Crypto ETFs offer a lower cost, lower risk way to invest in cryptocurrencies
India has one of the largest investor bases for crypto. The number is expected to rise further as there is some clarity on taxation and greater confidence that the regulator is unlikely to ban it anytime soon.
But investing in crypto is not easy for many. The jargon and hassle of currency conversion keep many people from owning physical assets. For these investors, ETFs can be a great alternative, as they offer many advantages.
Unlike a stock, the price of a cryptocurrency is not backed by an income-generating business or trade. There is no company or company on which you can do financial analysis and assess the value of crypto. It is also difficult to value it as a currency, because a currency like the rupee or the dollar is backed by the economic activity of a country. It is purely based on the supply and demand of the “project”. A single tweet from an “influencer” like Elon Musk can move the price of Bitcoin by a few percentage points. It’s like gambling. It is therefore difficult to advise in which crypto to invest; your guess is as good as mine.
In this case, crypto ETFs can be an inexpensive and less risky option for investing in this asset class.
What is a Crypto ETF?
Unlike regular ETFs that track a basket of stocks or an index, crypto ETFs typically track one or two digital assets. They are liquid and can be traded like common stocks and can be accessed by most international brokerages.
There are two types of crypto assets –
• Those backed by crypto derivatives like futures. Most ETFs today fall into this category
• The second type are those who buy physical cryptos. The fund directly buys the cryptos from the exchange and investors gain the price advantage by owning shares of the fund. The first such ETF (ProShares Bitcoin Strategy ETF or BITO) was launched in 2021.
Crypto ETFs offer a lower-cost, lower-risk way to invest. Some of the main advantages are as follows.
• No wallet needed: One can invest in crypto by creating an account or wallet on any crypto exchange. You can simply open an account on an international investment platform and invest in these ETFs.
• No currency conversion: Avoiding owning a wallet saves you the hassle of currency conversion. When you open a wallet, you must transfer money from a bank account to a wallet and convert it into digital tokens before buying the cryptocurrency. It sounds easy but daunting to many. Also, some banks do not approve the transfer of money to crypto wallets. ETFs don’t have this problem because you buy them from your regular investment account.
• Reduced cost of ownership: Purchasing crypto through a wallet will incur fees such as annual fees, custody fees, transaction fees, and network fees. All of these can be avoided to a large extent by going the ETF route. ETFs also allow the purchase of smaller notes. For example, the Bitcoin price today is $37,082. On the other hand, the bitcoin ETF BITO price is only $23.58, which makes it easy for retail investors to invest in crypto.
• Less ownership risk: There is always a security risk in buying crypto through wallets. There are many cases of wallets being hacked due to lost and stolen keys. ETF investors are largely protected from these risks.
• Lower learning curve: There’s quite a bit of jargon, like mining, staking, wallet, etc. things to be aware of while investing in crypto. While easier to understand for tech professionals, non-techies find it quite confusing. With ETFs, there is no such hassle.
Challenges for Indian Investors
To invest in a crypto ETF, an Indian investor will need to open an account with a global investment or brokerage platform. This will require them to transfer money through the LRS lane, the RBI-approved channel for investing overseas.
But they are likely to face resistance from banks as most banks do not allow money sent via LRS to be used to be invested in crypto assets. It’s a gray area.
Since investing in ETFs is not the same as owning digital assets, some banks may allow it. But it is advisable to check with the respective banks before transferring funds via LRS.
Cryptos are not gold
It is important to note that crypto is a highly volatile asset. They are not an alternative to gold as they have no storage value. Therefore, you should not place more than 4-5% of your investment portfolio in cryptos. If you play with your risk appetite, crypto can surely add value to your investment portfolio.
The author is Founder and CEO, Kristal.AI
March 21, 2022