An Exchange Traded Fund (ETF) is an investment fund that tracks prices of an underlying asset. It trades much the same as a stock. It brings together contributions from several individuals and puts them into different securities. An investor can buy or sell an ETF’s holdings to diverse market participants.
ETFs provide investment options that feature prominently in digital platforms. Several applications have been made to the United States Securities and Exchange Commission (SEC) for a Bitcoin EFT. The most recent re-submission was made by American exchange operator CBOE Global Markets in collaboration with VanEck and SolidX.
The approval of a Bitcoin ETF could be phenomenal. It would boost Bitcoins’ price to massive figures since investors would be able to invest freely through the ETF. With the continuous maturing of the crypto market coupled with transparency, there is greater likelihood for a Bitcoin ETF approval in the coming days.
Cryptocurrencies vs ETFs
While ETFs are a form of investment fund, Cryptocurrencies on the other handare virtual mediums of exchange that rely on cryptography to secure monetary transactions, establish exchange of assets and regulate further production of units.
Cryptocurrencies stand on their own. This means that they are not allied to any central influence or subject to government control. Instead, they operate via the Blockchain, a redistributed structure that is simply “a chain of blocks.”
Each block is a record of information sequentially interconnected to similar records of information that form a chain. Like the general ledger, blockchain contains all transactions that have ever taken place in the network. Therefore, the ledger continues to get bigger with every new dealing. With this, all cryptocurrencies can be traced no matter whether they are in use or just inside a digital wallet.
Each has its own merits and demerits. Different investors may be weary of either based on the level of knowledge and past experiences. Before getting too attached and prefer one more over the other, read on to find each one’s merits and demerits.
Advantages of investing in Cryptocurrencies
- Unlike ETFs which operate mostly during stipulated trading hours, cryptocurrencies operate 24 hours a day giving you access to your money at any time.
- The use of blockchain technology enables individuals to trace their coins thus promoting transparency.
- No third-party interference. Transactions involve two parties hence lesser fees charged.
- They are universally recognized making international dealings hassle-free. Reduced fraud cases because of full encryption of the system
- Do not bear sensitive information about users thus protecting their identities and at the same time making them less susceptible to losses.
Advantages of investing in ETFs
- They trade all through the trading day. As such, they provide flexibility to traders because they are aware of update of share prices as it happens.
- They enable you to diversify by giving you the opportunity to invest in several securities at the same time.
- They are tax-friendly because of the reduced capital gains they generate.
- They do not have a minimum investment amount. You can buy even one share.
- ETF companies publish asset lists daily thus creating transparency.
- Because of their straightforward structure, they are not difficult to understand.
Disadvantages of investing in Cryptocurrencies
- Like all things digital, they are prone to hacking. The uncertainty of getting into cryptocurrencies can be crippling especially to a newcomer in the industry.
- It is impossible to reverse cryptocurrency payments. And so, you stand to suffer a loss if you mistakenly send money to the wrong person.
- The frequent price swings make them an uncertain investment choice.
- There is a likelihood of losing all your coins in the event you forget your passwords/keys.
- They aren’t widely accepted. For this reason, it is not possible to use it for your everyday dealings.
- They are based on complex technologies therefore making it hard to understand the specifics.
Disadvantages of investing in ETFs
- Certain ETFs may suffer periods of inactivity due to sectorial or locational triggers.
- ETFs encounter international limitations and high tax impositions.
- Relatively low dividend returns.
- High brokerage and management fees.
- Limited options in terms of diversification.
- Tracking problems when an ETF moves away from its predestined index.
Why some investors may shy away from Exchange Traded Funds
With the massive growth that ETFs have experienced, there is a widespread fear that their newfound popularity might render them an unappreciated liability should a decline occur in the market. The following are some of the biggest fears that have been expressed by individuals in relation to ETFs.
However, there are other arguments that seek to disprove this notion. One school of thought is of the opinion that stress in the market affects all the securities and not just ETFs.
Volatility is the extent to which a security reduces or increases in price with regards to particular returns. It is believed that uncertain ETFs could cause an upsurge in volatility in the market since they need to balance their portfolios and keep them in line with the returns on underlying securities.
Experts are of the opinion that volatility in the financial markets in recent years is not because of the effect of ETFs but to some degree due to fast-paced trading as well as changes in the way people perceive information and manage their time.
Stocks have been observed to progressively move together. This has been attributed to the increase in popularity of ETFs and their close relatives, index mutual funds. There is a widespread fear of the simultaneous trading across numerous stocks raising risks through greater stock price interrelationships.
Additionally, it is feared that this increased correlation may have adverse effects on an investor that wants to diversify their portfolios.
However, investment should not be about selecting the perfect bundle of stocks. Instead, it should be concerned with the ideal individual securities.
Investors fear that the rapid increase in the number of ETFs may leave them confused and overwhelmed if they maintain that upward trajectory.
Even so, analysts indicate that this is a non-issue because the forces in the market will always indicate when the options become too many to choose from.
Complexity of ETFs
Not everyone is able to get the hang of how exchange-traded funds operate. All the same, they are available to everyone and exist in arguably all asset classes.
Although this is a valid argument, it should not prevent an investor from investing in ETFs. If an investor finds the underlying details too hard to understand, they can go for the most-popular ETFs that are linked to recognizable indexes.
In conclusion, it is important to weigh the pros and cons of investing in either an ETF or in cryptocurrencies. It is upon the investor to decide what suits them. Even with the risks involved, they are both viable investments. Do not be afraid, take the leap of faith and invest today.