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A beginner’s guide to cryptocurrency ETF

Vidhu Bajaj avatar
Vidhu Bajaj
- 4 min read
A beginner’s guide to cryptocurrency ETF

When beginning your cryptocurrency journey you typically need to sign up to a crypto exchange, fund your crypto wallet with an amount you’re comfortable with and use it to buy the crypto tokens of your choice. 

If you don’t want to purchase crypto directly but still want to try cryptocurrency investing you have options. One of the options you have is buying cryptocurrency ETFs that allow you to indirectly own crypto assets and potentially benefit from the price movements without purchasing crypto directly. Before diving into this new form of investing it’s best to get informed about the ups and downs or pros and cons of doing so.

What are crypto ETFs?

ETFs or exchange-traded funds refer to a basket of stocks traded on the stock exchange like shares. Crypto ETFs are similar to traditional ETFs, but the underlying asset isn’t company stocks but crypto. Crypto EFTs either directly invest in cryptocurrency assets or derivative products that track the price of one or more cryptocurrencies or digital tokens. The issuer of the crypto ETF holds the underlying asset divided into shares that can be traded on the stock exchange.

By purchasing shares of these funds, crypto investors could benefit from indirectly owning crypto assets without bearing any expenses or risks of owning these assets outright. 

The benefits of investing in cryptocurrency ETFs

Like any investment, there are some pros to investing in cryptocurrency ETFs. Here are a few:

  • ETF investments trade as regular stocks, allowing investors exposure to the underlying cryptocurrency without buying actual cryptocurrency coins. This may help investors avoid some of the costs and risks associated with cryptocurrency trading, such as signing up for a cryptocurrency exchange and managing a cryptocurrency wallet.
  • A crypto ETF may track the price of multiple digital currencies, which could make it seem like a safer investment option due to risk diversification.
  • Unlike cryptocurrency investments, crypto ETFs are regulated by the ASIC, offering investors a relatively higher level of transparency and authenticity. However, the underlying asset of a crypto ETF may or may not be regulated in Australia or elsewhere.
  • Retail investors who don’t know much about cryptocurrencies but still want to dip their toes in the cryptocurrency market may find cryptocurrency ETFs a relatively cheaper and more secure way of participating in cryptocurrency-based investments without gaining expertise in the field.

The risks of investing in cryptocurrency ETFs

Just like all other investments, there are risks that come with investing in cryptocurrency ETFs and it’s best to understand these before you put any money in. Here are some to consider:

  • Cryptocurrency ETFs are quite new on the market, with no previous operating history. It’s difficult to predict their behaviour in the long run and the level of risk they pose to investors over time.
  • Even though cryptocurrency ETFs mitigate some of the pitfalls around owning crypto coins directly, it doesn’t mean they’re entirely safe as an investment. Cryptocurrencies are subject to high price volatility, and the value of your investment could change dramatically when the markets are closed for trading.
  • If you choose to invest in crypto ETFs rather than directly in cryptocurrency coins you’ll not be able to use the coins or tokens to pay for goods and services.
  • You won’t be able to exchange the coins for other cryptocurrencies because crypto ETFs can only be traded as stocks.
  • As crypto ETFs are managed funds, you may be charged ETF management fees that could quickly add up depending on the level of stock you hold.

How to invest in cryptocurrency ETFs

The process of buying and selling crypto ETFs is similar to the process of buying and selling traditional ETFs on ASX through a share trading platform.

Here’s a broad outline of the steps involved:

  1. Find a broker: : Crypto ETFs can be bought and sold through brokers who have access to the relevant exchange on which your preferred ETFs are listed. You could search for an online share trading platform in Australia that lists cryptocurrency ETFs. Compare the brokerage and management fees charged by each platform, the breadth of available investment options, and other features and benefits before selecting the right broker for your needs. You may also want to check whether the broker platform is regulated and possesses an ASIC-issued Australia Financial Services License (AFSL) number.
  2. Set up an account with your broker:: You’ll need to open a brokerage account to invest in ETFs. It generally takes a few minutes to set up an account with an online broker. You’ll need to provide some personal information, like your name, address, and date of birth, and some documents to verify your identity to set up your account.
  3. Link your bank account and brokerage account:: Most online brokers allow you to directly link your bank account with your brokerage account so you can conveniently transfer funds.
  4. Invest in ETFs of your choice: : Once your brokerage account is set up, you can visit the trading section of the platform, and search for the code of the ETF you wish to purchase. Now set your order type to buy and enter the number of units you wish to buy depending on how much money you plan to invest. Once you’ve filled in all the information, the trade will be executed according to your order details and money will be directly debited from the linked bank account or brokerage account.

Should you invest in a cryptocurrency ETF?

A cryptocurrency ETF may be an option for investors who want exposure to cryptocurrency markets but don’t want to own cryptocurrency directly or don’t have the time to actively manage their cryptocurrency investments but still want to diversify their portfolio. 

However, it’s important to remember that cryptocurrency ETFs are also not entirely safe as an investment because they’re still linked to cryptocurrencies which are highly volatile and largely unregulated.  

Any crypto-based investment is highly speculative, offering potentially significant returns and losses. If the crypto market moves as predicted, you could see your investments jump in a short span, but they could also fall down as quickly. 

If you want to invest in cryptocurrency, consider investing only a small portion of your portfolio to limit your losses. Building a well-diversified investment portfolio could help you reduce your investment risk rather than putting all your money in a singular highly volatile and speculative asset like crypto. You could also read about these 10 popular investment options that may suit your financial goals.

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Product database updated 14 Jul, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.