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

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 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 vs
ETFs

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 investing
in Cryptocurrencies

Advantages of investing
in ETFs

Disadvantages of investing in Cryptocurrencies

Disadvantages of investing
in ETFs

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.

Liquidity uncertainty

Liquidity is the quality of being able to sell or buy an
asset fast and at a steady price. There is a huge worry that exchange-traded
funds 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 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.

Increased correlations

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.

Proliferation concerns

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.

Related articles:

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

Featured image via BigStock.

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