There is a lot of discussion lately about the possibility of crypto ETFs – personally , I am a fan of the idea and think that it's good for crypto-investors. But before we delve into that, let's talk about what an ETF is to begin with.
An ETF or "Exchange Traded Fund" is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares.
Think of it as a basket of stocks, bonds and other financial instruments. ETFs range from funds that track stock indices to those that include large-cap or small-cap stocks. Other ETFs focus on emerging markets, precious metals, specific parts of the world, stock sectors or specific industries.
Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets. To speak in terms familiar to crypto investors – you could say that they package up a bunch of investments and then tokenize them so they can be bought in smaller pieces and traded – but instead of being called tokens, they are called “shares”. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock since ETF shares are traded on public stock exchanges.
It's not a mutual fund
Those of you who are familiar with investing may notice that this is very similar to a mutual fund - however, there are a few key differences. A mutual fund can only be purchased at the end of the trading day, when all the assets in it have been calculated. An ETF however, will trade actively all day while the market is open and investors can buy or sell them at anytime throughout the day. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
What do they invest in?
ETFs can hold stocks, bonds, gold, silver, real estate, and many other investments. A fund manager ( or typically a team of them) will select the stocks, bonds, and other financial instruments that they want to invest in. They package them up into a fund and manage it daily, deciding how much of each asset to hold and how much to sell. They are active everyday trying to beat the market by buying the best performing assets while trimming off ( selling) the poor ones.
Cryptocurrency ETFs
Now you know what an ETF is. So what would a crypto ETF look like? Well – it would be a basket of Cryptocurrencies. Some of the first ones are highly likely to include Bitcoin as a main component of the fund, but for it to be a true ETF, it will have other alt-coins in it too.
So a manger might build a fund like this:
Bitcoin: 50%
Ethereum: 25%
Litecoin: 10%
Monero: 10%
Dash: 5%
This is simply an example, but the point of it is this that when you buy this fund, you will actually be buying a little bit of the cryptocurrency in that fund. It's like you're buying a small part of a portfolio that they have already built. You benefit from the diversity of the fund. In this post, I just give a basic primer on what an ETF is and how it would apply to cryptocurrency, however in future posts, I will do a more detailed breakdown on which coins are likely to be included and why. It will be pure speculation of course, but somewhere in the world – some really smart people are putting together lists right now of what they will include in their ETF.
Several different flavors to choose from
The great part about ETFs are that there are so many options for investing. Some of them may be filled will coins that focus on a specific area like real estate or gaming. So for example, there are several new ICOs coming out that claim to be based on real estate assets – so they could make a fund that has nothing but these real estate tokens in it. There are also many ICO's coming out that are based on gaming – and perhaps they will build a gaming ETF. There are currently over 1,000 different types of cryptocurrencies and as more ICO's come out, there will be expanded opportunities to group them into specialized indexes that investors can choose from. They don't have to focus on simply one industry - many ETF's are built with company stability in mind - so there could be cryptofunds built with more reliable coins like Bitcoin and Ethereum and other perceived quality coins. Some may be built with highly speculative coins - in the hopes that it will experience tremendous growth through appreciation.
Another example: right now there are several gold token ICOs and coins available for purchase – just look at the following partial list -
Ozcoingold
Goldcoin
Goldmint
HelloGold
ProspectorsGold
GoldResrerve
bitGold
GoldBlocks
GoldPressed
GBC GoldCoin
HackerGold
eGold
Some of these coins may just be capitalizing on the word “Gold” but again, the point is that if an ETF manger wanted build a fund based on gold related cryptocurrency, they could start with a list like this and determine which ones they prefer to include. They can also decide to build funds based on other factors such as smart contract tokens, real estate based tokens, gaming token funds, lending platform funds and a whole array of other potential altcoin types, with more coming out everyday.
Are ETFs good for cryptocurrency?
Crypto for everyone!
To summarize - crypto ETFs will be a basket of crypto coins bundled together and repackaged for sale. This packaging will make it easier for investors to buy and hold crytpo as well as generate renewed interest in them. The increase in exposure to larger markets should help create more demand, affecting prices in a positve way. I am looking forward to seeing them roll this out and plan to be an investor in a few of them. Let me know what you think about crypto ETFs and if you plan on owning any.
Please be sure to check out my others articles on real estate, investing , and cryptocurrency ( and some other random dog stuff)