What Are Cryptocurrency ETFs? How Do They Work?

Cryptocurrency exchanges are a nuanced businesses when it comes to trading. That's why some investors prefer trading or owning cryptocurrency through an exchange-traded fund or ETF. In functionality, cryptocurrency ETFs aren't very different from traditional ETFs and widely popular mutual funds. Cryptocurrency ETFs are traded over exchanges like New York Stock Exchange (NYSE) or the American Nasdaq Stock Market. This form of exchange makes it easier to trade crypto coins. Traditional ETF tracks index or basket of assets. Cryptocurrency ETF, on the other hand, tracks one or more digital tokens.

What is cryptocurrency ETF?

A cryptocurrency ETF is like a fund through which one can access a diversified portfolio of cryptocurrency tokens or coins for investors to trade in. ETFs offer transparency and greater liquidity. This exposes potential shareholders to the token or currency and individual investors can own the token in the crypto market.

With an ETF, an investor won't need to manage multiple digital wallets just for acquiring and tracking different cryptocurrencies.

How does it work?

In traditional ETFs, the fund provider owns assets (stocks or commodities) that are to be tracked. Shares from these are sold to investors. Similarly, an organisation providing cryptocurrency ETF and managing the funds needs to own the underlying assets (a digital token or currency) that it wishes to track.

The fund is exposed for purchase by potential investors. Thereafter, the ownership of these tokens is given as shares. By owning the shares of the fund, investors directly own the tokens.

What are the options for investors regarding cryptocurrency ETF?

Currently, there are not many options for investors regarding cryptocurrency ETF. Several countries, like India, are yet to decide their stand on cryptocurrency. In such a scenario, cryptocurrency ETFs are not even being considered in many parts of the world. However, in the few places where their application has been approved, different platforms provide different sets of services.

Till now, Bitcoin ETFs are the most popular crypto ETFs out there. However, Bitcoin ETFs (like Bitcoin Investment Trust) that work in the US do not directly own the currency. Instead, they own portfolios of stock with exposure to blockchain technology. There are also Blockchain ETFs that adopt blockchain technology to provide cryptocurrency assets to investors. Often, crypto ETFs charge a management charge of around 2 per cent.