Investing in cryptocurrencies began as a grassroots movement of investors who believed in the importance of decentralization. As demand grew, blockchain networks evolved, and regulatory winds began to change, increasingly more advisors and institutional investors began considering crypto investment. Investing directly in crypto versus through an ETF each offer different benefits and risks, as CoinShares recently delved into.
Crypto Direct Investment Pros and Cons
A number of investors choose to invest in crypto directly. This means they buy a cryptocurrency or digital asset and hold it themselves or pay an entity like an exchange to custody it for them. Investors that self-custody have complete control over their holdings, but must store them in a digital wallet. Digital wallet holders must keep a record of their keys to access it. One key is for the wallet address (public key) and one is unique to the investor (private key), used to authenticate transactions. Losing the private key equates to loss of the investment.
See also: A U.S. Crypto Regulatory Primer
Digital wallets come in two forms — hot or cold — which are either connected to the internet or disconnected, respectively. While the former provides ease-of-use, the latter provides greater security against hacking.
Those investors that choose to custody their crypto holdings with a third party, like an exchange, face risks. They are trusting that the third party always follows regulations, but unclear and sometimes conflicting regulations between different states in the U.S. can prove problematic. CoinShares is quick to note that exchanges are also not impervious to poor management or hackers. “FTX was one of the leading crypto exchanges when it collapsed in November 2022, owing creditors over $11B, after reports emerged that it had misused customer funds to support its trading arm.”
In addition to the risks of allowing a third party to custody an investor’s digital assets, they must also pay an assortment of fees for services provided. These fees vary and are not always readily apparent.
Investing in Crypto Through an ETF
Crypto ETFs range in strategies and the specific assets they invest in, as well as thy form in which they invest in them. While indirect investment through derivatives such as futures was the only form of access for several years, the approval of spot bitcoin ETFs in January 2024 resulted in an influx of investors. Currently, only bitcoin and ether are available via spot ETFs, but a number of filings for other cryptocurrencies sit with the SEC.
Investing through an ETF wrapper offers simplification and familiarity for many investors. Because ETFs trade like stocks, they offer liquidity and ease of access for investors. There’s no need to go on-chain or deal with an exchange to gain exposure to bitcoin or ether. They also eliminate the hassles and risks of direct investment and custody requirements.
“What’s more, trading on traditional exchanges means that crypto ETFs can sit in portfolios alongside assets like stocks and bonds and contribute to overall returns,” noted CoinShares. This helps to streamline reporting come tax season, while offering the transparency and regulatory oversight that ETFs adhere to.
To be clear, cryptocurrencies and digital assets carry elevated risk and enhanced volatility profiles. Investing in them via an ETF doesn’t change the inherent nature of the underlying asset, but it can help to eliminate some of the individual risk of direct investment. And the ability to streamline within portfolios may prove attractive to some investors, while others prefer the control of self-custody.
Bitcoin and Ether Investing With CoinShares
The CoinShares Valkyrie Bitcoin Fund (BRRR) provides exposure to bitcoin’s price movements with the ease of access through traditional brokerages. The fund seeks to reflect the price performance of the CME CF Bitcoin Reference Rate – New York Variant, minus fees and expenses. This index uses the same six bitcoin exchanges as the CME CF Bitcoin Reference Rate, but calculates bitcoin’s price at New York Market close (4 p.m. ET). The fund is a trust that passively holds bitcoin (meaning it’s physically backed). Shares held are tied to the value of the bitcoin held. BRRR carries management fees of 0.25%.
The CoinShares Bitcoin and Ether ETF (BTF) combines bitcoin and ether investing in a single strategy. The actively managed fund invests in both bitcoin futures and ether futures. This provides exposure to the price performance of the two largest cryptocurrencies by market cap. The fund provides exposure to bitcoin and ether futures while investing in cash or U.S. Treasuries and corporate bonds for collateral and liquidity. BTF does not invest directly in BTC or ETH, and carries an expense ratio of 1.25%.
For more news, information, and strategy, visit the CoinShares Crypto ETF Hub.
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