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How investing in a crypto ETF is different

Altcoin exposure: the value of a basket of cryptocurrencies like bitcoin is reflected by the BSX-listed Hashdex Nasday Crypto Index ETF (Photograph by Rick Bowmer/AP)

When The Hashdex Nasdaq Crypto Index ETF (HDEX.BH), listed on the Bermuda Stock Exchange, went live in February this year, it was another innovative first for Bermuda, the world’s premier risk capital, the BSX and listing sponsor Clarien BSX Services Ltd. And it bolstered Bermuda’s reputation as an emerging specialist in the management of fintech and digital assets.

The Hashdex Nasdaq Crypto Index ETF was developed by Hashdex Asset Management Ltd (Rio de Janeiro, Brazil and pending US offices in Miami and New York), the biggest crypto manager in Latin America with a global footprint – in conjunction with the United States Nasdaq (National Association of Securities Dealers Automated Quotations) stock exchange.

What are ETFs, or exchange-traded funds?

As the name indicates, these baskets of securities are readily marketable index trackers (benchmarks), traded in capital markets, like a stock or bond.

The Hashdex Nasdaq Crypto Index ETF tracks its actual benchmark index, the Nasdaq Crypto Index (NCI) co-created by Hashdex and the Nasdaq from Hashdex’s 2018 version HDAI, with the new index based on the same principles of HDAI, but improved scalability as well as designed to provide an accurate representation of the investable crypto market for institutions. Its unique methodology adjusts the weight and number of constituent assets to evolve with the emerging crypto asset class market.

NCI crypto index currently includes six cryptocurrencies in ordered, varying percentages: bitcoin, ethereum litecoin, bitcoin cash, chainlink and stellar lumens.

ETF structures exist in the thousands of variations: stocks, sectors, commodities, bonds, currencies, leveraged, inverse, international, brand names, geographical, styles and the newer cryptocurrencies:

• Heaviest influencers are highly liquid, such as SPY – the SPDR S&P 500 ETF Trust, in the large cap growth equities category tracking the S&P 500 Index

• Available in small sizes

• No special documentation or account

• Convenience

• Tax efficient

• Margin account accessibility

• Exempt from the short sale uptick rule

• Passive composition of assets

• Low transaction costs, although higher if large bid-ask spreads create illiquidity

• No cash drag

• Low management fees

• Diversification of crypto content

• Some ETFs, such as the Hashdex Nasdaq Crypto Index ETF, are considered more volatile, but still may be appropriate for small components of a diversified portfolio.

Owning a crypto index ETF is different from taking a single digital bitcoin, ethereum or other crypto position.

Owning individual positions on a cryptocurrency exchange

In general, the investor must open a crypto trading account on a crypto exchange or choose a broker that allows transfer of fiat currency in (say US dollars) that can be used to purchase crypto currency.

Currently, some institutional banks will not support conversion and redemption transactions into or out of cryptocurrency, while other exchanges do not allow purchases with fiat, only with another crypto.

Once your crypto exchange account is created and verified, fiat funds are deposited into your account by wire, bank account, or debit/credit cards – not generally recommended as too costly.

An access code is created. One then selects a cryptocurrency wallet – this holds the proof of your digital cash by storing the public and private keys require to buy crypto.

Your wallet also implements the digital signatures authorising each transaction. It is imperative to keep passwords, the keys secure; without them you cannot unlock your wallet to access your cryptocurrency.

You’ve read the stories of lost access, readers!

A storage method is then selected to securely store your crypto purchases.

Storage is free, but possibly subject to some security risk:

• Leave your crypto on the exchange, allowing them to store it

• Set up a hot storage wallet, such as a phone app or desktop software program

More security, for a price:

• Set up a cold wallet, considered more secure. It is a small, encrypted portable device that allows one to download crypto coins and store offline.

One can then proceed to transact in various choices in cryptocurrencies.

Indirect participation with a Hashdex Nasdaq Crypto Index ETF

• Access to higher volume participation, more traditional capital markets

• Easier to purchase and hold for numerous crypto digital exposures without having to buy underlying cryptos. As at July 15, 2021, the HDEX.BH portfolio composition includes varying percentages of: bitcoin, ethereum, litecoin, chainlink, bitcoin cash, uniswap, filecoin, stellar, and US dollars.

• Eliminates having separate crypto accounts, wallets, storing safe-keys, etc

• Not anonymous compared to crypto trading

• Greater accountability and transparency through traditional investment account tracking

• Avoidance of conversion to and from crypto to fiat currency

• Rebalancing of underlying assets once a quarter

• Further diversification for a traditional portfolio

• Safety – cold storage protection, with 100 per cent of assets insured and held in cold storage by industry leaders such as Coinbase, Fidelity and BitGo

• Audited by Big Four accounting firm and an independent board of directors.

At present, HDEX.BH is only available to accredited investors, but expansion plans are under consideration.

On July 12, 2021, the Bermuda Stock Exchange announced admission to their listings – another addition to the Hashdex family of ETFs: the Hashdex Nasdaq Bitcoin ETF (HBTC.BH), with listing sponsor Clarien BSX Services Ltd.

Sources and references

The Bermuda Stock Exchange, https://www.bsx.com/index.php

Nasdaq, https://www.nasdaq.com/

HASHDEX, https://www.hashdex.com/en/hashdex

Clarien BSX Services Limited, https://clarienbank.com/

An interview with CEO of Hashdex, Marcelo Sempeo, https://tinyurl.com/56ww4e67

Nasdaq-backed Crypto ETF Goes Live in Bermuda, DECRYPT, Liam Frost, February 9, 2021, https://tinyurl.com/599wv869

Bermuda-based ETF illustrates exchange giant Nasdaq's broader crypto ambitions, by Frank Chaparro, February 9, 2021 https://tinyurl.com/34pvc4au

Why cryptocurrencies have value, https://tinyurl.com/2t5vfu9a

Martha Harris Myron, CPA JSM, a native Bermudian, is a former qualified international cross-border financial planner, and the author of The Bermuda Islander Financial Planning Primers, international financial consultant to the Olderhood Group International, and financial columnist to The Royal Gazette. All proceeds from these articles are donated by The Royal Gazette to the Salvation Army, Bermuda. Contact: martha@pondstraddler.com

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Published July 17, 2021 at 10:37 am (Updated July 17, 2021 at 10:37 am)

How investing in a crypto ETF is different

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