X-Plained: How to Buy Cryptocurrencies on a Stock Exchange
Cryptocurrencies are digital assets which are used as a digital store of value and medium of exchange. Bitcoin and Ethereum are the most well-known cryptocurrencies, after both surged at the end of 2020 through to 2021 to more than US$61,000 and US$4,500 respectively. Subsequently, many investors have sought to add cryptocurrencies to their portfolio, however many are intimidated by the complex world of decentralised blockchain. ETFs backed by physical cryptocurrency are an efficient way to gain this exposure via a regulated stock exchange.
- What are cryptocurrency ETFs
- The advantages of accessing cryptocurrencies via a stock exchange
- Considerations for investing in cryptocurrencies
What are Cryptocurrency ETFs
Physically backed crypto ETFs aim to track the price of a cryptocurrency, like Bitcoin or Ethereum. The Global X 21Shares Bitcoin ETF (Exchange Code: EBTC) and Global X 21Shares Ethereum ETF (Exchange Code: EETH) do this by investing in Bitcoin and Ethereum which is held in cold storage by Coinbase, the world’s largest custodian of cryptocurrency. In this way, physically backed crypto ETFs work the same way as physical gold ETFs such as the Global X Physical Gold (ASX: GOLD), which tracks the gold price by investing in gold bullion stored in JP Morgan Chase Bank in London.
The Advantages of Accessing Cryptocurrencies via a Stock Exchange
There are some distinct advantages of using physically backed ETFs via a stock exchange to access cryptocurrencies.
- Efficient and Highly Regulated: Physically backed cryptocurrency ETFs are bought and sold on a stock exchange – such as Cboe – like any other ETF. They allow investors to gain exposure to these digital assets in a highly regulated, secure environment.
- Secure Access: Cold storage is where the private keys used to access and transact in cryptocurrency are stored offline entirely without internet access. It is often thought to be more secure than a Bitcoin wallet as there is no access route for hackers. Hence, ETFs like EBTC and EETH offer efficient access to bitcoin and Ethereum respectively, in a single trade without having to worry about losing the private key to a crypto wallet.
- Portfolio Diversification: A more general benefit of including crypto in a portfolio is for diversification. It sits in its own digital asset class, providing a potential growth tilt for investors with a suitable risk profile. Additionally, it has a low correlation to traditional asset classes including equities, fixed income, commodities, or property.
Considerations for Investing in Cryptocurrencies
Given that physically backed cryptocurrency ETFs are relatively new to mainstream markets (Global X being the first to introduce spot bitcoin and Ethereum in the Asia-Pacific region in 2022), investors need to educate themselves to ensure these kinds of funds are suitable for their investment needs and goals.
Cryptocurrency ETFs are a higher-risk investment as they are exposed to the underlying price movements of Bitcoin or Ethereum which is historically quite volatile. For further information on cryptocurrency, read our insight article, Nine Common Crypto Questions Answered.
Talking directly to the Global X 21Shares Bitcoin ETF (Exchange Code: EBTC) and Global X 21Shares Ethereum ETF (Exchange Code: EETH), these funds are only intended for investors who understand the risks involved in investing in a product with cryptocurrency exposure. Any investment in these products should be very closely monitored due to the high price volatility of the underlying cryptocurrencies. According to their Target Market Determinations (TMDs), EBTC and EETH are generally considered appropriate for investors with a very high-risk tolerance, seeking capital growth to be used as a very small portfolio component.
EBTC: The Global X 21Shares Bitcoin ETF (Exchange Code: EBTC) invests in physical Bitcoin to provide exposure to the price of Bitcoin in Australian dollars.
EETH: The Global X 21Shares Ethereum ETF (Exchange Code: EETH) invests in physical Ethereum to provide exposure to the price of Ethereum in Australian dollars.