ETF Trading Strategies for Beginners | Introductory Strategy for ETF Trading

Cryptocurrencies have been conquering the financial industry since their appearance to nowadays. Recently, traditional products like ETFs have reached the crypto sphere, offering a new method to diversify portfolios and enhance long-term strategies. 

In this introductory article, we will discuss crucial aspects of ETFs and their possible strategies.

Explaining ETFs: What are they?

ETF stands for exchange-traded funds, and these are Exchange-Traded Products (ETPs) listed in the traditional financial markets that emulate a function similar to stocks.

Traditionally, ETF investors buy and hold shares of a fund whose value is attached to an underlying asset or the aggregation of various instruments to offer a synthesized method to capitalize on the total sum of a portfolio.

Cryptocurrency ETFs offer a comparable approach: track the price evolution of crypto assets. In the case of crypto, ETFs are a relatively new product. After years of tangled regulation procedures, the most relevant ETFs are those linked to Bitcoin in the US spot markets.

Before BTC spot ETFs, the ProShares Bitcoin Strategy was the first Bitcoin ETF launched in the US on the Chicago Mercantile Exchange (CME), which means this ETF performs under futures contracts.

Futures ETFs do not offer investors/traders the possibility to hold the underlying asset as spot does, but they still track the price of underlying assets. Like any other futures derivative, retailers and investors use it to capitalize on a speculative basis and monthly expiration date.

How Do Crypto ETFs Work?

As briefly noted before, ETFs evolve with the market price of underlying assets. Essentially, these products are equivalent to an index, replicating the basket model to deliver a total valuation.

Depending on the ETF class, the process for tracking cryptocurrency prices varies. Let's define each available class:

• Spot ETFs: Buy and hold the underlying asset directly in the market. This class is what investors approach as a way to build portfolios. Every time an investor buys shares, the funds manager has to buy the equivalent quantity in the crypto market.
• Futures ETFs: This class exchanges contracts within a determined period and does not buy or hold the underlying asset. Instead, it derives its valuation from the performance of an existing portfolio, which tracks the price of crypto futures contracts.

Another crucial aspect to note regarding how ETFs work is how they redeem their shares to investors. For example, there is an elementary distinction between the spot ETFs offered in Hong Kong and those in the US. 

Let's see:

• Hong Kong Spot ETFs: the redemption of these products is in-kind, meaning they will require ETF intermediaries to use cryptocurrency to get a new share. In other words, investors can use crypto to invest in the fund.
• US Spot ETFs: these products, however, are cash-in, meaning investors do not access the crypto holdings and can only issue cash-created shares.

Additionally, ETFs can work on a specific intent. For example:

• Some ETFs manage market cap-weighted portfolios based on futures contracts.
• Some ETFs invest in long crypto baskets while short USD in the futures market or spot market.
• Others are based on the S&P CME Bitcoin Futures Daily Roll index and volatility.

How Many Crypto ETFs Exist Till Now?

Based on everything discussed so far, we can point out some existing ETFs and their function:

• 2x Bitcoin Strategy ETF (BITX): is based on the S&P CME Bitcoin Futures Daily Roll index. The fund aims to provide 2x the daily price movements of an index based on rolling front-month CME bitcoin futures.
• ProShares Bitcoin & Ether Market Cap Weight ETF (BETH): it doesn’t invest directly in Bitcoin or Ether. Instead, invest in a long cryptocurrency basket while short USD based on a market cap-weighted portfolio of front-month CME Bitcoin and Ether futures contracts.
• iShares Bitcoin Trust ETF (IBIT): it invests in long BTC while short USD. Unlike BETH, IBIT is a passively managed fund that tracks the spot price of Bitcoin. It is a spot ETF.
• 2x Ether ETF (ETHU): it invests in long ETH while short USD. It aims to provide 2x the daily price movements of Ether (ETH). Its primary investment is cash-settled CME Ether futures.
• ProShares Short Bitcoin ETF (BITI): it invests in long USD while short BTC. It tracks the inverse (-1x) daily price movements of its underlying index, aiming to profit from the price decline of Bitcoin.
• Valkyrie Bitcoin Futures Leveraged Strategy ETF (BTFX): it’s based on the S&P CME Bitcoin Futures index. It aims to achieve 2x daily Bitcoin index returns via Bitcoin futures contracts, mitigating risks through collateral investments and by using reverse repurchase agreements.
• WisdomTree Bitcoin Fund (BTCW): it invests in long BTC while short USD. It passively mirrors the performance of Bitcoin, leveraging a Benchmark Rate for valuation. It is a spot ETF.
• Fidelity Ethereum Fund (FETH): it invests in long ETH. It offers exposure to the daily USD spot price of ether (ETH).

What Is The Purpose And What Is Important in an ETF?

Some may wonder what is the purpose of ETFs. Is it not the same as buying the underlying asset directly in the market? Well, no. Also, some may wonder what is important in an ETF.

There are two principal factors to remark on:

1. The purpose is portfolio diversification.
2. The importance is performance over time.

Crypto ETF Trading: Spot And Futures Strategy

Traditionally, investors will seek steady growth through diversification. ETF accomplishes this goal pretty well.

The performance of these products tends to be healthy in the long term since, as we noted, each crypto ETF mentioned seeks a specific intent across spot, futures, and volatility.

In the case of crypto, ETFs are a safer and multi-dynamic method to diversify an investment while approaching several objectives.

Let's suppose an investor wants to be involved in crypto, but does not desire to expose so much to the risks of crypto markets. Instead, this investor desires to pursue steady growth over time.

This investor can implement a long-term strategy by adopting different ETFs, such as follows.

Conclusion

Crypto ETFs are sophisticated products that allow investors to be exposed safely to the crypto market while relying on steady growth and a diversification method to manage and offset a portfolio.

In Altrady, investors and traders can manage portfolios while tracking the cryptocurrency prices on spot and futures markets in a specialized trading terminal. Sign up for a free trial account today.