What do Canadians need to know about crypto ETFs?

Highlights

• Crypto exchange-traded funds (ETFs) have been drawing the attention of Canadian investors as investing in them can be a convenient way of gaining exposure to the cryptocurrency world.
• Investing in such ETFs can be a less cumbersome process as one does not have to worry about the digital wallet and its security.
• These cryptocurrency-backed ETFs are comparatively less risky than actual digital currencies, which are highly volatile.

Crypto exchange-traded funds (ETFs) have been drawing the attention of Canadian investors as investing in them can be a convenient way of gaining exposure to the cryptocurrency world.

Investing in such ETFs can be a less cumbersome process as one does not have to worry about the digital wallet and its security. These cryptocurrency-backed ETFs are comparatively less risky than actual digital currencies, which are highly volatile.

What is a crypto ETF?

A crypto ETF is a type of investment fund via which you can indirectly park your funds in cryptocurrencies.

As we know, ETFs mimic the performance of an index. Generally, investors opt to invest in ETFs to get exposure to any specific index, sector, or commodity.

Likewise, crypto ETFs provide an exposure to  specific cryptocurrencies, mainly Bitcoin and Ethereum. Each of them tracks and replicates the performance of underlying digital currencies.

Also read: Essentials to know before embarking on a crypto journey! 

Why invest in cryptocurrency ETFs?

A cryptocurrency exchange, as the name suggest, is a platform where one can directly trade in any cryptocurrency.

Maintaining a digital wallet and ensuring its security are also some important concerns that should be considered while planning for digital currency investment.

On the other hand, investing in crypto ETFs is a much simpler process. You can buy units of an ETF based on the cryptocurrency of your choice from a stock exchange.

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Pros of crypto ETFs

• Investors can get exposure to the underlying cryptos by investing in ETFs. The fund manager will buy and hold the cryptocurrency in a cold storage, making it convenient for investors.
• Unlike cryptocurrency itself, crypto ETFs can be held in Tax Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), which enables investors to save their profits and re-invest.
• Crypto ETFs are like traditional ETFs, which adhere to defined rules and regulations.
• ETFs securely hold crypto assets in a cold storage or hardware wallet to protect them against hacking and other fraudulent activities.

Cons of Crypto ETFs

• Although ETFs promise to imitate the performance of the underlying assets, one should still not overlook the tracking issues. Specifically, in case of cryptos, which are highly volatile and trades all day, tracking errors can result in heavy losses.
• While a stock market closes its trading at around four in the evening and operates only on weekdays, a crypto market is active 24 hours a day. This time barrier puts ETF investors in a position where they can not quickly react to market changes in the crypto world that happens after the stock market trading hours.
• Management expense ratio, which includes management fees, operational expenses, and other costs are generally high considering the volatility factor in the crypto market.
• Significant difference in bidding and ask-spread can make crypto transactions inconclusive, which can make an ETF less liquid.
• Crypto ETFs are also exposed to the market risks as these are based on underlying crypto assets, which are in themselves volatile. 

Also read: Planning to invest? Here are few tips for women investors 

Bottom line

The crypto market is a growing industry, and it has been gaining traction among retail and institutional investors over the past year.

However, although investors can make notable profits by investing in cryptocurrencies related ETFs, one should also bear in mind the volatility risk attached to it.