Trump, coin, your 401k: ETFs are one way to trade crypto for long-term investing
Is it a good thing? Some advisors, led most notably by Ric Edelman, say that investors should hold as much as 40% of their portfolio in digital assets (primarily replacing bonds). That's a big move, as just a few years ago, Edelman recommended as little as 1% in crypto like bitcoin and ethereum. Other advisors say the risks outweigh the potential benefits.
Cryptocurrency isn't new, with a history now dating back almost two decades, but it continues to disrupt the markets. Cryptocurrency ETFs are one example, experiencing explosive growth, all the while evolving at a rapid pace in investment strategy. Crypto ETFs have seen record inflows this year, at roughly $13 billion, making them one of the most popular portfolio choices within the ETF universe, and led by flagship bitcoin ETFs such as BlackRock's iShares Bitcoin Trust (IBIT). Ethereum ETFs are growing too, with Van Eck's Ethereum ETF (ETHV) now over $200 million in assets.
ETFs offer convenience for the long-term investor as a way to gain exposure to the asset class without holding an underlying cryptocurrency and needing to open a crypto wallet or use a crypto exchange. It's like owning a gold ETF, such as GLD, rather than actually owning the metals contract.
"From our perspective, demand is really strong, investors are really interested," said Eric Pan, CEO of ICI, the fund industry trade association, on a recent edition of CNBC's "ETF Edge."
"And we have a new regulatory environment here in Washington that is encouraging this kind of innovation," Pan added.
Bitcoin and ethereum have generated strong returns, though not without their fair share of volatility to match the gains. For example, IBIT and ETHV have generated roughly 20% and 11% in returns year-to-date, respectively.
July was a winning month, in particular, for ether and bitcoin ETFs, which have had $5 billion and $6 billion inflows during the month, out of a ETF industry cumulative haul of $55 billion in net new money from investors.
But within the world of retirement plans, access to crypto ETFs remains limited. Retirement plans that offer self-directed brokerage window options alongside company-sponsored 401(k)s and individual IRAs already offer investors ways to invest in crypto like bitcoin.
But as more crypto ETFs hit the market, it also ratchets up the risk for investors if they don't distinguish carefully between the options.
One of those evolutions within crypto space has been leveraged funds, which provide double or triple exposure to individual digital currencies, such as the Teucrium 2x Long Daily XRP ETF (XXRP), which provides double exposure to Ripple's XRP.
Leveraged and inverse ETFs have ballooned as an asset class, offering a way for traders to make big bets on some of the market's most popular assets, like tech stocks, whether they want to bet the asset is going to increase or decrease in value on any given day. But these types of funds are not meant for the faint of heart, the risk-averse, or, most importantly, to be held as a long-term investments.
"This is an aggressive product, it's leveraged, it's not designed to be bought and held, it's designed to be traded each day," said Sal Gilberte, Teucrium Trading's president, on the recent edition of CNBC's "ETF Edge."
Similar funds, such as ProShares Ultra XRP ETF (UXRP) and the Volatility Shares Trust XRP ETFs (XRPI & XRPT), rely on derivatives rather than holding XRP outright. The exposure provided via such funds comes at a lower cost than buying equivalent holdings.
While leverage funds offer the potential for big returns, double or triple the market return, they also increase the risk factor, which is why investors need to be savvy and "understand what they're owning", Gilberte said.
Losses can multiply quickly.
If investors are looking for a steady exposure to crypto, non-leveraged crypto ETFs such as iShares Bitcoin Trust ETF or VanEck Ethereum ETF might be better options.
"They should buy a fund that just holds the token, and goes up and down with the token very smoothly with no leverage whatsoever," Gilberte said. Disclaimer
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