What Is a Crypto ETF? Everything to Know

Crypto ETFs offer exposure to cryptocurrency and related technologies, such as blockchain, without having to directly hold the digital currency. Learn more about how cryptocurrency ETFs work, as well as the different types of crypto exchange-traded funds. 

What Is a Crypto ETF? 

A crypto ETF is a type of exchange-traded fund that provides exposure to cryptocurrency and digital assets, allowing investors to buy and sell shares of the ETF on traditional stock exchanges. Crypto ETFs are designed to track the performance of one or more cryptocurrencies or to provide exposure to related technologies, offering a way for investors to gain indirect exposure to crypto without directly owning the digital currency. 

What Do Crypto ETFs Track? 

Some crypto ETFs track the price of a single cryptocurrency, such as bitcoin or ethereum. Other crypto ETFs track the price of a basket of cryptocurrencies, or they may hold equity positions in crypto-related companies, as well as related technologies, such as blockchain or mining. 

Types of Cryptocurrency ETFs 

There are a number of different types of cryptocurrency ETFs available, each with its own unique characteristics. Here is a brief overview of some of the most common types of cryptocurrency ETFs, with an example for each: 

• Bitcoin ETFs: Bitcoin ETFs track the price of bitcoin, the world's largest cryptocurrency. An example of a bitcoin ETF is the ProShares Bitcoin Strategy ETF (BITO). 
• Ethereum ETFs: While there are currently no ether ETFs on the market, Grayscale Ethereum Trust (ETHE) is an open-ended fund that works similarly to the way an ETF does. 
• Blockchain ETFs: Blockchain is the technology that drives bitcoin and ethereum, but its application reaches beyond that. Blockchain ETFs enable broad access to companies pursuing blockchain-based strategies. An example of a blockchain ETF is Amplify Transformational Data Sharing ETF (BLOK). 
• Bitcoin miner ETFs: Bitcoin miners use computer hardware and specialized software to validate and record transactions on the Bitcoin blockchain and, in return, earn rewards in the form of newly created bitcoins and transaction fees. An example of a bitcoin mining ETF is the Valkyrie Bitcoin Miners ETF (WGMI). 

Is There a Spot Bitcoin ETF? 

There is not currently a spot bitcoin ETF on the market, but the Securities and Exchange Commission is reviewing several filings for approval that may come by late 2023. Like a physically backed gold ETF, a spot bitcoin ETF would be backed by cryptocurrency stored by the issuer. This means that the value of a spot bitcoin ETF will be directly correlated to the price of bitcoin, rather than by futures like current bitcoin ETFs. 

Regulations on Crypto ETFs 

Crypto ETFs must comply with the same regulatory requirements as traditional ETFs that track traditional assets such as stocks or bonds. However, the regulatory treatment of crypto ETFs can be complex and can differ significantly from traditional ETFs. Regulatory bodies may assess whether a crypto ETF qualifies as a security based on its underlying assets, structure and other factors. 

The SEC’s rejection of an application to offer a spot crypto ETFs resulted in a major defeat for the agency when a federal court ruled that the SEC arbitrarily prevented a crypto ETF provider, Grayscale Investments, from converting its Grayscale Bitcoin Trust into an exchange-traded fund. The court’s decision potentially clears the way for other crypto ETF products, such as a spot bitcoin ETF, to be approved and come to market. 

Pros and Cons of Crypto ETFs 

Investing in crypto ETFs offers a way for investors to gain exposure to the cryptocurrency market without directly owning and managing digital assets themselves. Like any investment, cryptocurrency ETFs come with their own set of advantages and disadvantages.  

Here are the pros and cons to consider when investing in Crypto ETFs: 

Pros of Investing in Crypto ETFs 

• Accessibility: Crypto ETFs offer a more straightforward way for traditional investors to enter the cryptocurrency market without the need to set up digital wallets or manage private keys.  
• Diversification: Crypto ETFs may hold a diversified portfolio of cryptocurrencies and related technology. This diversification can help spread risk across different digital assets, reducing the impact of poor performance from any single cryptocurrency. 
• Liquidity: ETFs are traded on traditional stock exchanges, which are generally more liquid and accessible than many cryptocurrency exchanges. Investors can buy and sell ETF shares during regular trading hours. 
• Risk mitigation: By investing in crypto ETFs, investors don’t have to manage the security aspects of cryptocurrency ownership, such as private key management, reducing the risk of theft or loss, or interaction with cryptocurrency wallets, which may introduce the risk of human error and security breaches. 

Cons of Investing in Crypto ETFs 

• Tracking error: The performance of a crypto ETF may not precisely match the performance of the underlying cryptocurrencies it aims to track because of factors like expenses, rebalancing, and tracking error. 
• Counterparty risk: Some crypto ETFs may use derivatives or other financial instruments to track the performance of cryptocurrencies. This introduces counterparty risk if the issuer of these instruments defaults. 
• Regulatory risks: Cryptocurrency regulations vary by country and can change over time and can restrict the use of these ETFs or depress the price of the underlying digital currency.  
• Market volatility: The cryptocurrency market is known for its price volatility, which can affect the value of crypto ETF shares. 
• Diversification limitations: While some crypto ETFs offer diversification, they may still be subject to overall market trends and conditions affecting the cryptocurrency market as a whole. 

How to Invest in Cryptocurrency ETFs 

The process to invest in cryptocurrency ETFs is the same as any other type of ETF and other securities like stocks, bonds and mutual funds. To invest in cryptocurrency ETFs, you will need an investment account, such as an individual brokerage account or any variety of individual retirement account, or IRA. Once you have the investment account open, you will need to fund it with cash, and you’ll be ready to invest in crypto ETFs.  

The basic steps to invest in ETFs are:  

• Open an investment account.  
• Fund the investment account with cash.  
• Select the crypto ETF(s) to purchase.  
• Execute the trade(s) to buy shares. 

Read more about how to build an ETF portfolio. 

Bottom Line on Investing in Cryptocurrency ETFs 

Cryptocurrency ETFs offer investors multiple advantages, including the ability to invest in digital currency and related technologies without having to hold cryptocurrency directly. Investors, however, should be aware of the potential risks of crypto ETFs, including regulatory risk and market volatility. As with any investment security, investors should conduct thorough research and consider their risk tolerance before buying shares of these funds.