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What You Need to Know About Crypto Mutual Funds

Crypto mutual funds and ETFs are an entirely new way to invest in cryptocurrencies. But are they worth buying?

Last updated:

November 16, 2022

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What You'll Learn

Plus, the technology behind crypto has the potential to change many aspects of our financial lives.

Put simply, crypto holds massive potential — both as a technology and an investment. 

However, because cryptocurrency is a relatively new asset class, it’s a bit more difficult to invest in than stocks or bonds. You can’t generally buy crypto through a normal stockbroker, nor can you easily hold it in your retirement account. 

Fortunately, this is starting to change. Crypto mutual funds and crypto ETFs are popping up, allowing investors to gain exposure to crypto through a more traditional investment account. 

This comprehensive guide discusses everything you need to know about cryptocurrency mutual funds. 

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What Is a Crypto Mutual Fund? 

A crypto mutual fund is a financial product designed to give investors exposure to crypto-assets such as Bitcoin or Ethereum through a standard brokerage account

A mutual fund is an investment product that pools investor money to purchase assets (stocks, bonds, cryptocurrencies, etc.). Investors own fractional shares of the mutual fund itself rather than directly owning the underlying securities. 

Mutual fund explanation
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The mutual fund can be bought or sold on the stock exchange, similar to an individual stock. However, mutual funds typically only trade once per trading day (based on the day’s closing price) and may also have a minimum investment amount. 

Mutual funds are offered by asset management firms and brokers. They can be actively managed (meaning professional investors actively make trades to try to improve returns) or passively managed. Mutual funds typically charge management fees of around 1-2% per year. 

A crypto mutual fund invests specifically in digital currency and/or other assets tied to the cryptocurrency market. They may invest in a basket of different cryptocurrencies, although as of the time of this writing, most funds focus solely on Bitcoin. 

Currently, buying a Bitcoin mutual fund does not mean that an investor actually owns the underlying Bitcoin — instead, they own shares of a mutual fund that’s designed to track the price of Bitcoin. 

In most cases, mutual funds do achieve price tracking, or at least get close, through the use of futures contracts, which we will go into more detail about in a bit. 

Mutual fund vs. ETF

Crypto investors can now choose between mutual funds and exchange-traded funds (ETFs). But what are the differences? 

Overall, mutual funds and ETFs are quite similar. Here’s what you need to know:

  • Both can be purchased in your existing investment accounts
  • Both are highly regulated 
  • Both are designed to track the price of the underlying assets 
  • Both have management fees, known as the expense ratio
  • Mutual funds only trade once per day; ETFs trade during normal trading hours
  • Mutual funds may have investment minimums; ETFs generally don’t
  • Most mutual funds are actively managed; most ETFs are passively managed

When it comes to crypto funds, there’s not a huge difference currently between these two investment vehicles. However, there are currently more crypto ETFs available than there are crypto mutual funds. 

Crypto mutual fund pros and cons

There are both advantages and disadvantages to these new Bitcoin mutual funds. What should investors be aware of? 

Pros

  • Mutual funds are simpler to buy than actual cryptocurrency — you can use your existing brokerage account.
  • You can easily hold these mutual funds in a retirement account or other tax-advantaged investment vehicle.
  • The mutual fund industry is highly regulated.
  • It’s easier to rebalance a diversified portfolio using mutual funds, as everything will be in the same account.

Cons

  • The price performance of a futures-based crypto mutual fund may differ from the performance of the underlying cryptocurrency.
  • Expense ratios (generally over 1%) can reduce your returns long-term.
  • Liquidity is limited, as mutual funds trade only once per day (and only on business days), while crypto trades 24/7.
  • You don’t technically own any cryptocurrencies when you invest in these mutual funds.

Types of Cryptocurrency Mutual Funds

The term “mutual fund” is sometimes confused with other similar investment products, such as ETFs and trusts. To add to the confusion, crypto funds also differ in how they actually provide exposure to the underlying cryptocurrency. 

Here are the different types investors should be aware of. 

Crypto futures mutual funds & ETFs

The most common type of crypto fund (and crypto ETF) are futures-linked funds. 

Explanation of futures
(Image Source)

These funds invest in futures contracts that are linked to Bitcoin or other cryptocurrencies (currently, only Bitcoin futures contracts are available). 

Futures are contracts that allow investors to purchase the underlying asset at a specific price on a specific date. A futures contract could be written for 100 Bitcoins at $52,500 in January 2023, for example. 

Fund managers buy these futures and then roll them into new contracts before they expire. If crypto prices increase, so do the values of the futures contracts — and vice versa. 

In this way, the fund gains exposure to cryptocurrency assets without ever owning actual cryptocurrency. 

Because futures are more regulated than cryptocurrencies themselves, the Securities and Exchange Commission (SEC) has approved the use of these futures-linked funds before the use of funds that actually invest directly in crypto. 

Because of this structure, futures-linked funds will not necessarily track the price of crypto exactly. Performance for these funds — particularly over the long run — will likely differ from the underlying security price. 

“Spot” crypto mutual funds & ETFs

A “spot” fund is a fund that actually buys and owns the underlying asset — whether that’s Bitcoin, Ethereum, or a basket of altcoins. 

There are not currently any “spot” crypto funds approved in the U.S. However, many funds are in the works, awaiting regulatory approval. 

Crypto trusts

Like a “spot” fund, trusts buy and hold the actual underlying asset. However, their legal and tax structure is different from an ETF or mutual fund. 

Trusts are generally reserved for institutional investors or wealthy accredited investors. However, once the initial issuance has been completed, some trusts then trade on the public market — meaning anyone can buy or sell shares in the trust. 

Crypto trusts have been around for a long time, with the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE) being the most popular. Unfortunately, these funds have very high fees of 2% and 2.5%, respectively, making them expensive for long-term investors. 

“Crypto-adjacent” funds

There are also a variety of mutual funds and ETFs that invest in companies related to cryptocurrency. For instance, they may buy equities in publicly traded crypto miners, crypto exchanges, or hardware manufacturers. 

Examples of these funds include BITQ, BLOK, and SATO

These are a far more indirect way to get exposure to the crypto world. But for crypto-averse investors, they provide a way to get some exposure while only investing in highly regulated companies. 

Crypto Mutual Funds You Can Invest in Today 

Currently, the selection of cryptocurrency mutual funds that are available in the U.S. is quite limited.

Crypto investment graph

Other countries have more selection at this point, but the SEC — the agency responsible for regulating investments in the U.S. — has been slow to approve crypto-backed funds. 

With that said, there are many funds in the works awaiting regulatory approval. It’s widely expected that many more mutual funds, ETFs, and trusts will launch in 2022. 

Right now, there’s only one true crypto mutual fund available — the Bitcoin Strategy ProFund.

Bitcoin Strategy ProFund

Ticker: BTCFX
Expense ratio: 1.15%
Minimum investment: $1,000

The Bitcoin Strategy ProFund was the first Bitcoin futures mutual fund to launch in the U.S. It utilizes Bitcoin futures to mirror the price movements of Bitcoin — but it does not directly own any of the cryptocurrency itself. 

The fund has a minimum investment of $1,000 and a net expense ratio of 1.15%. 

Other options

Crypto ETFs: A variety of crypto ETFs that use crypto futures are available. ETFs are similar to mutual funds, but they trade more like stocks and have no investment minimum. Examples include Bitcoin ETFs like BITO, XBTF, and BTF. 

Crypto trusts: Trusts that actually own the underlying crypto-assets are available as well. Trusts are closed to new investments, but you can purchase trust shares on the public market. Examples include GBTC and ETHE.

Funds with indirect exposure to crypto: Various mutual funds and ETFs provide indirect exposure to digital assets and crypto markets, usually by investing in shares of companies that are involved in the crypto industry or blockchain technology. 

An example is the blockchain ETF Amplify Transformational Data Sharing ETF (BLOK), which invests in Bitcoin miners, cryptocurrency exchanges, and other related industries. 

Investing in Crypto Mutual Funds vs. Buying Cryptocurrency Directly 

For retail investors, the alternative to a crypto mutual fund or ETF is to simply buy cryptocurrencies directly.

Gemini crypto exchange

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In most cases, this will involve using a cryptocurrency exchange, such as Gemini, Binance, or Coinbase. 

These exchanges function somewhat like a stock brokerage (although they are regulated differently). They provide a centralized place to buy, sell, and swap cryptocurrencies. You can set up an account, transfer money in, and start investing directly.

Most crypto exchanges offer access to dozens of cryptocurrencies, including:

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Solana (SOL)
  • Cardano (ADA)
  • Polkadot (DOT)
  • And many more

Our introduction to cryptocurrency guide dives into more detail about how to buy cryptocurrency directly. But for the purposes of this article, it’s useful to examine the differences between buying a mutual fund and buying actual crypto. Here’s what to consider. 

Exchanges offer direct ownership. When you buy tokens on an exchange, you directly own that crypto. You can transfer it, spend it, stake it, or just buy and hold. 

Crypto mutual funds, on the other hand, offer indirect ownership of crypto-assets — and in many cases, don’t hold actual crypto at all. Instead, most use futures or other financial derivatives to mimic exposure to crypto. 

Exchanges require a bit more effort. Mutual funds and ETFs are simple to buy, and you can use your existing brokerage account. 

With a crypto exchange, you’ll need to set up a new account with a trusted exchange before you can buy crypto — and you’ll need to familiarize yourself with crypto safety standards. Exchanges are becoming much more user-friendly but still require a few extra steps. 

Mutual funds mostly invest in Bitcoin. Bitcoin is the most popular cryptocurrency, but there are thousands of other coins. For investors wanting diversified exposure to crypto-assets, investing in other coins like Ethereum, Solana, or Cardano may be wise. 

As of early 2022, it’s very difficult to get exposure to any coin besides Bitcoin through a mutual fund or ETF. 

Mutual funds can be held in retirement accounts easily. For tax-advantaged crypto investing, mutual funds and ETFs are easy to buy in retirement accounts. You can technically hold crypto in a self-directed IRA, but this is more complex. 

Crypto can earn a yield; mutual funds typically don’t. By default, crypto mutual funds and directly owned crypto will not earn a yield or dividends. However, advanced crypto users can “stake” or lend their cryptocurrency to others.

Note: Staking and loaning crypto comes with additional risk and should only be utilized by experienced crypto investors.

Mutual funds trade once per day; crypto trades 24/7. By default, you can only trade mutual funds once per day — and only on weekdays. You can place an order at any point during the day, but the transaction will close after the market closes — at whatever the ending price for the day was. Cryptocurrencies, on the other hand, trade 24/7. 

Mutual funds may have a minimum investment. For instance, the Bitcoin Strategy ProFund has a $1,000 minimum investment. 

Through an exchange, there is generally no minimum to invest in cryptocurrency directly. You don’t have to buy a “whole” Bitcoin or Ethereum token — you could buy $5 worth of BTC if you wanted to. 

Both methods have fees, but they differ significantly. Crypto mutual funds charge an annual expense ratio, generally of around 1% or higher. This fee is charged every year, regardless of market performance. 

These fees can have a huge impact on your long-term returns. In some cases, your broker may also charge a small fee for buying or selling the fund. 

Buying crypto through an exchange will involve an upfront fee when you buy and a fee when you sell. However, there are no fees for holding the crypto. For long-term investors, directly owning cryptocurrency will generally be more cost-effective in terms of fees. 

Conclusion

The variety of crypto mutual funds available today is quite limited. However, there is a massive demand for this type of crypto investment, so we are likely to see more funds launch in the coming years. 

For the time being, investors looking to utilize crypto in their investment strategy may wish to buy Bitcoin or Ethereum directly through an exchange. Alternatively, investors can buy into a crypto ETF or trust that trades on the public stock market. 

Want to learn more about crypto and how you can invest in it for yourself or your loved ones? Read EarlyBird’s introduction to cryptocurrency. Cryptocurrency (also known as “crypto”) is a hot topic right now, and for good reasons. Crypto prices have exploded in recent years, making cryptocurrency one of the top-performing asset classes of the last decade. 

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This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.

Author

EarlyBird Team

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