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November 10, 2021updated 17 Jan 2022 10:28am

Crypto ETF debut highlights investors’ insatiable demand for digital assets

By Patrick Brusnahan

The ASX’s first Crypto ETF, BetaShares’ Crypto Innovators (CRYP), hit trading records on its first day of trading, reaching a trading volume of A$8m ($5.9m) in less than 15 minutes and A$42m ($31.2m) by close of trading. Offering funds that give indirect exposure to cryptocurrencies, such as the BetaShares ETF, is a good middle ground for those looking to capitalize on the cryptocurrency rush but not wanting to be too closely associated with such a volatile investment.

Australian investors are showing strong interest in both ETFs and digital currencies. Priced out of the housing market, many young Australians have been gravitating towards low-cost investments or those that promise high returns.

Data from our Investor Insights: Investment Drivers Analytics shows that millennials are four times more likely to hold an ETF than baby boomers, and demand has risen rapidly; between 2018 and 2021, the proportion of millennials with ETF exposure has risen from 8% to 12%.

At the same time, a study conducted by cryptocurrency exchange Kraken found that 39% of Australian millennials believe that cryptocurrencies are a “good alternative to having an investment property.”

This being the case, strong demand for CRYP comes as little surprise. The investment provides easy and cheap access to companies with exposure to the cryptocurrency market. For now, the Australian Securities and Investment Commission has only approved spot ETFs – those that hold the physical asset.

However, looking overseas, it is only a matter of time until futures ETFs will be approved. In the US, the first futures-backed Bitcoin ETF listed in October. Not investing directly in Bitcoin, futures ETFs track contracts that speculate on the future price of the asset. This means the price of crypto futures should be expected to differ from the current ‘spot’ price, meaning investors are exposed to additional volatility risk.

With demand for crypto at record highs, there is a real danger that investors are piling their savings into investments they do not understand. The recent $28,000 loss of a Shanghai investor who bet his life savings on the ‘Squid Game’ crypto token comes to mind. The average retail investor’s knowledge of futures products or crypto in general is likely limited, making it highly risky to offer cryptocurrencies directly to retail investors, as CBA is trialing in its app, no matter how strong the demand is.

One can easily foresee a future royal commission exploring the way in which small-scale investors were mis-sold crypto investments from their main bank, not realizing that these are speculative assets with very little in the way of traditional investment value. Just as Levi Strauss was one of the sounder investments during the Californian Gold Rush, investing in actual companies looking to profit from the crypto rush may very well be a more reliable strategy for cashing in on the investor frenzy.

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