What are Crypto ETFs?

Crypto Exchange Traded Funds made simple
Last Updated on December 1, 2023
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ETFs, or exchange-traded funds, are investment vehicles in which investors can invest in a basket of assets or currencies. But what is a crypto ETF?

Instead of an index or a basket of assets, cryptocurrency ETFs track the price of one or more digital coins or tokens. As investor sales and purchases influence ETF prices, these crypto ETFs are just like regular stocks in that they’re traded daily on conventional stock exchanges.

It’s important to note that the U.S. Securities and Exchange Commission (SEC) has not approved any Bitcoin ETFs at this point. Instead, the SEC has approved Bitcoin ETFs linked to Chicago Mercantile Exchange (CME) futures contracts. A futures contract is a contract for the purchase of an asset – usually a commodity or a stock – at a predetermined price, which is then delivered and paid for at a later date.

How Does a Cryptocurrency ETF Work?

A typical ETF purchases stocks and tracks their performance.

Investors can buy fractionalized shares in the company that bought them on exchanges. These exchanges are often open nearly all the time, meaning things can change at a moment’s notice.

Let’s take Bitcoin as an example when we talk about a crypto ETF.

To buy and hold Bitcoins, you’d need a Bitcoin ETF structured in this manner. As an ETF, it would be possible to trade fractional shares of the fund’s holdings on the market.

As we outlined above, the SEC has only authorized CME futures contracts. In other words, two players are able to agree to exchange predetermined amounts of financial assets. In this case, Bitcoin, for a set price on a specific date in the future. For example, 5 BTC could equal one ‘contract unit’ of Bitcoin.

What are the benefits of Crypto ETFs?

There are several benefits for investors looking to explore crypto ETFs, including:

Investing in cryptocurrencies can be intimidating

For non-institutional investors, cryptocurrency is a complex and confusing universe to get the hang of. But these ETFs make it possible for typical investors to participate without actually owning – or going through the hassle of obtaining – any of the underlying assets.

Additionally, the jargon used to describe cryptocurrency has stifled its adoption since its inception. The average investor has difficulty deciphering cryptocurrency’s ins and outs. It can be challenging for non-technical investors to understand terms like “blockchain” and “halving.” It’s all taken care of for you if you invest in a cryptocurrency ETF by an analyst.

High fees are avoided

ETFs for cryptocurrencies offer investors a way to participate in the cryptocurrency market without paying the high fees associated with owning a cryptocurrency outright. For instance, even purchasing any crypto coin for the first time will make you saddled with a slew of additional expenses. 

In the cryptocurrency world, this is exemplified by transaction fees, which happen on centralized finance (CeFi) exchanges and decentralized finance (DeFi) exchanges. Additionally, annual fees are also charged by extra-secure, cold-storage digital wallets used to keep cryptocurrency purchases. 

Over the course of a year, all of these fees will add up massively. Instead, investing in cryptocurrency ETFs avoids many of these costs. 

This is especially true for security costs, as cryptocurrency’s security has been repeatedly breached since its inception, which raises concerns. Inexperienced investors may struggle to acquire cryptocurrencies because they are unfamiliar with how they work. Cryptocurrency ETF providers handle security functions on their behalf. 

Lower entry point for new investors

Over the past few years, the value of cryptocurrencies has fluctuated massively, with Bitcoin leading the charge. For the most part, these investments are out of reach for the typical investor. A cryptocurrency ETF makes it easier to invest as for a fraction of the price of a single cryptocurrency, investors can purchase shares in ETFs that track the market’s value and do most of the leg work for them. 

With the incredible amount of cryptocurrency options to choose from (over 1,800), there is an overwhelming amount of choice. Even if investors do their research and find a specific coin they want to invest in, we haven’t built the infrastructure to buy and sell these tokens fairly and properly yet. 

Subsequently, depending on which cryptocurrency exchange you use, you may be able to buy some tokens but not others. These tokens are also expensive to purchase. Investors can diversify their holdings in cryptocurrencies through exchange-traded funds (ETFs), eliminating the need to purchase individual coins.

What is the best performing crypto ETF?

The ProShares Bitcoin Strategy ETF (BITO) was a game-changer for those who were interested in cryptocurrencies. The BITO fund is what cautious Bitcoin investors wanted while waiting for U.S. regulators’ green light.

With the SEC’s recent approval, BITO became the first cryptocurrency ETF to be traded on one of the country’s major exchanges. It now has about $800 million in assets under management (AUM), and 6.6 million shares are traded daily.

It’s important to note that the BITO fund doesn’t hold Bitcoin itself. Instead, it contains a number of futures contracts on Bitcoin.

What is a Bitcoin ETF?

Perhaps the most well-known type of crypto ETF, a Bitcoin ETF is simply a specific type of ETF that invests in Bitcoin instead of other altcoins. Once the price of a single Bitcoin surpassed $3,000, it became impossible for the average person to make a direct and meaningful investment. 

Traders have responded to the demand of potential investors by creating Bitcoin ETFs. Bitcoin ETFs have emerged first due to the popularity of the cryptocurrency, making it the most stable – and hopefully profitable – investment.

Traditional stock exchanges, such as the New York Stock Exchange (NYSE), can trade a Bitcoin ETF, which is a collection of bitcoin-related assets in one place.

How do I invest in Bitcoin ETF?

It depends. However, you should check if Bitcoin ETFs are available via your broker or financial advisor, as they can now be traded on the ARCA and Nasdaq New York exchanges. Some prominent ones include:

  • BITO, as mentioned above
  • BTF – Valkyrie Bitcoin Strategy 
  • XBTF – VanEck Bitcoin Strategy
  • BITS – Global X Blockchain & Bitcoin Strategy

To be clear, these ETFs aren’t solely based on Bitcoin futures contracts. They invest primarily in traditional securities, but they do hold Bitcoin futures contracts when they align with their internal investment strategy, likely when those Bitcoin futures become profitable. 

Is investing in a Bitcoin ETF risky?

Prior to making any purchase regarding cryptocurrency, it is recommended that you seek the advice of a financial advisor to better understand your options, given the market’s inherent volatility. Find out more about crypto in our dedicated cryptocurrency hub.

Jack Goodson has written about cryptocurrencies and NFTs for PC Guide - an area he is hugely interested and has plenty of experience in.