Crypto and ETFs: what you need to know
Since the initial release of Bitcoin in 2009, cryptocurrencies have steadily pushed their way into the mainstream of finance. They have been widely accepted as “virtual currencies,” or digital means of exchange created and used by private individuals or groups.
As with all assets whose existence is enabled by blockchain technology, cryptocurrencies are “decentralised.” Rather than being tied to, created by and regulated by a state or government, cryptocurrencies are digital currencies that do not have a central bank or single administrator. Cryptocurrencies rely on cryptographic methods to maintain security and fidelity, and allow the transfer funds and other digital assets in a peer-to-peer manner, between two different individuals, without any central authority being involved.
In this way, cryptocurrencies are intended for payments, transmitting value (effectively, digital money) across a decentralised network of users. But some cryptocurrencies are also making a case to be considered as an investable asset class – used, as gold is used, for example, as a “store” of value and wealth.
Unlike the “fiat” currencies issued and maintained by central banks on behalf of their respective governments, cryptocurrencies are finite in the amount that will ever be in circulation. Cryptocurrency is created through “mining,” the process by which very mathematical problems are solved by computers: the first computer to find the solution to the problem is rewarded the next “block” of cryptocurrency “coins,” and the process begins again (for Bitcoin, this is approximately every 10 minutes and the reward is 6.25 BTC).
The finite nature of Bitcoin was written-into the software protocol as the digital currency was being created 13 years ago, by a person, or persons, identifying themselves as “Satoshi Nakamoto.” Bitcoin is designed to experience regular “halvenings” (roughly every four years), which constrict supply of the digital asset: this event means that the supply of new bitcoins drops in half. No more bitcoins will be created after the total number of bitcoin in existence hits 21 million, no matter how much effort and energy is expended. This in-built (and increasing) scarcity ultimately should see Bitcoin playing a major role as a store of value – regardless of how the price fluctuates in the short term.
Since Bitcoin joined the world, hundreds of alternative digital assets – coins or tokens that are not Bitcoin – have come into being: these are known as “altcoins.” Ethereum is the most widely used altcoin, and is second only in global market capitalisation (total market value) to Bitcoin.
Individuals can readily invest in cryptocurrency on a crypto exchange, a marketplace where you can buy and sell cryptocurrencies and “safe-keep” in a crypto wallet. But more recently, the first exchange-traded funds (ETFs) have been established to offer investors access to crypto in a financial product, giving them the familiarity, comfort and security just like trading shares.
ETFs are very popular with investors because they offer simple access to a range of different asset classes by buying one vehicle, which is itself a listed stock, and gives exposure to a sharemarket index, or an investing style, or other asset class, an industry sector, a currency, or a commodity. ETFs offer investors a simple and low-cost way to diversify their investment portfolio.
Crypto ETFs give both investors and traders a way to gain exposure to cryptocurrency without having to buy it directly or set up an account with a crypto exchange. Investors can simply buy and sell the fund like they would any other shares trading on an exchange, making it simple and convenient to get started in the crypto world.
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Dan is the CEO of Cosmos Asset Management and is responsible for leading the business operations and strategic direction. He has extensive experience in the local and global funds management industry, with over 15 years dedicated to Exchange...