The Pros and Cons of Investing in an ETF Versus Buying Cryptocurrencies

Содержание статьи:

1. Cryptocurrencies vsETFs
2. Advantages of investingin Cryptocurrencies
3. Advantages of investingin ETFs
4. Disadvantages of investing in Cryptocurrencies
5. Disadvantages of investingin ETFs
6. Why some investors may shy away from Exchange Traded Funds
7. Liquidity uncertainty
8. Volatility concerns
9. Increased correlations
10. Proliferation concerns
11. Complexity of ETFs
12. Related articles:

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 investmentoptions that feature prominently in digital platforms. Several applications have been made to the United States Securitiesand Exchange Commission (SEC) for a Bitcoin EFT. The most recent re-submissionwas 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 Bitcoin’s 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 vsETFs

While ETFs are a form of investment fund, Cryptocurrencies on the other hand are 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 wary 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 investingin Cryptocurrencies

1. UnlikeETFs which operate mostly during stipulated trading hours, cryptocurrenciesoperate 24 hours a day giving you access to your money at any time.
2. Theuse of blockchain technology enables individuals to trace their coins thuspromoting transparency.
3. Nothird-party interference. Transactions involve two parties hence lesser feescharged.
4. Theyare universally recognized making international dealings hassle-free.
5. Reducedfraud cases because of full encryption of the system
6. Donot bear sensitive information about users thus protecting their identities andat the same time making them less susceptible to losses.

Advantages of investingin ETFs

1. 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.
2. They enable you to diversify by giving you the opportunity to invest in several securities at the same time.
3. They are tax-friendly because of the reduced capital gains they generate.
4. They do not have a minimum investment amount. You can buy even one share.
5. ETF companies publish asset lists daily thus creating transparency.
6. Because of their straightforward structure, they are not difficult to understand.

Disadvantages of investing in Cryptocurrencies

1. 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.
2. It is impossible to reverse cryptocurrency payments. And so, you stand to suffer a loss if you mistakenly send money to the wrong person.
3. The frequent price swings make them an uncertain investment choice.
4. There is a likelihood of losing all your coins in the event you forget your passwords/keys.
5. They aren’t widely accepted. For this reason, it is not possible to use it for your everyday dealings.
6. They are based on complex technologies therefore making it hard to understand the specifics.

Disadvantages of investingin ETFs

1. CertainETFs may suffer periods of inactivity due to sectorial or locational triggers.
2. ETFsencounter international limitations and high tax impositions.
3. Relativelylow dividend returns.
4. Highbrokerage and management fees.
5. Limitedoptions in terms of diversification.
6. Trackingproblems 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 isa widespread fear that their newfound popularity might render them anunappreciated liability should a decline occur in the market. The following aresome of the biggest fears that have been expressed by individuals in relationto ETFs.

Liquidity uncertainty

Liquidity is the quality of being able to sell or buy anasset fast and at a steady price. There is a huge worry that exchange-tradedfunds might prove illiquid in the event of a crisis.

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.

Additionally, alternative arguments disagree with the assumption that ETF liquidity is assessed by trading volumes. Rather, it is dependent on the elemental securities that constitute the ETF.

Volatility concerns

Volatility is the extent to which a security reduces orincreases in price with regards to particular returns. It is believed thatuncertain ETFs could cause an upsurge in volatility in the market since theyneed to balance their portfolios and keep them in line with the returns onunderlying 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.

Increased correlations

Stocks have been observed to progressively move together.This has been attributed to the increase in popularity of ETFs and their closerelatives, index mutual funds. There is a widespread fear of the simultaneoustrading across numerous stocks  raisingrisks  through greater stock priceinterrelationships.

Additionally,  it isfeared that this increased correlation may have adverse effects on an investorthat wants to diversify their portfolios.

However, investment should not be about selecting theperfect bundle of stocks. Instead, it should be concerned with the idealindividual securities.

Proliferation concerns

Investors fear that the rapid increase in the number of ETFsmay leave them confused and overwhelmed if they maintain that upwardtrajectory.

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-tradedfunds operate. All the same, they are available to everyone and exist inarguably 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.

Related articles:

• As Platforms & Exchanges Mature, Options for Purchasing and Trading are Growing
• Cryptocurrency ETF Race Happening in the US

Featured image via BigStock.