Why it makes sense to invest through crypto ETFs 

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Crypto ETFs offer a way to invest in cryptocurrencies at lower cost and lesser risk

India has one the biggest investor bases for cryp­to. The num­ber is expect­ed to increase fur­ther as there is some clar­i­ty on tax­a­tion and more con­fi­dence that the reg­u­la­tor are unlike­ly to ban it any time soon. 

But cryp­to invest­ing is not easy for many. The jar­gon and has­sle of cur­ren­cy con­ver­sion stops many from own­ing phys­i­cal assets. For such investors, ETFs can be a great alter­na­tive, as it offers many benefits. 

Guessing game

Unlike a stock, the price of a cryp­to cur­ren­cy is not backed by com­pa­ny or income gen­er­at­ing trade. There is no com­pa­ny or busi­ness on which you can do a finan­cial analy­sis and assess the val­ue of the cryp­to. It’s also dif­fi­cult to val­ue it like a cur­ren­cy, because a cur­ren­cy like a rupee or dol­lar is backed by the eco­nom­ic activ­i­ty of a coun­try. It is pure­ly based on sup­ply and demand of the “project”. Just a sin­gle tweet by an “influ­encer” like Elon Musk can move the price of Bit­coin by a few per­cent­age points. Its just like gam­bling. There­fore it is dif­fi­cult to advise which cryp­to to invest; your guess is as good as mine. 

In such case cryp­to ETFs can be a low cost and less risky option to invest in this asset class.

What is a crypto ETF?

Unlike reg­u­lar ETFs which track a bas­ket of stocks or an index, cryp­to ETFs typ­i­cal­ly track one or two dig­i­tal assets. They are liq­uid and can be trad­ed just like reg­u­lar stocks and are acces­si­ble through most inter­na­tion­al brokerages. 

There are two kinds of cryp­to assets — 

• The ones backed by cryp­to deriv­a­tives like future con­tracts. Most ETFs today fall into this category 

• The sec­ond type are the ones that buy phys­i­cal cryp­tos. The fund direct­ly buys the cryp­tos from the exchange and investors get the price ben­e­fit by hold­ing shares of the fund. The first such ETF (ProShares Bit­coin Strat­e­gy ETF or BITO) was launched in 2021. 

Benefits

Cryp­to ETFs offer a way to invest at low­er cost and less­er risk. Some of the key ben­e­fits are as follows. 

No need for a wal­let: One can invest in cryp­to with cre­at­ing an account or wal­let on any cryp­to exchange. You can just open an account on an inter­na­tion­al invest­ing plat­form and invest in these ETFs. 

No cur­ren­cy con­ver­sion: Avoid­ance of own­ing a wal­let, saves one from the has­sle of cur­ren­cy con­ver­sion. When you open a wal­let, you have to trans­fer mon­ey from bank account to wal­let and con­vert it into dig­i­tal tokens, before pur­chas­ing the cryp­to cur­ren­cy. This sounds easy but is intim­i­dat­ing for many. Also some banks don’t approve trans­fer of cash to cryp­to wal­lets. ETFs have no such issue as you pur­chase them from your reg­u­lar invest­ing account. 

Low­er cost of own­er­ship: Buy­ing cryp­to through wal­let will make one incur charges like annu­al fees, cus­to­di­an charges, trans­ac­tion fees and net­work charges. All these can be avoid­ed to a large extent by tak­ing the ETF route. ETFs also enable buy­ing in small­er tick­et size. For exam­ple, the price of Bit­coin today is at $37,082. On the oth­er hand, the price of bit­coin ETF BITO is just $23.58 mak­ing it eas­i­er for retail investors invest in crypto. 

Low­er risk of own­er­ship: There is always a secu­ri­ty risk in buy­ing cryp­to through wal­lets. There are many instances of hack­ing in wal­lets on account of keys being lost and stolen. ETF investors are safe­guard­ed from these risks to a large extent. 

Low­er learn­ing curve: There is quite a bit of jar­gon, like min­ing, stak­ing, wal­let, etc. that one needs to be famil­iar with while invest­ing in cryp­to. While its eas­i­er to under­stand for tech pro­fes­sion­als, non-techies find it quite con­fus­ing. With ETFs there is no such hassle. 

Challenges for Indian investors

To invest in cryp­to ETF, an Indi­an investor will need to open an account with a glob­al invest­ment or a bro­ker­age plat­form. This will require them to trans­fer mon­ey through the LRS route, the RBI approved chan­nel to invest overseas. 

But they are like­ly to face resis­tance from banks as most of the banks don’t per­mit usage of mon­ey sent through LRS to be invest­ed in cryp­to assets. This is a grey area. 

Since invest­ing in ETFs does­n’t not tan­ta­mount to own­ing dig­i­tal assets, it is pos­si­ble that some banks may per­mit it. But it is advised to check with the respec­tive banks before trans­fer­ring funds through LRS. 

Cryptos are not gold

It is impor­tant to note that cryp­to is a very volatile asset. They are not an alter­na­tive to gold as they have no stor­age val­ue. Hence one should not put more than 4–5 per cent of their invest­ment port­fo­lio in cryp­tos. If you play with­in your risk appetite, cryp­to can sure­ly add val­ue to one’s invest­ment portfolio. 

The author is founder & CEO, Kristal.AI

Pub­lished on


March 21, 2022

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