Crypto ETFs offer a way to invest in cryptocurrencies at lower cost and lesser risk
India has one the biggest investor bases for crypto. The number is expected to increase further as there is some clarity on taxation and more confidence that the regulator are unlikely to ban it any time soon.
But crypto investing is not easy for many. The jargon and hassle of currency conversion stops many from owning physical assets. For such investors, ETFs can be a great alternative, as it offers many benefits.
Unlike a stock, the price of a crypto currency is not backed by company or income generating trade. There is no company or business on which you can do a financial analysis and assess the value of the crypto. It’s also difficult to value it like a currency, because a currency like a rupee or dollar is backed by the economic activity of a country. It is purely based on supply and demand of the “project”. Just a single tweet by an “influencer” like Elon Musk can move the price of Bitcoin by a few percentage points. Its just like gambling. Therefore it is difficult to advise which crypto to invest; your guess is as good as mine.
In such case crypto ETFs can be a low cost and less risky option to invest in this asset class.
What is a crypto ETF?
Unlike regular ETFs which track a basket of stocks or an index, crypto ETFs typically track one or two digital assets. They are liquid and can be traded just like regular stocks and are accessible through most international brokerages.
There are two kinds of crypto assets —
• The ones backed by crypto derivatives like future contracts. Most ETFs today fall into this category
• The second type are the ones that buy physical cryptos. The fund directly buys the cryptos from the exchange and investors get the price benefit by holding shares of the fund. The first such ETF (ProShares Bitcoin Strategy ETF or BITO) was launched in 2021.
Crypto ETFs offer a way to invest at lower cost and lesser risk. Some of the key benefits are as follows.
• No need for a wallet: One can invest in crypto with creating an account or wallet on any crypto exchange. You can just open an account on an international investing platform and invest in these ETFs.
• No currency conversion: Avoidance of owning a wallet, saves one from the hassle of currency conversion. When you open a wallet, you have to transfer money from bank account to wallet and convert it into digital tokens, before purchasing the crypto currency. This sounds easy but is intimidating for many. Also some banks don’t approve transfer of cash to crypto wallets. ETFs have no such issue as you purchase them from your regular investing account.
• Lower cost of ownership: Buying crypto through wallet will make one incur charges like annual fees, custodian charges, transaction fees and network charges. All these can be avoided to a large extent by taking the ETF route. ETFs also enable buying in smaller ticket size. For example, the price of Bitcoin today is at $37,082. On the other hand, the price of bitcoin ETF BITO is just $23.58 making it easier for retail investors invest in crypto.
• Lower risk of ownership: There is always a security risk in buying crypto through wallets. There are many instances of hacking in wallets on account of keys being lost and stolen. ETF investors are safeguarded from these risks to a large extent.
• Lower learning curve: There is quite a bit of jargon, like mining, staking, wallet, etc. that one needs to be familiar with while investing in crypto. While its easier to understand for tech professionals, non-techies find it quite confusing. With ETFs there is no such hassle.
Challenges for Indian investors
To invest in crypto ETF, an Indian investor will need to open an account with a global investment or a brokerage platform. This will require them to transfer money through the LRS route, the RBI approved channel to invest overseas.
But they are likely to face resistance from banks as most of the banks don’t permit usage of money sent through LRS to be invested in crypto assets. This is a grey area.
Since investing in ETFs doesn’t not tantamount to owning digital assets, it is possible that some banks may permit it. But it is advised to check with the respective banks before transferring funds through LRS.
Cryptos are not gold
It is important to note that crypto is a very volatile asset. They are not an alternative to gold as they have no storage value. Hence one should not put more than 4-5 per cent of their investment portfolio in cryptos. If you play within your risk appetite, crypto can surely add value to one’s investment portfolio.
The author is founder & CEO, Kristal.AI
March 21, 2022