Crypto ETF Advantage: Australia

Understanding Crypto Exchange-Traded Funds (ETFs)

Crypto ETFs represent a specific kind of investment fund known as an exchange-traded fund (ETF). These funds direct capital towards either digital currencies themselves or businesses actively engaged in the cryptocurrency arena. Certain ETFs focusing on direct cryptocurrency investments might concentrate solely on a single digital asset, such as Bitcoin or Ethereum, or they might diversify by incorporating a selection of various digital tokens.

For investors, crypto ETFs offer a streamlined and economical avenue to participate in the crypto market and related industries. A significant benefit lies in delegating investment decisions to a professional fund manager, thereby substantially reducing the time individuals need to dedicate to in-depth cryptocurrency research.

This presents a notable advantage over directly investing in cryptocurrencies, especially given the sometimes unclear and inherently unstable nature of the crypto landscape.

However, it’s crucial to acknowledge that crypto ETFs are not without significant inherent risks. Awareness of these risks is essential. Before delving into the specifics of crypto ETFs available on the Australian Securities Exchange (ASX), let’s establish a foundational understanding.

Defining Cryptocurrencies

At their core, cryptocurrencies are digital assets. Unlike traditional government-issued currencies like the Australian dollar or the U.S. dollar, cryptocurrencies are not issued by central banks. Instead, they are generated using blockchain technology through a process referred to as mining. A comprehensive exploration of blockchain technology can be found in our detailed article on cryptocurrencies.

Once created, cryptocurrencies can be traded much like any other asset. Bitcoin was the pioneering cryptocurrency and remains the most valuable. As blockchain technology’s potential applications have expanded, the variety of cryptocurrencies has grown considerably. However, after reaching a peak of over 10,000 listed cryptocurrencies in February 2022, the number decreased to roughly 8600 by February 2023.¹

Understanding ETFs

ETFs function as investment vehicles, sharing similarities with mutual funds. However, a key distinction lies in the fact that ETFs are traded on stock exchanges, similar to standard shares, unlike mutual funds.

ETF managers collect funds from numerous investors and allocate these funds according to a defined mandate or investment strategy. Many ETFs are designed as passively managed funds, aiming to mirror the performance of a specific index, such as the S&P/ASX 200 (ASX: XJO), a specific industry sector (e.g., technology or healthcare), or even a physical commodity (like gold or oil).

Australian ETF Investing: A Guide

The Australian Securities Exchange offers a diverse range of ETFs, each employing distinct investment approaches. These ETFs provide a cost-effective way to diversify investment portfolios across a wide array of shares and asset classes.

Investors can easily build a portfolio comprising international technology company shares, ASX-listed companies with high dividend yields, or a collection of various commodities, all through a single transaction.

The main advantage of ETFs is the ease of buying and selling units within the fund, akin to trading regular shares. This is accomplished by simply placing a trade order through a chosen broker.

Accessing Global Markets Through ETFs

ETF investing opens two primary paths to gaining exposure to international markets. The first involves purchasing units of an ETF listed on the ASX that invests in international shares. An example is the iShares Global 100 ETF AUD (ASX: IOO), which focuses on the world’s 100 largest companies, based on their market capitalisation.

The alternative approach is direct investment in ETFs traded on foreign stock exchanges. Increasingly, brokers (particularly newer online platforms like Stake) are facilitating access to overseas stock markets at competitive rates. This unlocks a broader spectrum of ETF investment opportunities, many of which follow different strategies than those available on the ASX.

This increased choice is particularly beneficial for investors seeking exposure to crypto assets, given the limited selection of crypto ETFs currently available in Australia.

For Australian investors, the US markets are often the most accessible for overseas investing. Stock exchanges such as the NASDAQ and the New York Stock Exchange list thousands of ETFs, many of which offer avenues for investing in crypto.

For instance, the Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF) aims to replicate Bitcoin’s price movements by investing in Bitcoin futures contracts.

The Rationale Behind Crypto ETF Investments

Many cryptocurrencies are designed with a limited supply coded into their underlying technology. Some, like Bitcoin, are designed so that they become increasingly difficult to mine over time, eventually leading to a complete exhaustion of the supply.

Crypto enthusiasts argue that this inherent scarcity contributes to the value of cryptocurrencies, similar to precious metals. Supporters of Bitcoin, in particular, believe it could evolve into a ‘digital gold’ – a safe-haven asset for investors to turn to during times of economic instability.

The decentralised nature of cryptocurrencies also appeals to some investors. Unlike government-backed currencies, cryptocurrencies are not subject to central bank control. They exist independently of government regulations and conventional monetary policies, making them appealing to those seeking an alternative to traditional financial systems.

The anti-establishment sentiment associated with crypto stems from blockchain technology itself. Blockchain’s decentralised framework has the potential to dramatically reshape various sectors, especially banking and financial services, by removing the reliance on trusted intermediaries. Investing in crypto offers exposure to this potentially transformative technology.

As mentioned earlier, crypto ETFs can provide a convenient and affordable means of gaining exposure to the crypto space. Many offer diversified exposure to various cryptocurrencies and companies operating within the crypto ecosystem. Accessing this diversification at a reasonable cost can also mitigate some of the inherent risks associated with crypto investing.

Leading Crypto ETF Options

Currently, the BetaShares Crypto Innovators ETF (ASX: CRYP) is the sole option for Australian investors looking to invest in crypto ETFs on the ASX. Notably, this ETF focuses on companies involved in the crypto sector rather than direct investment in cryptocurrencies themselves.

To gain direct exposure to cryptocurrency price movements, investors need to explore overseas options. Several funds trading on US stock exchanges offer more direct exposure to cryptocurrencies.

BetaShares Crypto Innovators: An In-Depth Look

The BetaShares Crypto Innovators fund allocates capital to companies involved in manufacturing crypto mining hardware, such as high-performance computing equipment, and other businesses supporting the broader crypto industry. The fund achieves diversification through holdings in up to 50 crypto-related companies.

Currently, this fund stands as the primary avenue for ASX investors seeking crypto exposure. Its most significant holdings include Marathon Digital Holdings Inc (NASDAQ: MARA) and Riot Platforms Inc (NASDAQ: RIOT), which are both crypto mining firms, along with Coinbase Global Inc (NASDAQ: COIN), the operator of a prominent cryptocurrency trading platform.

ProShares Bitcoin Strategy ETF: Details and Performance

With net assets exceeding US$500 million, the ProShares Bitcoin Strategy ETF is widely recognised as the world’s largest and most actively traded Bitcoin ETF. It’s important to note, however, that it doesn’t directly invest in Bitcoin itself. Instead, the fund utilises futures contracts with the goal of mirroring Bitcoin’s price fluctuations.

This remains a viable option for investors looking to gain exposure to Bitcoin. The fund has generally succeeded in tracking Bitcoin’s price movements since its inception in October 2021. However, it’s worth noting that Bitcoin’s value has decreased by over 60% during that period.

Bitwise 10 Crypto Index Units: An Overview

The Bitwise fund is designed to track an index comprising the 10 largest cryptocurrencies, ranked by their market capitalisations. Units in this fund are available for purchase and sale over the counter in the US market.

Due to the rapid price volatility of cryptocurrencies, the fund undergoes monthly rebalancing. This active management comes with substantial costs, including annual fees totaling 2.5%, which translates to $25 for every $1,000 invested. These fees can potentially erode potential returns.

Nevertheless, the Bitwise fund is considered a good choice for investors seeking broad exposure to the overall crypto market. Approximately 60% of the fund’s holdings are in Bitcoin, 30% in Ethereum, and the remaining 10% are allocated to other alternative cryptocurrencies.

Weighing the Advantages and Disadvantages of Crypto ETF Investing

We’ve already covered some potential benefits of investing in crypto.

Crypto proponents suggest that the limited supply of some digital tokens bestows them with intrinsic value. If this holds true, certain cryptocurrencies, particularly Bitcoin, could emerge as viable alternatives to traditional safe-haven investments. Some even see crypto as a potential hedge against inflation.

The blockchain technology behind cryptocurrencies also offers the potential to revolutionise various sectors. Companies are actively exploring and developing innovative applications for blockchain. While not all of these ventures will succeed, those that do could significantly transform existing industries.

Investors should approach crypto investments cautiously. Crypto markets are characterised by volatility and substantial risk. The collapse of FTX, a major crypto exchange, due to allegations of fraud, serves as a reminder of these risks. Unfortunately, FTX is only one example of fraud and theft within the short history of the crypto industry.

Such events may discourage some investors from participating in the crypto market. In fact, some critics view crypto as a Ponzi scheme, predicting that the world will eventually realise that these digital tokens lack fundamental value.

Considering the risks, thorough research is essential before investing in crypto, even through diversified ETFs. It is also critical to only invest funds that you can afford to lose.

The Impact of Global Events on Crypto Markets

The collapse of the FTX exchange had a significant negative impact on crypto markets, resulting in substantial losses in the market capitalisation of leading cryptocurrencies. However, the decline in crypto markets pre-dated the FTX collapse.

Factors such as rising inflation, increasing interest rates, and concerns about a potential recession led investors to reduce their exposure to riskier assets. Bitcoin has not yet established itself as a reliable alternative to gold and other safe-haven assets during periods of economic uncertainty.

Market conditions have stabilised somewhat recently, but the FTX collapse serves as a reminder of the risks associated with investing in an unregulated industry.

Determining if Crypto ETFs are Suitable for You

Crypto ETFs can provide an accessible and affordable way for individual investors to participate in the cryptocurrency market and related industries. This approach can be particularly appealing to growth investors interested in technology companies and blockchain applications.

While the potential for significant returns exists, crypto investing remains a high-risk activity, as highlighted by the FTX collapse. Therefore, it’s essential to acknowledge that crypto investing may not align with every investor’s profile.

Before adding crypto ETFs to your portfolio, it’s crucial to carefully consider your financial situation. Ensuring that crypto investments align with your investment goals and your personal risk tolerance is crucial.