Why ETFs are a great way to get into crypto

ETFs are a great way to get into crypto for traditional investors. For many crypto first-timers, the ins and outs of exchanges, wallets, and market movements can be overwhelming. Luckily, as of 2024, US investors can now look forward to adding two kinds of spot crypto ETFs to their portfolio. In January, the Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, followed in May by a rule change approved by the SEC allowing Ethereum ETFs to be listed on a series of US exchanges, such as NASDAQ. This latest set of ETFs will not be fully approved or accessible for a few weeks yet, allowing investors and traders time to factor these securities into their strategies. 

This article takes a closer look at what crypto ETFs are, why ETFs are a great way to get into crypto for traditional investors, and how adding them to an investment portfolio can help increase diversification and guard against market volatility.

What is a crypto ETF?

Crypto ETFs are a type of exchange-traded product that allows traditional investors to add cryptocurrency exposure to their portfolios. There are two main types of crypto ETFs: spot ETFs and futures ETFs. Spot ETFs directly buy and store digital assets, such as Bitcoin, while futures ETFs track cryptocurrency prices via standardized futures contracts, allowing investors to gain exposure to the crypto market without managing the assets themselves. The SEC was wary of approving crypto ETFs due to concerns about market manipulation and fraud, as well as the largely unregulated nature of the cryptocurrency market. They feared that approval could mislead retail investors about the safety of these investments and potentially create speculative bubbles. What’s more, despite approving spot Bitcoin ETFs after a federal court ruling and a rule change allowing Ethereum ETFs to enter the market, the SEC has intensified its scrutiny of the sector by expanding its enforcement division and taking over 140 actions against crypto firms in recent years.

The simplicity of crypto ETFs

For many traditional investors, crypto ETFs offer a more simple and streamlined way to gain exposure to the cryptocurrency market without having to delve into and navigate the complexities of blockchain technology, crypto exchanges, the different types of wallets and private addresses. Unlike direct cryptocurrency investments, investors can buy and sell crypto ETFs through traditional brokerage accounts in a matter of seconds. This streamlined option eliminates the potential risk of hacking or loss associated with holding cryptocurrencies directly. When managed through a professional portfolio, crypto ETFs provide a simpler, more secure method to invest in the sometimes confusing and volatile world of digital assets. Despite typically incurring higher fees, for many, the simplicity of crypto ETFs outweighs these drawbacks of complexity and price. Investors can trade ETF shares easily from any device with an internet connection, bypassing the process of direct cryptocurrency transactions and trades.

The benefits of portfolio diversification

For traditional investors, including crypto ETFs in an already diversified portfolio enhances the benefits of diversification, such as risk reduction, less emotional bias, and long-term growth. The ETFs currently available to US investors offer exposure to the two biggest cryptocurrencies and crypto projects on the market. Investing in either Bitcoin or Ethereum ETFs is also a chance to support these projects’ underlying technology and protocols and their future utility as means to significantly improve how we develop new tech programs, in the case of Ethereum, or manage our payments and transactions, in the case of Bitcoin. 

Generally speaking, diversification reduces the risk assumed by investors by spreading value across a number of asset classes, which results in more consistent returns. This approach also allows investors to customize their portfolios based on their individual interests, goals, and risk tolerance and helps to reduce the emotional bias in investment decisions, seeing them more as strategic decisions. What’s more, a diversified portfolio can adapt more easily to changing market conditions. While unforeseen events may cause certain assets to lose value, others remain stable. Given that Bitcoin and Ethereum tend not to be greatly affected by stock and bond market fluctuation, the new crypto ETFs could be a strategic addition to an already diversified portfolio in order to offset more general market volatility. 

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