How crypto ETFs are challenging the $257b gold ETFs legacy

What should you consider when evaluating the options between investing in crypto ETFs and the mature gold ETF market?

Crypto ETFs struggle

2024 will mark a major turning point in the crypto world, with the first spot Bitcoin (BTC) ETFs launching on January 10, followed by spot Ethereum (ETH) ETFs on July 23.

Coming after years of struggle and numerous rejected applications, these launches have finally brought mainstream financial products into the cryptocurrency market.

To grasp the significance of these events, consider the first gold ETFs introduced in 2003. They generated significant interest and excitement by making it easier for investors to invest in gold without physically owning it, thereby democratizing gold investment practices.

New inflows have brought total assets under management (AUM) for gold ETFs to $257 billion, according to data from the World Gold Council as of August 2024, although aggregate assets remain near their lowest levels since 2020.

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

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

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

Let us delve deeper into these questions to help you make an informed decision.

What are crypto ETFs?

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

Like stock ETFs that bundle a group of stocks, crypto ETFs bundle cryptocurrencies, making it easier for you to participate in the cryptocurrency market without dealing with the complexities of buying, storing, and securing digital assets.

Crypto ETFs work by holding a portfolio of crypto assets that typically mirror the performance of a particular crypto asset or group of assets.

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

For example, a spot Bitcoin ETF holds Bitcoin directly. When the price of Bitcoin rises, the value of the ETF shares increases. If the price of Bitcoin falls, the value of the ETF shares decreases.

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

Pros and cons of crypto ETFs

Investing in crypto ETFs can be a great way to get into the crypto world, but it’s important to weigh the pros and cons before making your decision. Here are some key points to consider:

Pros of Crypto ETFs Simplicity: Crypto ETFs make it easy to invest in cryptocurrencies. You don’t have to worry about setting up a digital wallet, securing your private keys, or trading on crypto exchanges. You can buy and sell shares of an ETF just like any other stock. Regulation: Crypto ETFs are typically regulated by financial authorities like the SEC, providing an additional layer of security and trust for investors. This can be especially reassuring for those who are wary of the often unregulated nature of the crypto market. Liquidity: ETFs can be traded on exchanges during market hours and offer high liquidity. This means that you can quickly cash out your investment if needed, unlike direct investments in certain crypto assets, which may have less liquidity. Accessibility: Crypto ETFs can be purchased through traditional brokerage accounts, making them accessible to a wider range of investors who aren’t comfortable trading on crypto exchanges. Cons of Crypto ETFs Fees: Crypto ETFs come with management fees that can eat into your returns over time. These fees are sometimes higher than holding crypto assets directly. Indirect Ownership: When you invest in a crypto 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 participating in network governance. Limited Options: While the number of crypto ETFs is increasing, the selection is still relatively limited compared to the vast number of cryptocurrencies available on the market. This can limit your investment options. Tax Implications: The tax treatment of crypto ETFs can be complex and vary by country. You may face different tax implications compared to holding cryptocurrencies directly, potentially complicating your tax situation. How to Choose a Crypto ETF

Choosing the right crypto ETF can be difficult, but here are some tips to help you make an informed decision:

Research the ETF Provider: Look for well-established companies with a strong track record. For example, providers like BlackRock, Fidelity, and VanEck have a track record of running successful ETFs in the past, which adds to their credibility. Understand the Fund’s Strategy: Some ETFs simply track the price of Bitcoin or Ethereum, while others may use more complex strategies like futures or derivatives. Make sure you understand how the ETF works and its investment approach. 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. Performance history: Look at the ETF’s past performance. While past performance is no guarantee of future results, it can give you an idea of ​​how the ETF handles market fluctuations. Liquidity: Make sure the ETF has sufficient trading volume. Higher liquidity means you can more easily buy and sell stocks without affecting the price too much. Should you invest in spot crypto ETFs, and how much should you allocate?

Deciding whether to invest in spot crypto ETFs and how much to allocate requires careful consideration. Here are some key points to consider:

Assess your risk tolerance: Crypto ETFs can be volatile. Allocate only what you are willing to lose. A general rule of thumb is to keep high-risk investments like crypto ETFs as a small portion of your portfolio, such as 5-10%. Diversify: Don’t put all your eggs in one basket. Diversify your investments across different asset classes to spread risk. Crypto ETFs should be just one part of a larger investment strategy. Consider Your Investment Horizon: If you have a long-term investment horizon, you can tolerate more volatility. Short-term investors may want to allocate less to crypto ETFs due to price fluctuations. Stay Informed: The crypto market is constantly evolving. Follow the news and trends to make informed decisions to adjust your allocation as needed. The Road Ahead

As the market develops, we are set to see exciting new financial products, such as ETFs for different cryptos. The direction these developments will take will largely depend on the regulatory climate – will the rules tighten or loosen?

In the meantime, monitoring how spot BTC and ETH ETFs perform will be important as it could drive future innovations and the broader integration of cryptocurrencies into the financial space.

Disclosure: This article does not provide investment advice. The content and materials contained on this page are for educational purposes only.