Traditional ETFs Transition to Digital Assets: Emergence of Crypto ETFs
If you are investing in Exchange Traded Funds (ETFs), it is high time to consider including cryptocurrency ETFs in your portfolio as well. Just like how traditional ETFs track a basket of assets to amplify returns, such as the SPDR S&P 500 ETF (“SPY”) which tracks the S&P 500 Index, crypto ETFs similarly amplify returns by tracking an index of cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). In fact, these crypto ETFs can be traded and managed on reputable market platforms just like traditional ETFs. Popular exchange XBT Provider enables investors to trade Bitcoin ETNs (exchange-traded notes) on the Nasdaq Stockholm stock exchange, and the U.S.-based Grayscale Bitcoin Investment Trust as a state-certified cryptocurrency custodian hosts publicly-quoted Bitcoin securities that are securely stored and regularly audited.
So why shift your portfolio into crypto ETFs over traditional ETFs?
Cryptocurrency ETFs resemble similar risk/reward profiles as traditional ETFs, though they are often more pronounced — touting potential for higher returns through volatility as well as correspondingly higher risk.
Consider the aforementioned SPY ETF, which tracks the S&P 500. As an ETF, SPY is a conveniently packaged investment product, enabling investors to buy, sell, manage, and trade a single entity diversified among some of the largest companies in the world. At a relatively low expense ratio, its diversification also helps to familiarize investors with the macroeconomic trends in the economy. The downside of ETFs being that commission prices can erode returns, some ETFs have smaller volumes which can constrain higher bid-ask spreads while others, such as precious metals, can be taxed higher as well.
Meanwhile, cryptocurrency ETFs carry similar benefits and trade-offs — the difference being the underlying market upon which the index is based. As cryptocurrencies tend to be more volatile than traditional markets (at least pre-Covid recession) leveraged crypto ETFs are more suitable for short-term holding than their traditional counterparts. Furthermore, as a diversified product, crypto ETFs enable traditional investors to get a foothold on the macro trends vital in an up-and-coming industry. Alongside the growth of blockchain and other digital asset technology, crypto market returns have also been beating traditional markets year over year:
In 2020–21 alone, BTC value grew more than 362% in stark comparison to the ~17.18% growth of the S&P 500 Index during the same period. As of the writing of this article, one BTC can be traded on exchanges for an equivalent 47,868 USD.
The market capitalization of BTC increased from 170.11 billion USD in January 2020 to 616.45 billion USD in January 2021, an increase of more than 362%. For reference, the total market capitalization of companies within the S&P 500 Index increased from 26.72T USD in January 2020 to 31.31T USD in January 2021, an increase of 17.18%. While projecting future growth may be too presumptive for the purposes of this article, it is without question that the trend of rising market capitalization and commercial interests in cryptocurrencies are surely worth looking out for in the near future.
Alongside the Grayscale Bitcoin Investment Trust mentioned previously, other digital asset ETFs, particularly blockchain, have their individual array of benefits and niches in contrast to traditional markets. For instance, the large-cap ETF, KOIN, tracks the Innovation Labs Blockchain Innovators Index, an index comprised of companies affiliated with or utilizing cryptocurrency and blockchain technology. Including top holdings like Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), a multinational semiconductor company, NVIDIA Corp. (NVDA), and PayPal Holdings Inc. (PYPL), last year KOIN had a 25.4% growth performance; a solid ETF in 2020 as well.
So, consider adding crypto ETFs to your investment portfolio! Establish your standing in this growing global market now, rather than later.
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