The abbreviation ETF stands for Exchange Traded Funds. These are funds that are traded on an exchange.
An ETF is a collection of assets that can be bought and sold in the stock market. This works the same way investors invest in a company's stock.
ETFs are mutual funds that track a particular index, such as the AEX or the S&P500. Buying an ETF on the AEX, for example, means you are investing in the largest twenty-five Dutch companies at once. This is easier, faster and cheaper than buying securities of every single company listed on the AEX.
There are hundreds of thousands of ETFs worldwide that fit into different asset classes. For example, you can find ETFs that operate in the stock market, but there are also funds that are in bonds or commodities. Other funds are again purely focused on technology or have a portfolio of assets around a particular theme such as sustainability.
ETF funds can be either actively, or passively managed. Funds that trade more actively with the underlying assets can achieve higher returns (of course, this is no guarantee). Consequently, actively managed funds have a different cost tag. Funds that only follow an index are generally cheaper.
A crypto ETF tracks the price of one or more cryptocurrencies. So you can use an ETF to invest in the value of Bitcoin or a collection of different cryptocurrencies, without purchasing them independently. An ETF is probably the easiest way to invest in funds composed of different cryptocurrencies with few actions.
A Spot ETF is one that is backed by physical ownership of the digital asset(s). So in the case of crypto, these funds actually own the coins being invested in. It is basically a way to purchase crypto without having to be too much at the controls yourself. The fund buys on your behalf and with your money. If the market value of the coins in the fund rises, the value of the ETF rises accordingly. There is a charge for the portfolio-building service, however.
Aside from the cost, the biggest disadvantage of these ETFs is that trading is only possible during the hours when the exchange is open. Because of the volatility in the market, you may find that the price has already dropped quite a bit before you can sell your ETF. And conversely, you may have to wait to buy an ETF until Monday afternoon when the price was much more advantageous on the Saturday before.
In this type of ETF, the shares in the fund are not based on ownership of crypto, but on futures contracts. These are futures contracts in which the price and date for buying or selling a currency are fixed. Futures contracts allow investors to potentially profit from both upward and downward market trends: more or less speculating on a possible rise or fall in the price. Futures-backed ETFs were originally conceived for assets for which physical ownership would be inconvenient, such as oil, gold and grain.
Futures are highly complex investment products that involve additional risk. It is important for investors to be aware of these risks before investing in a Futures ETF. Futures funds do not own the underlying assets and sometimes use leverage structures where there is a risk of liquidation of the entire position.
The costs associated with investing in futures ETFs are usually higher than those for investing in an ETF of a fund that actually owns the crypto.
This type of ETF allows indirect investment in crypto and blockchain technology with shares of related companies. These include miners, crypto exchanges, hedge funds or companies that own a lot of Bitcoin themselves, such as MicroStrategy. This market is less volatile and dependent on how the crypto industry will evolve. A hypothetical example: Mining company X manages to reduce the cost of mining by tapping into an advantageous way of extracting energy. This leads to better earnings for the company, which increases the demand for its shares. These shares become worth more through the market forces of supply and demand. Investors who got there in time make a profit due to the increase in price.
