There is a lot of discussion lately about the possibility of crypto ETFs – personally , I am a fan of the idea and think that it's good for crypto-investors. But before we delve into that, let's talk about what an ETF is to begin with.

An ETF or "Exchange Traded Fund" is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares.

Think of it as a basket of stocks, bonds and other financial instruments. ETFs range from funds that track stock indices to those that include large-cap or small-cap stocks. Other ETFs focus on emerging markets, precious metals, specific parts of the world, stock sectors or specific industries.

Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets. To speak in terms familiar to crypto investors – you could say that they package up a bunch of investments and then tokenize them so they can be bought in smaller pieces and traded – but instead of being called tokens, they are called “shares”. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock since ETF shares are traded on public stock exchanges.

It's not a mutual fund

Those of you who are familiar with investing may notice that this is very similar to a mutual fund - however, there are a few key differences. A mutual fund can only be purchased at the end of the trading day, when all the assets in it have been calculated. An ETF however, will trade actively all day while the market is open and investors can buy or sell them at anytime throughout the day. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

What do they invest in?

ETFs can hold stocks, bonds, gold, silver, real estate, and many other investments. A fund manager ( or typically a team of them) will select the stocks, bonds, and other financial instruments that they want to invest in. They package them up into a fund and manage it daily, deciding how much of each asset to hold and how much to sell. They are active everyday trying to beat the market by buying the best performing assets while trimming off ( selling) the poor ones.

Cryptocurrency ETFs

Now you know what an ETF is. So what would a crypto ETF look like? Well – it would be a basket of Cryptocurrencies. Some of the first ones are highly likely to include Bitcoin as a main component of the fund, but for it to be a true ETF, it will have other alt-coins in it too.
 

So a manger might build a fund like this:

Bitcoin: 50%
Ethereum: 25%
Litecoin: 10%
Monero: 10%
Dash: 5%

This is simply an example, but the point of it is this that when you buy this fund, you will actually be buying a little bit of the cryptocurrency in that fund. It's like you're buying a small part of a portfolio that they have already built. You benefit from the diversity of the fund. In this post, I just give a basic primer on what an ETF is and how it would apply to cryptocurrency, however in future posts, I will do a more detailed breakdown on which coins are likely to be included and why. It will be pure speculation of course, but somewhere in the world – some really smart people are putting together lists right now of what they will include in their ETF.

Several different flavors to choose from

The great part about ETFs are that there are so many options for investing. Some of them may be filled will coins that focus on a specific area like real estate or gaming. So for example, there are several new ICOs coming out that claim to be based on real estate assets – so they could make a fund that has nothing but these real estate tokens in it. There are also many ICO's coming out that are based on gaming – and perhaps they will build a gaming ETF. There are currently over 1,000 different types of cryptocurrencies and as more ICO's come out, there will be expanded opportunities to group them into specialized indexes that investors can choose from. They don't have to focus on simply one industry - many ETF's are built with company stability in mind - so there could be cryptofunds built with more reliable coins like Bitcoin and Ethereum and other perceived quality coins. Some may be built with highly speculative coins - in the hopes that it will experience tremendous growth through appreciation.

Another example: right now there are several gold token ICOs and coins available for purchase – just look at the following partial list -

Ozcoingold
Goldcoin
Goldmint
HelloGold
ProspectorsGold
GoldResrerve
bitGold
GoldBlocks
GoldPressed
GBC GoldCoin
HackerGold
eGold

Some of these coins may just be capitalizing on the word “Gold” but again, the point is that if an ETF manger wanted build a fund based on gold related cryptocurrency, they could start with a list like this and determine which ones they prefer to include. They can also decide to build funds based on other factors such as smart contract tokens, real estate based tokens, gaming token funds, lending platform funds and a whole array of other potential altcoin types, with more coming out everyday.

Are ETFs good for cryptocurrency?

You bet they are! One of the primary benefits is that by becoming ETF funds, they gain an added level of legitimacy , as they will have to be regulated by the SEC , which gives a lot of credibility to it. But even beyond that – having SEC approval will allow them to be sold in many more markets and could allow them to be traded on the open stock market like the NYSE ( New York Stock Exchange) or NASDAQ. This kind of exposure to the marketplace will push cryptocurrency well into the stratosphere. Its the equivilant of “ going viral”

Crypto for everyone!

By trading on the open stock markets, millions of more investors will get exposure to crypto – and fund managers will be able to buy them for their larger funds. Many retirement funds will be able to hold some of it and large hedge fund managers will be eager to stack their investments with crypto ETFS. The wide scale exposure to it will put cryptocoins on par with regular stocks like Microsoft or Apple and create a level of demand never before seen in the world of digital currency. The volume of trades taking place will increase to levels that I cannot even contemplate. Those who are holding onto crypto already will likely see a massive increase in the value of it as demand grows - and since they only have limited number of coins, the marketplace with be swarming with institutional investors who want to own the lion's share of them. As they get bought up , and held onto, the supply in circulation drops, creating even more demand for them. There are still some legal hurdles for them to get over before they can offer these ETFs to the public, however they are currently working with law makers and regulatory agencies to get it into place.

 
To summarize - crypto ETFs will be a basket of crypto coins bundled together and repackaged for sale. This packaging will make it easier for investors to buy and hold crytpo as well as generate renewed interest in them. The increase in exposure to larger markets should help create more demand, affecting prices in a positve way. I am looking forward to seeing them roll this out and plan to be an investor in a few of them. Let me know what you think about crypto ETFs and if you plan on owning any.

 
 

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Please be sure to check out my others articles on real estate, investing , and cryptocurrency ( and some other random dog stuff)

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