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Crypto ETFs: What to Know Before Investing

November 16, 2020 • Devin Partida

Crypto exchange-traded funds (ETFs) are a theoretical investment product, which would work in the same way that other ETFs do. 

These funds are traded on a public exchange and are, in effect, a collection of securities. The value of ETF shares is tied to the worth of an asset. In effect, they allow people to invest in something without necessarily holding or managing the item in question.

Investors who want to be involved in the crypto space but are not interested in crypto custody complexities may be attracted to ETFs or similar investment vehicles. They provide an alternative that simplifies the process.

Proponents of the funds believe the advent of a crypto ETF could open the market to mainstream investors and encourage a major flow of capital into the cryptocurrency space.

When Will the SEC Approve a Crypto ETF?

While there are similar investment vehicles available, the Securities and Exchange Commission (SEC), which regulates ETFs, has not approved a crypto ETF for public trading so far. The latest bid was rejected in February 2020. 

The SEC has not ruled out crypto ETFs altogether and has continued to accept applications since — though none have been successful so far. 

In October 2020, SEC Chair Jay Clayton said he was open to the idea — and that because ETFs were being “openly considered by U.S. regulators,” they may have a better shot at approval in the near future.

Other crypto analysts have also suggested that growing retail demand for crypto could also drive the SEC to approve ETFs shortly. As major financial institutions display more interest in the crypto market, the SEC may feel pressured to more seriously consider OKing ETFs.

In the meantime, there’s no SEC-approved crypto ETF just yet. Suppose an organization is advertising such a fund. In that case, ty may be stretching the definition and applying it to another asset or fund that works similarly. They might also be offering some kind of vehicle that isn’t approved by the SEC. 

The Available Cryptocurrency Investment Products

There aren’t any crypto ETFs available, but the SEC has approved several other investment products related to cryptocurrencies. They may provide a similar offering for investors who are interested in a crypto ETF — but not willing to wait for the SEC to potentially approve a fund in the future.

The main vehicle for institutional crypto investment is the Grayscale Bitcoin Trust (GBTC), a digital currency investment product that individual investors can buy and sell via their brokerage accounts.

The GBTC is “solely and passively invested in bitcoin,” meaning that the trust’s price will be tied to the ups and downs of this market only. In October 2020, the trust was managing more than $5.4 billion of bitcoin.

Grayscale also offers an Ethereum Trust (ETHE) for investors wanting to invest in the Ethereum market.

Both of these Grayscale vehicles have gained reporting company status by the SEC — they aren’t ETFs, but they do provide similar transparency for institutional investors.

There’s also the ARK Next Generation Internet ETF (ARKW), an ETF that invests in crypto products, including the GBTC. The fund has a lower expense ratio than the GBTC, but it doesn’t invest solely in bitcoin or similar currencies, which may be off-putting to investors wanting to limit their investments to crypto. While the bitcoin investment is part of what makes the ARKW ETF unique, it is better known for its high allocation to Tesla, the electric car manufacturer.

Although crypto ETFs are not available, there are several blockchain ETFs that invest in companies working in the blockchain industry. The blockchain, which is a kind of digital ledger tech that powers cryptocurrencies, is related to crypto but does not mean you’re investing in the market.

Investing in Cryptocurrency Funds — or Waiting for a Crypto ETF

Currently, there are no SEC-approved crypto ETFs for investors. This means that if you want to invest in cryptocurrency, you’ll either need to hold on to the coins yourself or use a non-crypto ETF vehicle.

The most notable available products are the Grayscale Bitcoin and Ethereum Trusts, which have values tied to crypto markets, and the ARKW, an ETF with investments in the Grayscale Bitcoin Trust.

It may be worth the wait if you want to hold out for a cryptocurrency ETF. While the SEC hasn’t approved any of the bids for a crypto ETF just yet, industry analysts remain hopeful that the commission will soon change course.

Recent signals suggest that SEC leadership is open to the idea of an ETF that trades exclusively in cryptocurrency, meaning there may not be too much of a wait left for investors.

However, openness isn’t the same thing as enthusiasm. In the short term, it may be better to investigate alternatives that have already received SEC approval — or to look into buying and holding coins directly.

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