Investing in cryptocurrencies had been one of the main trends in 2020 as valuations embarked on a massive bull run, on the back of a strong appetite for risk and accommodative financial conditions. The growth witnessed in the digital asset world had also been facilitated by the appearance of new investment tools, one of the most important being Exchange-Traded funds (ETFs).
The price of Bitcoin is currently hovering around $40,000 and most of the market is consolidating after a decent selloff. Since valuations are now more attractive, people might be interested to find out some of the main differences between crypto ETFs investing and traditional crypto trading.
Buying a basket of cryptocurrencies
An Exchange-Traded Fund (ETF) is a publicly-listed entity enabling retail traders or investors to gain exposure on a basket of assets, by buying shares. In the case of crypto ETFs, traders indirectly gain exposure to one or more tokens.
Having exposure to different cryptos is important because not all names have the same performance. Investors had been rotating in and out of hot tokens requiring more attention when it comes to diversification.
Diversifying risk
With ETFs on crypto, risk diversification is ensured. Retail traders generally learn about this via a demo trading account, where they use stop losses or take profits to reduce the upside and the downside of their trading accounts. Risk can be kept under control by allocating capital in such a way that not “all eggs will be put in one basket”.
In traditional crypto trading, users can only have a diversified exposure on the market only by placing multiple trades on different cryptocurrencies. An ETF covering a basket of cryptos will no longer require that approach.
Reduced costs?
Another important reason why there had been a shift towards ETFs trading since a few years ago has to do with trading costs. When buying a basket of assets, traders have to pay spreads and even commissions for each individual contract.
An ETF will carry a single cost, even though the owner will indirectly buy and gain exposure to a larger number of assets. Cryptocurrency trading can be associated with higher trading costs since volatility is elevated and liquidity much lower as compared to other mature markets.
Higher security
Traders wanting to get involved in altcoins, not just in Bitcoin, will find ETFs attractive from a security point of view as well. Even though they will buy crypto, indirectly, they won’t have to worry about ownership vulnerabilities, cryptocurrency wallet thefts, or other technological weaknesses that had been linked with crypto over the past several years.
Although there are several differences between crypto ETFs investing and crypto trading, ultimately both are ways to gain exposure to some of the most popular tokens in the world. Expectancies are for a faster transition towards a fully digitalized economy and digital assets can play a leading role. Regardless of choice, traders and investors need to be aware that the risks involving cryptocurrency investing are still the same and must be dealt with properly.
This article originally appeared on Crypto Vevo.
