What are ETFs: A primer on Exchange-Traded Funds and their Implications for the Cryptocurrency Market
By: Nicholas Donahue
Tags: Investing, Bitcoin, Blockchain, Cryptocurrency, Blogs

There are a number of recent articles talking about ETFs and companies trying to get cryptocurrency ETFs approved. We think it’s a good time to take a step back and ask more fundamental questions, including: “What is an ETF?” and “Why do ETFs matter?”

In this post, we’re going to dive into exchange-traded funds (ETFs) and their implications for the future of the cryptocurrency market.

What is an ETF?

An exchange-traded fund, or ETF, is a basket of securities that trades on an exchange. The securities can be almost anything — from stocks to bonds, commodities, currencies, and more. Household names such as Fidelity, Charles Schwab, Vanguard, and others create these baskets of assets and charge a small fee to investors who purchase them.

ETFs date back to 1990, when the first exchange-traded fund was created in Canada. Fast forward to today, ETFs have over $3.4 trillion dollars in assets under management. For investors who are interested in tracking the stock market, a particular sector, or a specific index, ETFs are often the “go-to” choice.

Another benefit of ETFs are that they have low fees, mostly because the strategies are straightforward and the assets are managed passively. In contrast, something like a mutual fund or hedge fund has a more active strategy with investment managers trying to “beat” the returns of the market.

How do ETFs influence the stock market?

Let’s say, for instance, you want exposure to the U.S. equities market. You could certainly buy dozens of individual shares, or, you could also purchase the Schwab U.S. Large-Cap ETF. To execute a trade, investors can simply enter the ticker symbol of the fund. In this case, the ticker symbol is SCHX.

As mentioned above, trillions of dollars globally are held in ETFs. Because they are a convenient asset — easily purchased with a single ticker symbol, in small denominations — they are open to a large swath of investors. If you have $500 to invest, you can purchase multiple shares in the SCHX ETF, which has a trading price around $68. (These shares in the ETF represent fractional ownership of the underlying securities.)

But that same $500 could not purchase you dozens of stocks in the open market because the price of a single Amazon (AMZN) share is over $1,900 at the time of writing.

ETFs also create opportunities for international investors who are looking to get exposure into a different market and are common choices for 401(k) and IRA retirement accounts.

In short, they provide a convenient way of diversifying a portfolio of securities in a single, low-fee vehicle.

Evaluating Crypto ETFs

Let’s bring it back to cryptocurrencies and the crypto world. The U.S. Securities and Exchange Commission (SEC) is evaluating whether to allow crypto ETFs to be listed on U.S. exchanges. For illustration purposes, if approved, a crypto ETF could be a vehicle that includes the 10 largest cryptocurrencies by market cap.

Crypto ETFs are important for at least 3 reasons. Firstly, they provide millions of investors another way of accessing cryptocurrencies — including investing crypto in their retirement.

Secondly, the ETFs would be USD-denominated, allowing individuals and institutions to gain exposure to Bitcoin, Ethereum, and other crypto without complicated trading or tax implications. (This is particularly important for certain institutions who are barred from investing in other currencies.)

And lastly, cryptocurrency exchange-traded funds provide another level of legitimacy for crypto. The financial services market is enormous, with many moving pieces, and allowing people and businesses a new way of transacting helps strengthen the market as a whole.

Conclusion

Looking at the long-term prospects, we believe that crypto ETFs will eventually be allowed by the SEC once applicants can meet the regulator’s standards for compliance and investor protection.

We believe that crypto ETFs represent an exciting opportunity to open cryptocurrencies to millions of investors around the world, including those who are looking to hold crypto in their retirement accounts.

What do you think? To discuss crypto ETFs, and other crypto topics, be sure to check out Hilo: