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Wednesday, December 6, 2023

Investing in Cryptocurrency ETFs

Cryptocurrencies offer investors an alternative route for building and storing wealth. While directly holding these digital assets is a popular option, investors are also clamoring for financial products such as cryptocurrency exchange-traded funds (ETFs).

“There is a high demand for a Bitcoin product that has all the features that people love about ETFs — that they trade on an exchange, that they’re liquid,” Ross Mayfield, investment strategy analyst at Robert W. Baird & Co., told Bloomberg in a mid-2021 interview.

ETFs also protect investors from losing their cryptocurrencies by storing their holdings offline.

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Canada approved the first pure-play bitcoin ETFs for trade on the Toronto Stock Exchange (TSX) in early 2021. These Canadian cryptocurrency ETFs allow investors to place returns in tax-sheltered accounts like the tax-free savings accounts or registered retirement savings plans.

The story is different in the US — nearly a dozen crypto ETFs are awaiting approval from the US Securities Exchange Commission (SEC). The federal agency is seemingly dragging its feet on approving these applications because of a lack of regulatory framework to govern crypto exchanges, as well as a perceived need for greater investor protections.

“The market has grown, but it still lacks some basic standards that we have in the security space, and that are imposed on securities exchanges,” Timothy Massad, research fellow at the Kennedy School of Government at Harvard University, explained to CNBC.

So far the SEC roadblock remains, although it has prompted investment fund issuers to get creative with workaround ETFs that offer Americans exposure to crypto-linked equities.

“There’s clearly strong demand from investors for exposure to the price of Bitcoin, and ETF issuers are simply looking to meet that demand,” said Nate Geraci, president of the ETF Store. “The SEC is essentially forcing ETF issuers into the laboratory to create these Frankenstein products.”

For example, fund manager Invesco (NYSE:IVC) has filed with the SEC to launch the Invesco Galaxy Crypto Economy ETF and the Invesco Galaxy Blockchain Economy ETF. Crypto-linked equities will make up about 85 percent of each ETF’s asset base with the remainder in trusts and funds that hold cryptocurrencies.

While investors hold their collective breath in anticipation of the launch of pure-play cryptocurrency ETFs in the US market, it’s worth taking a look at the currently available Canadian crypto ETFs. The list below includes the six options on the market, and all data presented was current as of June 23, 2021.

1. Purpose Bitcoin ETF (TSX:BTCC)

Assets under management: C$835.7 million

Billed as the first physically settled bitcoin ETF, this ETF launched in February 2021 and is backed by bitcoin. The ETF allows investors to add and sell bitcoin with no digital wallet required.

Hosted by Canadian investment company Purpose Investments, the Purpose Bitcoin ETF is backed by 21,000.6738 bitcoin and has a management expense ratio of 1 percent.

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2. Purpose Ether ETF (TSX:ETHH)

Assets under management: C$137 million

Launched in April 2021, the Purpose Ether ETF is the world’s first direct-custody ether ETF. Ethereum is the most widely used blockchain technology, and ether, the digital currency of this platform, is the second largest cryptocurrency after bitcoin. Evolve ETFs and CI Global Asset Management claim to have also launched the first ether ETF on the same day, but it looks like Purpose was the first to announce it.

The Purpose Ether ETF offers investors exposure to the daily price movements of physically settled ether tokens through either Canadian dollar hedged units, Canadian dollar non-currency hedged units or US dollar units. The management fee is 0.75 percent.

3. Evolve Bitcoin ETF (TSX:EBIT)

Assets under management: C$63.23 million

Evolve ETFs partnered with cryptocurrency experts including Gemini Trust Company, CF Benchmarks, Cidel Trust Company and CIBC Mellon Global Services to launch the Evolve Bitcoin ETF. The fund has a management fee of 0.75 percent.

Launched a week after the Purpose Bitcoin ETF, its holdings of bitcoin are priced based on the CME CF Bitcoin Reference Rate, a once-a-day benchmark index price for bitcoin denominated in US dollars.

4. Evolve Ether ETF (TSX:ETHR)

Assets under management: C$31.77 million

The Evolve Ether ETF offers investors an easier route to investing directly in ether. The fund’s holdings of ether are priced based on the CME CF Ether-Dollar Reference Rate, a once-a-day benchmark index price for ether denominated in US dollars. As with the Evolve Bitcoin ETF, the Evolve Ether ETF also has a management fee of 0.75 percent.

5. CI Galaxy Bitcoin ETF (TSX:BTCX.B)

Assets under management: C$211.24 million

Launched in March 2021, the CI Galaxy Bitcoin ETF was born out of a partnership between cryptocurrency leaders Galaxy Fund Management (GFM) and CI Global Asset Management. GFM is part of the management arm of Galaxy Digital, a diversified financial services firm with a focus on the digital asset and blockchain technology sector.

The ETF’s objective is to give investors exposure to bitcoin via an institutional-quality fund platform. At 0.4 percent, this fund boasts the lowest management fee of all the crypto funds on the market.

6. CI Galaxy Ethereum ETF (TSX:ETHX.U)

Assets under management: C$290.63 million

CI Global Asset Management suggests that “owning Ether is similar to owning a basket of early-stage, high-growth technology stocks.” The CI Galaxy Ethereum ETF has blown the competition out of the water in terms of assets under management.

Some of that may be due to its ultra-low management fees, which were at zero for nearly the first two months following the fund’s April launch date. After June 15, the management fees increased to 0.4 percent, in line with the CI Galaxy Bitcoin ETF, but still well below those of its competitors.

Don’t forget to follow us @INN_Technology for real-time news updates!

Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.

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