What Is an ETF? Holding Cryptocurrency VS Bitcoin ETFs

Cryptocurrency has become increasingly more popular in the past year or so. After Bitcoin jumped to an all-time high price, new investors came out of the woodwork looking to get their piece. While things have cooled off, for now, it seems that the market is bubbling again, and this time around investors may be interested in taking a route less traveled thanks to new financial instruments that have come about.

One of these investment vehicles is called an ETF, otherwise known as an exchange traded fund, and it’s currently stirring the waters even with traditional cryptocurrency holders. Many of them are convinced that this will be what makes mainstream investors jump in, as it gives them a safety net that was previously unavailable.

By using one of these funds, investors who are not very tech savvy can have exposure to Bitcoin and other promising crypto assets without the need to learn how to manage them for themselves. First, let’s talk about what an ETF is.

What is an exchange traded fund (ETF)?

Typically an ETF is a collection of other assets that are managed by a company. You can think of something like this as a more hands-off investment option. Schemes like this a typical in retirement accounts or other long-term investment plans where investors may have little knowledge of or desire to learn about financial markets.

Many times these are used by people who need a safe place to store their money without the worries of choosing their own investment assets. These funds can contain many different things such as stocks, bonds or commodities. An ETF trades just like a company stock does on major exchanges, and that’s good news for Bitcoin because it allows investors who aren’t interested in navigating the waters of holding cryptocurrency themselves to speculate on it.

While it’s true that they will not actually be buying this cryptocurrency themselves, the company holding the fund will, and it will take coins out of circulation when they purchase them. A fund is also capable of purchasing a much larger number of coins than an individual, so the volume of assets which they consume could be substantial.

It’s likely that fund managers will only use high profile coins such as Bitcoin and Ethereum which are deemed safest, but in the past, even lower valued altcoins have seen the trickle-down effect when the Bitcoin market begins booming.

Should you invest in Bitcoin directly or through an ETF?

This decision is one you’ll need to make for yourself, but there are some serious points to consider before making a decision. Both of these options have their pros and cons.

Pros to purchasing shares of an exchange traded fund

  • No need to purchase assets individually

There’s now an exhausting number of cryptocurrencies, and those who are not enthusiasts themselves may be interested in this emerging technology but just can’t learn everything that’s needed about them before investing. Investing in a fund allows you to take the guesswork out of it, and many people appreciate this approach.

  • Fully managed

ETFs are fully managed by a company and a financial manager. They learn all the ins and outs of the market and make important decisions. They take the actions they think are best to preserve the value of the fund including buying, selling or reducing exposure to certain assets. Their investors don’t need to worry about it.

  • Convenient and safe

If you have other traditional stock assets, then it’s convenient to manage your cryptocurrency assets right next to them using an insured company that operates in the traditional finance space. Many investors will value this safety, especially if they are using this ETF for their retirement savings.

  • No need to worry about private keys and storage

Cryptocurrency storage can be complicated for users that don’t understand the technology. It’s easy to make a mistake and lose a good deal of money or have it stolen from you. By investing in an ETF, you can still have exposure without worrying about private keys or how to store your coins or tokens safely.

Cons to invest in Exchange Traded Funds

  • No hedge against traditional financial assets

An ETF’s value is meant to trade cryptocurrencies, but the reality could be very different in the event of an economic downturn. If this happens you can expect investors to dump their shares in the ETF, and this could be very bad for their investors. You don’t actually own any Bitcoin here, you own shares in somebody else’s Bitcoin.

  • Funds and companies can declare bankruptcy

It’s entirely possible that the fund holding your cryptocurrencies could go bankrupt. If they do then you may not be able to recover your investment. By holding cryptocurrencies privately instead you can eliminate this risk. Once you own cryptocurrencies yourself nobody can take them from you for any reason.

  • Regulations for crypto ETFs are not yet certain

It’s not currently certain how these investment vehicles will be treated. It’s also not certain whether the people managing them actually know how to store these assets safely or not. By turning over control of your money to others you put yourself at a greater risk, one that cryptocurrencies like Bitcoin were meant to remove.

  • Limited access to coins and tokens

ETFs will only list the most successful cryptos. This means Bitcoin and Ethereum and likely no other options. As an investor, this is very limiting, and it’s possible that you could make substantially more profit for less money investing in lesser-known assets. While it is riskier, it’s something you will not be able to do in an ETF.

Conclusion

While there are a lot of reasons to pursue both methods, holding your own cryptocurrency is still likely the best route. It’s not very hard to learn how to properly manage your crypto portfolio and how to store your coins or tokens safely.

Cointobuy.io has numerous articles available which can help you with this. Check out the rest of the blog to find out how to store your cryptocurrencies safely, how to find good coins to invest in and how to better manage your portfolio’s risk profile.

Becoming a good investor is not easy. It takes a lot of work and dedication to make sound financial decisions that are not impacted by your emotions. It is something that anyone can learn to do with a little work, however, and if you’re willing to take on this task for yourself then you could be greatly rewarded for your efforts. More so than you would be letting somebody else take the wheel because in many cases fund returns are not the best.