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A cryptocurrency exchange traded fund (ETF) is a fund consisting of cryptocurrencies. While most ETFs track an index or a basket of assets, a cryptocurrency ETF tracks the price of one or more digital tokens. Based on investor sales or purchases, the share price of cryptocurrency ETFs fluctuates on a daily basis. Just like common stocks, they are also traded on a daily basis.
KEY TAKEAWAYS
Cryptocurrency exchange traded funds (ETFs) track a single cryptocurrency or a basket of different digital tokens and currencies.
Among the benefits of ETFs are low cost of ownership, diversification, and outsourcing of knowledge- and time-intensive functions related to picking crypto tokens.
The first cryptocurrency ETF started trading in October 2021: the ProShares Bitcoin Strategy ETF.1
There are a number of alternative funds in the market that allow for exposure to cryptocurrency without requiring investors to manage the digital assets themselves.
How Does a Cryptocurrency ETF Work?
Cryptocurrency ETFs provide several benefits to investors, such as significantly lower cryptocurrency ownership costs and outsourcing of the steep learning curve required to trade cryptocurrencies.
There are two kinds of cryptocurrency ETFs:
The first type is backed by physical cryptocurrencies. The investment firm managing the fund makes purchases of cryptocurrencies, and ownership of the coins is represented as shares. When purchasing shares in the ETF, investors will indirectly own cryptocurrencies. Thus, owners can gain exposure to cryptocurrencies without the accompanying expense and risk of owning them outright.
The second type is a synthetic variant that tracks cryptocurrency derivatives like futures contracts and cryptocurrency exchange traded products (ETPs). For example, many ETFs proposed to the U.S. Securities and Exchange Commission (SEC) track prices of bitcoin futures contracts traded at the Chicago Mercantile Exchange (CME).
The first cryptocurrency ETF, the ProShares Bitcoin Strategy ETF (BITO), started trading in October 2021. This is an ETF that tracks bitcoin futures prices.12
The ETF share price mimics price movements of derivatives, instead of prices of actual cryptocurrencies. Therefore, the price of shares in a given cryptocurrency ETF rises with an increase in futures contract prices. It declines with a corresponding decrease. Just like other derivatives, synthetic cryptocurrency ETFs carry added risk because their operations may not always be transparent.
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