By the time the US SEC allowed the listing of the first cryptocurrency-based ETF in October 2021, the price of Bitcoin had soared to its all-time high of $ 67,000. While the ETF did not invest directly in Bitcoin and instead bought its futures contracts, it was still a key event in cryptocurrency history as it signaled regulatory and institutional acceptance in the world’s largest financial market. Cryptocurrency futures are derivatives of virtual currencies similar to products on stocks, commodities and other fiat currencies that are traded on exchanges globally.
In recent months, several types of cryptocurrency-related ETFs have debuted globally – some invest directly in virtual assets, others stick to futures, while others focus on stocks of companies found in blockchain and other cryptocurrency-related areas. The first US ETF had created market history as it attracted $ 1 billion within days of its debut. But ETFs not only bring greater inflows, they also allow for a larger pool of investors. Institutions and individuals are attracted to cryptocurrency ETFs as regulated investment vehicles.
What are ETFs
An exchange-traded fund (ETF) is a basket of stocks that is traded on an exchange just like a stock does. A Nifty ETF, for example, tracks the prices of 50 indexed stocks. Likewise, a crypto ETF tracks the value of one or more crypto assets such as Bitcoin.
The main benefit of an ETF is that it allows you to diversify your portfolio without owning the asset. Like mutual funds, ETF issuers also buy the asset they track. But unlike mutual funds, not all crypto ETFs are managed by a regulated asset manager. These are also traded on an exchange but operated by a cryptocurrency exchange or some other company. Furthermore, a demat account is not required to invest in cryptocurrencies. While ETFs that invest directly in cryptocurrencies have been listed in Canada and some European countries, the US has yet to approve such ETFs.
Can Indians invest in cryptocurrencies?
In India, ETFs are generally offered by mutual fund companies and the markets regulator Sebi has limited them to stocks and their indices, gold and silver. According to industry players, wealth management companies will not come up with cryptocurrency plans until a law is in place. So how can Indians invest in cryptocurrencies? One option is to invest in regulated global crypto ETFs through platforms that allow clients to buy stocks, bonds, mutual funds and ETFs listed overseas using the RBI’s Liberalized Remittance Scheme (LRS). Through LRS, under the regulatory jurisdiction of RBI, an Indian resident can invest up to $ 250,000 (approximately Rs 1.9 crore) annually.
Krishna Mohan Meenavalli, CEO, Torus Kling Blockchain IFSC, which is launching India’s first crypto ETF in GIFT City, said: “When it goes public, it will be as simple as looking for ‘Bitcoin’, put your money in and start trading. “. He said that ETFs, after their launch in India, will give investors confidence as they will be regulated. In fiscal 21, Indians invested $ 472 million in approved foreign investment products, official figures showed. There was no ETF specific data available.
Another avenue, industry players said, is through national asset management companies that offer ETF-equivalent products. An ETF equivalent is just a basket of cryptocurrencies, and unlike regular ETFs, these products cannot be traded. According to Joseph Massey, MD and CEO of CryptoWire who recently launched IC15, India’s first crypto index, ETFs can be beneficial for those who aren’t sure which crypto token to buy and in what proportion. “The index is weighted based on the market capitalization and popularity of a token. Hence, investors don’t need to apply their minds to how much Bitcoin or Ether to buy, “Massey said.
Safety first: check foreign regulations
India has not legalized the use and investment of cryptocurrencies. But it took budgetary steps to tax cryptocurrency earnings. Furthermore, as crypto ETFs listed abroad are not leveraged investment instruments, Indians can invest in them through the LRS route. Investors should also review the quality of regulatory standards in the jurisdiction in which such ETFs are listed before making a decision.