ETF stands for Exchange Traded Funds and are also called trackers or index trackers. Especially popular in the stock market, ETFs come in all shapes and sizes. With the increasingly widespread adoption of cryptocurrencies, ETFs are now also being used for crypto. Therefore, ETFs are also seen as the glue between the crypto and traditional stock markets. In this article, we explain to you what ETFs are and whether they are beneficial for the crypto market.
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What are ETFs?
ETFs are financial products that derive their value from another product. This can be literally any product, but is traditionally linked to an index. Consider, for example, the AEX or S&P500. When you buy an ETF of the AEX, you are speculating on the value of the overall AEX. If the value of the AEX rises, so does the value of the ETF.
An ETF is therefore incredibly convenient when you want to invest in all the companies that fall within a particular index at once. But an ETF does not always have to follow an index. In fact, it can also track bonds, commodities, a composite of products or other financial products.
For example, ETFs that track the gold price are incredibly popular. The value of these ETF is the same as the gold price. You can invest and speculate on the gold price in these ways without having to buy gold. Investing in gold this way is a lot more efficient because you don't have to go through the buying process of physical gold.
The benefits of ETFs
ETFs have several advantages, which is why they are very popular among investors. You can also buy ETFs on almost any stock-buying platform. Here are the main advantages of ETFs:
- Easier investing in certain products. It can sometimes be difficult to invest in certain products. Consider gas or oil, for example. If you want to invest in these, you can buy an oil barrel, but it is also possible to buy an ETF that tracks the price of oil.
- Lower costs. You can buy an ETF quickly and easily from a broker. Because this involves less than buying physical products, you generally pay lower fees as well.
- Greater market reach. Because ETFs are easy to buy, there is also greater market reach. This allows a larger number of people to speculate on the price of certain financial goods.
- Can be linked to anything. The value of an ETF can be linked to almost anything. As a result, ETFs can be widely used. For example, it is also possible to link an ETF to the price of certain cryptocurrencies.
- Regulation ensures by more security. ETFs are regulated by governments, so there is more control over the ETF's coverage. With stablecoins, for example, which must be covered by an underlying currency, there is no such control.
What is the risk of ETFs?
Investing in ETFs is not entirely without risk. Of course, there is always a risk when you invest money in a product. After all, the value can always drop, which means you could lose some of your assets. This is no different with investing in ETFs. Still, there is an additional risk to investing in ETFs that is not present, or is present to a lesser extent, with other products.
What do ETFs and cryptocurrencies have to do with each other?
In Europe, there are several ETFs that are linked to the prices of different cryptocurrencies. These ETFs, also called cryptotrackers, are the buy on the platform of different stock brokers, allowing a larger number of people to speculate on the prices of crypto currencies.
When it comes to crypto trackers, it is good to know more about ETNs. These are slightly different from ETFs, although both are mostly used for the crypto market.
The difference between ETFs and ETNs
ETN stands for Exchange Traded Notes and can be compared to a bond. In fact, an ETN is an unsecured debt security that can be issued by a company. By buying an ETN, you are effectively buying a debt instrument for a cryptocurrency, for example.
The issuer of the ETN must ensure that it holds the cryptocurrency. This way, the value of the ETN is actually backed by a financial product. This prevents an ETN from being unsecured and therefore based on "air.
What crypto ETFs can you buy?
Setting up an ETF or ETN is not as easy as developing a token on the blockchain. In fact, you could do the latter in about 10 minutes. ETFs, on the other hand, are heavily regulated, making it difficult to market a crypto ETF.
There are a number of issuers within the European market that have issued various crypto ETFs and ETNs, such as VanEck, CoinShares, WisdomTree and 21Shares. To give you a better idea of this, below are the crypto ETNs issued by VanEck:
- Bitcoin ETN (VBTC)
- Ethereum ETN (VETH)
- Polka dot ETN (VDOT)
- Solana ETN (VSOL)
- TRON ETHN (VTRX)
- Avalanche ETN (VAVA)
- Polygon ETN (VPOL)
The same publisher has also issued a basket of the top 10 cryptocurrencies called Crypto Leaders ETN (VTOP). This basket can be compared to an index and tracks the prices of the 10 best-performing cryptocurrencies.
Are ETFs beneficial to the crypto market?
The issuance of crypto ETFs and ETNs makes it easier for a larger group of people to invest in cryptocurrencies. These people had wanted to invest in crypto currencies anyway, but found it too cumbersome and difficult to buy crypto on a crypto exchange. Or they thought it was a scary idea to purchase crypto when it is not regulated. They can invest in crypto a lot easier and safer through ETFs.
Of course, the fact that a larger group of people can speculate on the prices of cryptocurrencies does not mean that this is immediately beneficial to the crypto market. This is because buying an ETF is different from buying the actual cryptocurrency.
No cryptocurrencies will be purchased
We continue to talk about ETFs here, but also mean ETNs. The issuer of an ETF does not have to buy cryptocurrencies when it sells an ETF. Suppose the ETF is linked to the price of Bitcoin, and you buy this ETF. No actual Bitcoin is then purchased. Instead, the issuer will have to be creditworthy enough to absorb the underlying asset.
At the time the buyer of an ETF wants to resell it again, the issuer will need to own the underlying asset. Therefore, it is important to always check the creditworthiness of an ETF issuer.
Thus, it should be clear that purchasing an ETF will not affect the price of a cryptocurrency. After all, the price of a cryptocurrency is determined by the relationship between supply and demand.
This is why crypto ETFs are not beneficial to the crypto market
When you buy an ETF, no actual cryptocurrencies are purchased. This means that the demand for Bitcoin does not increase when you buy a Bitcoin ETF. If people were to switch from actually purchasing the cryptocurrencies to buying ETFs, this could have a negative effect on the crypto market. This is because the demand for crypto coins will decrease in that case, which will also decrease the price.
If ETFs were not available, people would be forced to buy cryptocurrencies. This will cause demand to increase, after which the price of the cryptocurrency will also rise.
And this is why crypto ETFs do benefit the crypto market
Yet it is not as black and white as outlined above. The offering of ETFs may cause fewer people to actually buy real crypto coins, but the opposite could also take place.
People who were initially put off by the "scary" stories about cryptocurrencies might actually buy a crypto ETF because it is regulated. In this way, a group of people who never wanted to do anything with crypto will still be able to become interested in crypto. If they like the investment in crypto ETFs, this could cause the investor to later decide to buy actual crypto coins. This could then benefit the crypto market.
Conclusion
ETFs are financial products that derive their value from another financial product. These can be indices, commodities, composite products or cryptocurrencies. You can buy an ETF on platforms that also offer stocks. These types of platforms are also called stock brokers.
The supply of ETFs can have both favorable and unfavorable effects on the cryptocurrency market. ETFs are linked to the value of a cryptocurrency, but when they are issued, no actual cryptocurrencies are purchased. Therefore, by buying ETFs, you are not contributing to the demand, so there will also be no influence on the price.
However, because ETFs are regulated, a large group of people who did not want to invest in crypto might still take the plunge into ETFs. In this way, a larger group of people will be introduced to the crypto market, which could cause these people to later decide to purchase actual crypto coins after all, should the ETFs be liked. In this way, a market that at first seemed inaccessible can still be reached.
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