Crypto ETFs are back in the news in a big way. The Security and Exchange Commission (SEC)’s updated standards for approval for these assets, streamlining the financial sector’s product launch process.
The financial services sector is chomping at the bit.
Now, based on your view of cryptocurrencies, you might call that good news or bad news.
The truth, as we so often find, lies somewhere in between. Here’s why.
Crypto in a new wrapper
ETFs are a type of financial product representing a basket of assets. Those assets could be anything – gold bars, mortgages or portfolios of financial derivatives (even all three!). What makes ETFs important is that retail investors, just everyday folks like you and me, can decide to buy shares of them with our brokerage accounts.
From one angle, that’s strange. Why would you buy a piece of a basket when you could buy the contents of the basket directly? Originally, ETFs were created and used to hold hundreds or thousands of different assets (the sheer number of which made it impractical to own one of each directly).
Then, well, things got weird. Blame the pandemic lockdowns, or maybe the marketing departments at big asset managers. ETFs started becoming more niche, more specialized. Some even have “active managers” who operate a sort of hedge fund using investor dollars to buy and sell assets they think will go up. Crypto believer Cathie Wood is probably the most famous manager running a sort of retail hedge fund these days.
The financial services industry saw an opportunity… See, these sorts of funds have expense ratios. That’s the percentage you pay for the privilege of owning it. There’s a huge spread on these expense ratios – from 0% (yes, free) all the way up to 18.5%. And this isn’t a “performance fee” either. Your fees accrue daily for as long as you own the fund. Whether it goes up or down.
If you think about it, that’s a pretty good deal for whoever puts the fund together! They charge you money for buying the assets you could buy yourself. This niche of the financial services industry became so incredibly popular that, today, there are actually more ETFs than there are publicly-traded stocks in the U.S.
So there were already, arguably, more of these things than we need (and thanks to “white-label” providers, anyone can build and launch their very own!) I’m pretty sure Paul Volcker was thinking of this kind of thing when he said,
“The most important financial innovation that I have seen in the past 20 years is the ATM.”
In other words, the most important financial innovation of those decades of hyper-financialization wasn’t derivatives, securitization or complex instruments. All those did was make the financial services industry more popular.
Now, if you’re a regular reader, you already know there are crypto ETFs – are they beneficial?
Why some people are getting excited about crypto funds
One big reason is that fund managers can now bring cryptocurrency ETFs to market much more quickly. Suzanne McGee and Hannah Lang with Reuters write:
The vote last week by the SEC to adopt new listing standards eliminates the need for individual regulatory review of each crypto ETF application, allowing products that meet predetermined standards to launch without a lengthy case-by-case approval process. That will slash the approval time for new crypto products to 75 days or less, from up to 270 days previously, industry sources said.
From nine months to 10 weeks – that’s a big deal. In my mind, there’s exactly one reason to get excited about this. It means more of the crypto sector (more coins and tokens) will be available to everyday retail investors. And, since the folks who sell those funds make a profit on them, I think it will mean more crypto investment generally.
With fund managers pushing crypto ETFs, you can expect many more retail investors to get involved in what they think is crypto as retail investors see more validation of crypto by investment funds based on the assumption that fund managers see cryptocurrencies as being here for the long haul.
Which brings us back to something that I mentioned earlier…
Exposure vs. ownership
What ETFs are is trusting someone else to manage your money. This is what fund managers do, after all. Yes, ETFs make it easy and comfortable for people to buy shares in a brokerage account. And it’s important to remember this as well: Exposure isn’t the same as ownership.
Buying into a bitcoin ETF, for example, does not make you an owner of any bitcoin. I’d argue that means you aren’t actually a crypto investor simply because you have no asset ownership. What you have instead is financial exposure to crypto prices. For some people, that’s sufficient.
They’re overlooking a few risks (counterparty risk, index tracking errors and so on). I don’t want to belabor this point, because, again, some people are happy with indirect arms-length exposure. But there’s a better way.
Diversifying with the future of money
The first thing that I would recommend is to look at control. You want to be in control of your investments. So, you want to both have ownership of the cryptocurrencies that you invest in, and you want to have control over buying and selling them. That allows you to make your own choices.
And, if you want a way to buy and sell cryptocurrencies in a tax advantaged way, you can choose to invest into a Digital IRA which will allow you to have both direct ownership and control of your crypto. Along with deferred taxes.
Additionally, if your digital IRA is with BitIRA, your assets are secured in insured cold storage for the best security available.
So, while crypto ETFs offer exposure to cryptocurrencies in the wider marketplace, if you want to make the most of the benefits of crypto investing, you would be smart to open a digital IRA. It’s your money, and you know how to best invest it.
You can start your due diligence by getting our free Essential Guide to Digital IRAs. Or you can open your Digital IRA right now, anytime (day or night) – in less than 10 minutes.
