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LearnAcademyCrypto investing: Fundamental conceptsLesson 3: An Introduction to Crypto ETFs

Lesson 3: An Introduction to Crypto ETFs

After completing this lesson, you will be able to:
Know what an exchange traded fund is.
Know where to purchase shares in an ETF.
Understand what a fund is.
Name different kinds of funds.
Understand the advantages and disadvantages of crypto ETFs versus purchasing cryptocurrency directly.

Welcome to the third lesson in Kriptomat Academy’s guide to investment concepts. This lesson is about crypto ETFs.

We can start by breaking down the term “exchange-traded fund.”

  • Funds are bundles of related stocks and other securities.
  • A fund is generally specialized. Investors can choose from high-growth funds, blue-chip funds, high-tech funds, medical funds, international funds, energy funds, green funds, Asia funds, Africa funds, large-cap funds, and so on.
  • Buying shares in a fund is much like buying shares of a stock. But instead of tying your investment’s performance to a single company, your fund value rises and falls based on the performance of the entire group of assets in the fund.
  • “Exchange-traded” means that the funds are bought and sold at stock exchanges.

It sounds like ETFs have nothing to do with crypto – but the market has found a way!

  • Most brokerages and investment banks are reluctant or prohibited to sell crypto directly to customers.
  • So they invented crypto funds that allow investors to profit from cryptocurrency price movements without actually owning any crypto.
  • Crypto funds are managed and sold by conventional banks and brokerage houses, which means they operate under the same rigorous regulations and security guidelines that govern stock trading.

Stock exchanges have existed since the 17th century. During that time, bankers and brokers have found many ways to buy and sell assets directly or in derivative products.

  • For example, investors can profit when the market is rising or bet against the market and profit when prices fall.
  • Financial institutions have applied their experience and imagination to the creation of crypto ETFs.
  • The simplest of these instruments is the single-crypto ETF. A Bitcoin ETF might hold verified, audited amounts of Bitcoin in secure offline storage. Investors who buy shares of the ETF experience profits and losses proportional to their holdings but never actually own any of the cryptocurrency.
  • Ethereum ETFs have appeared on the market also.
  • Other crypto ETFs are composed of stock – for example, shares of Bitcoin mining companies or publicly traded cryptocurrency exchanges.
  • There are also ETFs based on crypto futures. These ETFs could be profitable when the price of Bitcoin falls if fund managers bet against Bitcoin.

Here are some of the differences between buying cryptocurrency directly at a crypto exchange and indirect ownership through an ETF.

  • When you buy crypto directly, you own the coins or tokens and you can do anything with them: transfer them to another wallet, spend them, entangle them in a staking place, and so on. With an ETF, you don’t actually own the crypto.
  • ETFs can only approximate crypto prices. Remember, too, that most brokerage houses pass along the expenses of managing and investing in crypto funds to the investor. The price returns of a Bitcoin ETF may differ from the long-term performance of Bitcoin itself.
  • You have more options at a crypto exchange. ETFs tend to focus on Bitcoin or Ethereum – and that’s all. At a crypto exchange, you’ll be able to invest in hundreds or thousands of different cryptocurrencies.
  • Crypto ETFs don’t pay interest or dividends. Cryptocurrency you’ve purchased at an exchange can generate passive income through staking, lending, or innovative products like the Kriptomat KriptoEarn wallet.
  • Crypto ETFs charge an annual fee of about 0.6% to 1%. At a crypto exchange, you’ll pay a small fee upon buying or selling. If you’re making long-term investments, you could save money at a crypto exchange.

So – what have we learned?

  • ETFs are basically portfolio investments opposed to actually owning a specific crypto.
  • Brokers created crypto exchange-traded funds and sell shares of them to fiat investors.
  • Returns from ETFs may be substantially higher or lower than returns from owning crypto directly.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

What is an exchange-traded fund?

A bundle of related stocks and other securities created by a fund manager and sold on the conventional stock exchange.
An investment plan that allows assets in the investor's portfolio to be swapped freely by the investor.
A marketplace in which niche-specific stocks and other assets are traded.
The transaction fees collected by a stock exchange or crypto exchange.

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How do you buy an exchange-traded fund?

Register your portfolio with government authorities so shares of it can be traded on open markets.
Buy all of your stock and/or crypto at the same exchange.
The same way you buy any stock or security: through an exchange or brokerage.
Buy a minimum amount of every asset in the fund.

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What is a benefit of investing in a fund?

It guarantees a reliable small yield on every investment.
It relieves investors of the need to monitor the market or predict highs and lows.
It lets the investor easily invest in a specialized marketplace such as entertainment or gaming.
It provides access to special investor-only documentation such as company financial statements and business plans.

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What is a crypto ETF?

The reward miners earn for validating blocks of transactions on the blockchain.
A machine that allows you to buy and sell crypto with a credit card.
An exchange that sells derivative products like crypto futures and options.
A financial investment instrument that allows investors to profit from the cryptocurrency market without actually owning any crypto.

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Which of these is NOT an advantage of crypto ETFs?

Portfolio diversification.

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Kriptomat Academy content is informative in nature and should not be considered a personalised or any other investment recommendations or advice.
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