Bitcoin and Blockchain ETFs hit the market: What you need to know

We need to have a serious discussion about cryptocurrency.

Last week, two Australian crypto-based exchange traded funds (ETFs) launched. One from Betashares and the other from ETF Securities.

This suggests there is a movement in Australia where investors are backing crypto, blockchain and all things fintech, and that many Aussies curious about crypto investing just needed an easier way in.

• Also read: How do you mine Bitcoin?

• Also read: Bill Gates, Elon Musk: What the experts think of crypto

• Also read: Everything you need to know about Bitcoin in 2021

The issue with crypto has always been how complicated it is for anyone new to it. The concept of blockchain and smart contracts are fascinating but also difficult to grasp.

So, here is a breakdown of everything you need to know about cryptocurrency in Australia and how you can invest.

What is cryptocurrency?

A cryptocurrency is a digital or virtual currency that is almost impossible to counterfeit or double-spend. This is because it exists in a decentralised network, where everyone connected to that network can see every transaction that occurs.

A transaction will not be able to go through without those connected on the network to validate it.

What is Blockchain?

Blockchain is an essential element of cryptocurrencies. There have been many investors who have said they wouldn't invest in cryptocurrencies but they would invest in Blockchain.

Blockchain is a database, but you can think of it more like a brick wall being built. Every transaction that occurs on the Blockchian network appears as another brick in the wall.

Everyone can see the bricks being added, so it is completely transparent, and once a brick is locked into place next to another you can’t remove it, so it is secure.

Blockchain technology is significantly faster and a less costly way to complete transactions, whether it be regular currencies or digital ones.

Don’t we already live in a digital world?

We already use credit cards, online banking, and now even our phones to complete transactions, so what is the difference between our already-existing cashless society and digital currencies?

It’s about the decentralised nature of things. Traditional money (or as they call it in the crypto world ‘fiat’ money) is regulated through central banks, who control the currency through interest rates to keep inflation steady.

Digital currencies are completely decentralised. There is nothing that controls its worth except for itself. Yes, I know that sounds confusing.

We will use Bitcoin as an example. Bitcoins can be ‘mined’ (watch the video below for more on that) but there are a finite amount of them. Every four years a halving event occurs where each new block produces half as much Bitcoin.

This means that all new Bitcoin blocks mined after a certain time will only be worth half as much as those mined before. This will happen a few times, before we eventually mine the last coin around 2140.

This is how Bitcoin regulates inflation.

Why are investors getting hyped about crypto?

It's all about technology. The different cryptocurrency coins can be serious, fun, goofy or just completely weird but the technology that backs them all is likely to be a massive game changer in the world of finance.

This technology is bringing about a digital financial revolution, Betashares CEO Alex Vynokur told Yahoo Finance.

“If you look at the world of trade finance or if you look at the world of supply-chain logistics, some of the technological innovations that blockchain is bringing forward is really exciting,” Vynokur said.

“We're talking about moving from very heavy, paper-based transaction systems to a transaction system which is mostly digital. I think we're just seeing the tip of the iceberg in terms of what that technology is going to be powering.”

Kanish Chugh, head of distribution at ETF Securities told Yahoo Finance that now was the time the finance industry was seeing a huge amount of innovation.

“I think these technologies are going to be the future. You may see a bit of a marriage between [traditional finance and new digital technology] but in any industry there needs to be innovation,” Chugh said.

“As technology improves these products, software and services will enhance our ability to service the finance industry as well as the wealth industry and insurance industry.”

Chugh points to smart contracts as a great example of the disruption these technologies can bring into the modern world.

At the very basic level, a smart contract is a self-executing contract with the agreement terms between the buyer and seller directly written into the code.

Smart contracts have the ability to be used in the legal system, accounting, currency exchanges and much more.

They can save vast amounts of money and time. So, the companies that create Blockchain infrastructure and crypto mining hardware are only going to be growing.

How can you invest?

It depends what you want to invest in. Even the two Australian ETFs that were listed last week take different approaches.

If you are interested in investing in crypto coins specifically, we have written a guide on that too. But, if you’re interested in investing in the technology that supports crypto, then here are some options.

The Betashares Cryptocurrency and Blockchain ETF (ASX: CRYP) will provide exposure to a portfolio of global companies at the forefront of the crypto economy.

CRYP will offer investors the ability to invest in those technologies, or companies that make at least 75 per cent of their money from crypto technologies.

“Mark Twain is famous for saying that ‘during the gold rush it’s a good time to be in the pick and shovel business’,” Vynokur said.

“CRYP will take a ‘pick and shovel’ approach to the crypto sector, investing in the companies that are driving the crypto economy.”

While being similar in nature, the ETF Securities Fintech and Blockchain ETF (ASX: FTEC) takes a different approach.

The index contains 75 companies from around the world that draw on nine fintech sub themes including blockchain, data and research companies, buy now pay later, digital wallets and more.

“As a society, we’re moving further and further away from hard cash, and even further away from credit cards,” Chugh said.

“Now we’re using our phones to complete our everyday transactions. We need to be thinking how this technology will continue to be used in other industries as well.”

Chugh said this was just the beginning for blockchain technology, and how it would be adopted around other segments of society was yet to be known.

“The idea of autonomous vehicles and AI software now gets used in agricultural tractors but also in consumer electronics, like the smart robots or the vacuum cleaners,” he said.

“So, just because it starts off within one industry doesn’t mean it won’t branch off into other areas as well and that is what I think we’re going to see.”

First Bitcoin ETF hits the market

If investing overseas is more your style, Proshares has launched the Bitcoin Strategy ETF (NYSE: BITO) on the New York Stock Exchange.

This ETF also takes a different approach, providing investors an opportunity to gain exposure to bitcoin returns.

The fund seeks to provide returns primarily through a managed exposure to bitcoin futures contracts, but does not invest directly in Bitcoin.

Some experts have predicted the price of Bitcoin could go through the roof thanks to the new ETF.

Fundstrat believes the ETF could bring in over US$50 billion in its first year - which means around US$50 million of additional demand for Bitcoin.

Based on that, Fundstrat said the price of Bitcoin could reach US$168,000 per coin in the next year.

One thing does seem pretty clear: this technology is not going anywhere.

Correction: A previous version of this article said that when a Bitcoin halving event occurs the new Bitcoin will be worth half as much. In reality, it should have said that each new block that is mined will produce half the number of Bitcoins than the "pre-halving" blocks

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.