Cryptocurrency exchange-traded funds (ETFs) track the price performance of crypto assets by investing in a portfolio linked to their investment fund. Crypto ETFs are like every other exchange-traded fund that trades on regular stock exchanges. Moreover, investors can also hold them in their standard brokerage accounts.
Crypto ETFs either invest directly in digital currencies, known as spot market ETFs, or in futures contracts that track the price of a particular cryptocurrency, otherwise called futures ETFs.
This makes it possible for mainstream investors to gain exposure to cryptocurrency prices without directly interacting with crypto exchanges or dealing with the costs and complexities of buying and storing crypto tokens.
In January 2024, the Securities and Exchange Commission (SEC) greenlit the first batch of spot crypto ETFs that directly invest in Bitcoin (BTC), allowing investors to gain access to the world’s most coveted cryptocurrency without directly owning the asset.
How Does A Crypto ETF Work?
Crypto ETFs work a little differently from regular ETFs that hold a basket of the underlying asset.
Spot exchange-traded funds that directly hold the cryptocurrency build a portfolio that naturally replicates the price performance of the digital asset it holds.
Whereas, crypto ETFs that invest in futures contracts are technically an agreement made to buy or sell crypto at a predetermined date and price. However, crypto futures ETFs don’t hold the assets they track. These ETFs have share prices that mimic the changes in the price of derivatives instead of the cryptocurrencies themselves.
As a result, the price of shares in a crypto futures ETF rises or falls in line with the futures contract it is tracking. There is also the element of additional risk as the operations of such funds are not always transparent.
Meanwhile, spot cryptocurrency ETFs are investment funds that directly trade and hold cryptocurrencies. These funds purchase the crypto assets and secure them and investors can buy and sell their shares as needed, just like a traditional ETF.
A spot crypto ETF can issue and redeem shares, offer retail and other investors more liquidity in the cryptocurrency market, and give them a chance to gain exposure to the digital asset class.
What are the Pros and Cons of Crypto ETFs?
Here are the advantages and disadvantages of investing in crypto ETFs
By investing in crypto ETFs, investors can gain exposure to crypto without having to worry about its various risk factors such as ownership expenses or storage. ETF issuers take care of transaction costs and network fees that are normally charged when purchasing a cryptocurrency via an exchange.
Average investors find it hard to grasp the scope and function of cryptocurrencies due to their unfamiliar networking technology and language such as halving and blockchain. With ETFs, investors don’t have to speak crypto to understand the market.
Cryptocurrencies and their infrastructure like exchanges, storage devices, and even blockchains are susceptible to hacks. This has been a growing concern for investors and has impacted crypto’s adoption by the mainstream market. Crypto ETFs are regulated by federal agencies and employ rigid investor protection mechanisms. Therefore, there is no need to worry about losing your funds to hacks, scams, or network failures.
Even though there are nearly 9,000 cryptocurrencies available in trading markets, not all of them are readily available on all crypto exchanges. Moreover, there are extra costs associated with buying and selling crypto tokens. Crypto ETFs allow investors to diversify their crypto portfolio without incurring the fees and hassles of buying and exchanging the tokens by themselves.
Crypto ETFs don’t always replicate the price movements of the underlying cryptocurrency. This is especially true for crypto ETFs that track futures contracts linked to cryptocurrencies.
While ETFs help investors avoid certain costs associated with directly owning a crypto asset, they do have their fees. Since crypto ETFs are often actively managed, they can have a higher expense ratio than regular ETFs.
The cryptocurrency market is well known for its high volatility. Crypto ETFs have no escape from this phenomenon either. Although the instruments simplify some of the trading, they are still subject to dramatic price swings. This equates to more risk to investors, which can be particularly concerning if they are more accustomed to the low volatile nature of regular ETFs.
The goal of cryptocurrencies is to provide investors with total control over their assets. While crypto ETFs do bring convenience, they don’t give investors any control or access to the underlying cryptocurrency. The decentralization and anonymity that is commonly associated with cryptocurrencies don’t apply to ETF holders.
Crypto ETFs Available in the United States
Below is a list of some of the top-performing cryptocurrency ETFs that are available to retail and institutional investors in the US. The list includes both spot and futures ETFs tracking Bitcoin.