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Current market dynamics paving the way for crypto ETFs
Growth of cryptocurrencies has provided investors with another asset class where they can invest to diversify their portfolio. Cryptocurrencies are a volatile asset class, and direct investment implies additional expenses of physical ownership, custody charges such as purchase of digital wallets etc. However, in light of increasing correlation between equity and cryptocurrency as evidenced by the 2022 study from IMF which states that correlation coefficient of Bitcoin price with that of S&P500 has increased from 0.01 to 0.36 from 2016–2017 to 2020–2021 as both these asset classes are now seen soaring and collapsing together, cryptocurrency is not only becoming mainstream with emerging use cases but is a risky asset class plagued with co-movement and spillovers to equity and vice-versa.
This amplified correlation in turn may imply more investments into cryptocurrency, opening the possibility for exposure to digital currency to investors who are comfortable with Exchange Traded Funds (ETF) style traditional financial structured products considered more viable option to gain exposure to a basket of cryptocurrencies without having to deal with unregulated exchanges where most of the coins and tokens are currently traded also aiding avoidance of undue exposure to susceptible to fraud and manipulation.
With cryptocurrency emerging as the alternative asset class, there has been a steep rise in the launch of crypto ETFs with more than 34 such ETFs available as of January 2022. Crypto ETFs are currently available in Canada, Brazil and a few European countries with USA permitting only future-based crypto ETFs. Australia, on the other hand, has recently approved few spot cryptocurrency ETFs only.
Though ETFs are considered one of the effortless ways for any novice investor to gain diversified exposure to a cryptocurrency if he or she is unsure of its underlying market dynamics, a closer look paints a different picture as these investment products are found to be fraught with misleading, opaque structures and eccentric risk and performance reporting frameworks.
Crypto ETFs universe is quite diverse!
From a transactional cost perspective, crypto ETFs offer exposure to cryptocurrency at a fraction of the cost of purchasing crypto directly. However, from the underlying asset perspective, there are four types of crypto ETFs. One that physically holds the underlying cryptocurrency by directly taking...