Similar to individual stocks, an exchange-traded fund (ETF) is a type of investment fund traded on stock exchanges and designed to track the performance of a specific index, sector, commodity, or asset class (for example, cryptocurrencies). ETFs offer diversified exposure to various assets, providing better accessibility, transparency, and cost-efficiency for traders.
ETFs consist of a single asset or combination of various types of investments (an index of stocks, a basket of commodities) through their funding mechanism but are permitted to trade as a stock on US stock exchanges. Since they are traded on stock exchanges, ETFs allow traders to buy and sell them throughout the trading day at market prices, providing liquidity and flexibility compared to traditional mutual funds.
ETFs offer traders the opportunity to gain broad market exposure and diversification, and potentially lower costs compared to actively managed funds. They are a popular choice for both individual and institutional traders seeking a passive investment strategy.
There are different types of crypto ETFs offered in the market, namely spot (physical) crypto ETFs, futures-based crypto ETFs, and crypto industry ETFs. Spot ETFs directly invest in cryptocurrencies and securitise them. By issuing and redeeming shares, spot ETFs provide increased liquidity in the cryptocurrency market, and offer retail and other traders the opportunity to gain exposure to these assets.
Futures-based cryptocurrency ETFs do not hold the actual cryptocurrency. Instead, they track the price of crypto through futures contracts, which allow traders to speculate on the future price of an asset without actually owning it.
Crypto industry ETFs hold shares in companies that have invested in cryptocurrency or whose business involves cryptocurrency trading, mining, or other services. These companies are considered to be involved in the development, adoption, and utilisation of blockchain technology and cryptocurrencies, and these ETFs provide traders with diversified exposure to the industry without directly investing in cryptocurrencies.
