Crypto Exchange-Traded Funds(ETFs) provide access to cryptocurrencies and blockchain technology without needing to own the digital assets directly. They function similarly to traditional exchange-traded funds but focus on the crypto market. Investors can benefit from diversification and exposure to various crypto assets without the complexities of individual coin ownership.
Understanding how crypto ETFs operate and the different types available can help investors make informed decisions about their investment strategies. Whether tracking the performance of specific cryptocurrencies or broader market indices, crypto ETFs offer a convenient and accessible way to participate in the growing digital asset space.
What Exactly Forms a Crypto ETF?
A crypto ETF functions like a regular exchange-traded fund but focuses on cryptocurrencies and digital assets. Investors can purchase and sell shares of the ETF on traditional stock exchanges, making it accessible and familiar. These funds aim to mirror the performance of one or more cryptocurrencies or offer exposure to associated technologies, providing a pathway for investors to indirectly engage with the crypto market without the need to possess digital currencies directly.
With crypto exchange-traded funds(ETFs), investors can diversify their portfolios and potentially benefit from the growth of the cryptocurrency market without the complexities and risks associated with direct ownership. It’s a convenient and straightforward way for individuals to participate in the burgeoning crypto space while leveraging the stability and infrastructure of traditional financial markets.
What Assets Do Crypto ETFs Track?
Certain crypto ETFs monitor the value of individual cryptocurrencies, like Bitcoin or Ethereum. Others trace the value of a collection of cryptocurrencies or may possess shares in companies involved in the crypto sector, including blockchain or mining entities. These ETFs aim to reflect the performance of the underlying assets they track, allowing investors to gain exposure to diverse aspects of the cryptocurrency market through a single investment. By offering a convenient and diversified approach to crypto investing, these ETFs cater to a wide range of investors with varying risk tolerances and investment objectives.
Whether an investor seeks direct exposure to specific cryptocurrencies or prefers a broader exposure to the crypto ecosystem, crypto ETFs provide a flexible and accessible investment option. Additionally, by investing in ETFs rather than individual cryptocurrencies, investors can mitigate some of the risks associated with the volatile cryptocurrency market while still participating in its potential growth opportunities.
Types of Cryptocurrency Exchange-Traded Funds
There are various kinds of cryptocurrency ETFs out there, each with its own special features. Let’s take a quick look at some of the most common types, with an example for each:
- Bitcoin ETFs: These track the price of Bitcoin, the largest cryptocurrency globally. For instance, the ProShares Bitcoin Strategy ETF (BITO) is a Bitcoin ETF.
- Ethereum ETFs: Currently, there are no ether ETFs available. However, the Grayscale Ethereum Trust (ETHE) functions similarly to an ETF.
- Blockchain ETFs: Blockchain, the technology behind Bitcoin and Ethereum, has broader applications. Blockchain ETFs provide exposure to companies involved in blockchain-based initiatives. An example is the Amplify Transformational Data Sharing ETF (BLOK).
- Bitcoin miner ETFs: These focus on companies involved in Bitcoin mining, where computers validate and record transactions on the Bitcoin blockchain to earn rewards. The Valkyrie Bitcoin Miners ETF (WGMI) is an example of a bitcoin mining ETF.
- Spot Bitcoin ETF: A spot bitcoin ETF lets regular investors access bitcoin price movements directly in their brokerage accounts, bypassing futures contracts. It’s regulated and accessible, though fees like management and brokerage still apply.
Top Bitcoin ETFs in 2024!
Currently, there are 10 spot Bitcoin ETFs given the green light. Although all these ETFs aim to follow Bitcoin’s price, they might vary in some aspects.
- Ticker: A ticker is a short 4-digit symbol used to represent a stock or index that is traded publicly.
- AUM: Assets under management (AUM) indicate the total value of assets that the Bitcoin ETF manages.
- Management Fee: This fee, charged annually, covers expenses related to fund management, marketing, and other operational costs. It is deducted automatically from your brokerage account.
- Sponsors: Sponsors are the firms backing the ETF and tasked with creating and redeeming its shares.
| Issuing Company | Ticker | AUM | Management Fee | Fee Waiver |
|---|---|---|---|---|
| VanEck | HODL | $134M | 0.21% | N/A |
| Fidelity | FBTC | $2.7B | 0.39% | N/A |
| Grayscale | GTBC | $20B* | 1.5% | N/A |
| Hashdex | DEFI | $5M | 0.9% | N/A |
| 21 Shares & ARK | ARKB | $717M | 0.25% | No charges for the initial 6 months or the first $1B inflow. |
| Blackrock | IBTC | $3.3B | 0.25% | 0.12% for the initial 6 months or first $5B inflows. |
| Bitwise | BITB | $672M | 0.20% | Initial 6 months fee-free or up to $5B inflows. |
| Wisdomtree | BTCW | $15M | 0.3% | N/A |
| Valkyrie | BRRR | $114M | 0.49% | N/A |
| Franklin Templeton | EZBC | $64M | 0.19% | No fees on initial $10B inflows. |
What fees are associated with Bitcoin ETFs?
When you invest in an ETF, you’re charged an annual fee by the issuer to cover various expenses like management, trading, and marketing. These fees are automatically taken out of your brokerage account.
In the race for dominance in the Bitcoin ETF market, issuers have been slashing their fees to attract investors. Some, like BlackRock and Bitwise, have even waived fees for a limited time.
Grayscale stands out with the highest fee, mainly because they’re converting their existing Bitcoin Trust into an ETF. Despite the higher fee, Grayscale is banking on investor loyalty and the reluctance to trigger taxable events by switching to another ETF.
Here’s a breakdown of the management fees charged by the filers:
| Issuing Company | Ticker | Yearly Fee | Fee Waiver |
|---|---|---|---|
| Grayscale | GTBC | 1.5% | N/A |
| Blackrock | IBTC | 0.25% | 0.12% for the first 6 months OR first $5B on inflows |
| Bitwise | BITB | 0.20% | No fees for the first 6 months OR first $5B of inflows |
| Wisdomtree | BTCW | 0.30% | N/A |
| Fidelity | FBTC | 0.39% | N/A |
| Valkyrie | BRRR | 0.49% | N/A |
| Hashdex | DEFI | 0.9% | N/A |
Bitcoin Options Available for Selection
As noted earlier, spot ETFs vary from futures ETFs for several reasons. Alongside spot ETFs, the following futures ETFs are presently active and available for trading:
| Issuer | Ticker | AUM | Avg. Daily Volume | Annual Fee |
|---|---|---|---|---|
| VanEck | XBTF | $46M | $32k | 0.76% |
| Proshares | BITO | $880M | $15M | 0.95% |
| Valkyrie | BTF | $26M | $100k | 1.20% |
| Grayscale Trust | GBTC | $17B | $4.7M | 2% |
Note: There are more ETFs you can trade, but they’re not as well-known. Since we’re concentrating on Spot ETFs, we’re not discussing them for now.
What makes a Bitcoin ETF a better choice than buying Bitcoin directly?
Many individuals are interested in entering the cryptocurrency market but may find the process daunting, akin to learning a new language. Consequently, many investors prefer owning assets within their brokerage accounts, where they feel more comfortable.
Moreover, brokerage accounts offer additional advantages such as asset protection, simplified tax reporting, and lower fees. Using these accounts is much simpler than dealing with wallet addresses and seed phrases.
Lastly, investing in crypto through ETFs facilitates the allocation of funds from retirement accounts, benefiting not only institutions but also various individuals. This ease of access is a significant factor for many considering purchasing a spot ETF instead of Bitcoin itself.
Regulatory Framework for Crypto ETFs
Crypto ETFs must stick to the same regulatory standards as traditional ETFs tracking stocks or bonds. However, navigating the regulatory landscape for crypto exchange-traded funds(ETFs) can be intricate and differs notably from traditional counterparts. Regulatory bodies scrutinize factors like underlying assets and structure to determine if a crypto ETF qualifies as a security.
The SEC’s refusal of a spot crypto ETF application dealt a significant blow when a federal court found the SEC unfairly obstructed Grayscale Investments from converting its Grayscale Bitcoin Trust into an ETF. This ruling potentially paves the way for other crypto ETFs, including a spot bitcoin ETF, to gain approval and enter the market.
Advantages and Disadvantages of Cryptocurrency ETFs
Investing in cryptocurrency ETFs offers investors a way to enter the cryptocurrency market without the necessity of directly purchasing and overseeing digital assets themselves. Similar to any investment, cryptocurrency ETFs present both advantages and disadvantages.
Here are the advantages and drawbacks to keep in mind when considering investments in Cryptocurrency ETFs:
Advantages of Investing in Crypto ETFs
1. Simplicity:
Crypto ETFs offer a simpler route for traditional investors to join the cryptocurrency market without needing to set up digital wallets or handle private keys.
2. Diversification:
Crypto ETFs often hold a variety of cryptocurrencies and related technology. This mix can spread risk across different digital assets, lessening the impact of poor performance from any single cryptocurrency.
3. Market Liquidity:
ETFs trade on traditional stock exchanges, which are usually more liquid and accessible than many cryptocurrency platforms. Investors can trade ETF shares during regular market hours.
4. Risk Management:
Investing in crypto ETFs removes the need for investors to handle the security aspects of cryptocurrency ownership, like managing private keys. This reduces the risk of theft or loss, as well as the need to interact with cryptocurrency wallets, which can introduce the risk of human error and security breaches.
Disadvantages of Investing in Crypto ETFs
1. Tracking Variation:
A crypto ETF’s performance might not exactly match the performance of the cryptocurrencies it tracks due to factors like fees, rebalancing, and tracking variations.
2. Counterparty Risk:
Some crypto ETFs may rely on derivatives or other financial tools to mirror cryptocurrency performance. This exposes investors to counterparty risk if the issuer of these instruments defaults.
3. Regulatory Uncertainty:
Cryptocurrency regulations can vary across jurisdictions and change over time, potentially restricting the use of these ETFs or impacting the value of the underlying digital assets.
4. Market Volatility:
The cryptocurrency market is notorious for its price fluctuations, which can influence the value of crypto ETF shares.
5. Diversification Constraints:
While certain crypto ETFs offer diversification, they can still be influenced by overall market trends and conditions affecting the broader cryptocurrency market.
Here is a Simple Guide on how to get Started Investing in Cryptocurrency ETFs
Investing in cryptocurrency exchange-traded funds(ETFs) follows the same process as investing in traditional ETFs or other securities like stocks, bonds, and mutual funds. You’ll need an investment account, such as a brokerage account or an individual retirement account (IRA). After opening your account, you’ll fund it with cash, and then you’re all set to invest in crypto ETFs.
The basic steps to invest in ETFs are:
- Open an investment account.
- Deposit cash into the investment account.
- Choose the crypto ETF(s) you want to buy.
- Make the trade(s) to acquire shares.
Conclusion
Investing in cryptocurrency ETFs has its perks, such as gaining exposure to digital currency and related technologies without the need to directly own cryptocurrency. Yet, investors must also acknowledge the risks associated with crypto exchange-traded funds(ETFs), like regulatory uncertainties and market fluctuations. Like with any investment, investors must conduct diligent research and assess their risk tolerance before diving into these funds.
