The race for the first physically backed ETF is heating up, but here’s what crypto investors can buy today.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
It was inevitable, given the popularity of cryptocurrencies and the audience crossover, that several digital asset-themed ETFs have launched in Australia, providing investors with exposure to the ever-emerging industry.
For example, the Cosmos Global Digital Miners Access ETF (Ticker: DIGA, Cboe Australia) tracks the price movement of a basket of businesses focused on cryptocurrency mining and infrastructure, including companies you’ve probably heard of such as Marathon Digital Holdings and Riot Blockchain.
Returns are based on share price movement of the underlying companies in the Global Digital Miners Total Return Index and if the price goes up, the ETF increases in value and if the underlying assets fall, so does the value of the ETF.
And coming soon: The race is on to launch the first physically-settled Bitcoin ETFs.
Why choose a crypto ETF?
Whether or not you choose to directly invest in Bitcoin or buy an ETF is completely up to you.
But for those that want a simpler way to gain exposure to cryptoassets, an ETF might be the right approach. An ETF delivers the exposure in a financial product, giving investors a regulated platform to invest, with a level of security, custody and administration similar to owning shares or on an exchange.
It’s all about opening up digital assets to a range of new investors.
Instead of having to open a separate cryptocurrency wallet and keep your Bitcoin secure, share traders can gain exposure to cryptoassets through a single share trade.
Crypto ETFs work just the same as any other ETF. They are bought and sold on an exchange and track an underlying basket of the assets.
Buying and selling future contracts
Most of the current crypto ETFs use a futures based strategy which allows you to gain exposure to cryptocurrency through its prices. For example, should the price of Bitcoin increase, so will the price of the underlying ETF. Should the price fall, the ETF falls in value.
Most ETF providers have chosen this approach due to how highly regulated the futures market is, especially when compared with cryptocurrency exchanges. However, there are punitive costs to the futures backed crypto ETF structure; most notable and commonly known are “rolling costs”, which can make the product expensive and which investors (retail and some institutional) are often not aware of. The alternative model is the picks and shovels, or “digital miners model”.
The picks and shovels approach
The “picks and shovels” approach is a relatively simple and alternative way of “mining” the growing crypto industry. Think traditional mining. This is the crypto equivalent, allowing you to invest in miners and suppliers of mining equipment and services, instead of investing directly in cryptoassets.
CEO of Cosmos Asset Management Dan Annan believes investing in cryptocurrency mining businesses and their suppliers could help investors dip their toes into cryptocurrency waters, with the familiarity of shares investing.
“The miners have a high correlation to Bitcoin and Ethereum (and other cryptocurrencies); however, provide different risk metrics to Bitcoin.”
“Our analysis shows the miners carry a higher volatility than Bitcoin; however, deliver higher returns than Bitcoin (approximately 2x since the inception of the index),” he said.
The first Bitcoin ETFs in Australia
It is really only a matter of time before the launch of a physical crypto ETF in Australia.
Cosmos Asset Management recently announced a partnership with Canadian firm Purpose Investments – a Canadian $15 billion fund manager, that launched the world’s first Bitcoin ETF on the Toronto Stock Exchange in February 2021. The Purpose Bitcoin ETF (CBTC) invests directly in physically settled Bitcoin, not derivatives, allowing investors easy and efficient access to cryptocurrency without the associated risk.
The local version will give investors access to the Institutional grade and liquidity of the TSX listed Purpose Bitcoin ETF and will be called the Cosmos Purpose Bitcoin Access ETF (CBTC). Cosmos says the fund has been registered with ASIC and is subject to regulatory and exchange approval.
“Institutional acceptance in the viability of crypto and blockchain tech is one of the driving forces behind the recent crypto ETF boom,” said Cosmos CEO Dan Annan.
“The future sees positive regulation supporting the evolution of cryptocurrencies and job creations… allowing for crypto coin ETFs to give investors access to a financial product and platform for investors,” Annan said.
Risks and regulation
Whether or not you want to buy cryptoassets directly or through an ETF is a personal decision.
Cryptoassets are inherently riskier than other forms of investments and are highly volatile; and while investors currently have options through the listed shares market through an ETF, it is prudent that investors evaluate their risk appetite for the level of exposure they are willing to take into the asset class.
For those who want to invest in this emerging asset class, they can follow a raft of investors who are calling for a crypto-based ETF.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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