Stay up to date with news and trends to make informed decisions on how to adjust your allocation as needed.

The road ahead

As the market evolves, we will see some exciting new financial products, such as ETFs for different cryptocurrencies. The direction these developments take depends largely on the regulatory climate – will the rules be tightened or relaxed?

In the meantime, watching the performance of BTC and ETH spot ETFs will be key as it could guide future innovations and broader integration of cryptocurrencies into the financial space.