Cryptocurrencies (crypto) are a relatively new asset class that’s seen explosive growth in recent years.
The technology behind crypto is still in relatively early stages, but investors are increasingly hungry to get in on a piece of the action.
At the same time, buying crypto is definitely not as simple as buying a stock or a mutual fund. You can’t buy crypto at your normal broker, nor can you hold crypto in most retirement accounts.
To invest, you generally need to sign up for a cryptocurrency exchange, and then you’ll need to learn how to keep your assets safe.
Fortunately, the investment industry is responding to increased demand for crypto products.
A new type of crypto investment is now available: Cryptocurrency exchange-traded funds, aka crypto ETFs.
This comprehensive guide explains everything you need to know about crypto ETFs — what they are, how they work, and how you can buy them.
A cryptocurrency ETF is a financial product that allows investors to gain exposure to crypto-assets through a normal stock brokerage account.
ETF stands for “exchange-traded fund.” An ETF is a type of security that’s traded on the public stock markets and regulated by the Securities and Exchange Commission (SEC). ETFs can be bought and sold just like a regular stock.
ETFs are designed to track the price of a specific asset, index, industry, or commodity.
For instance, the “SPY” ETF tracks the price of the S&P 500 stock index, while “SGOL” tracks the price of gold.
ETFs make it simpler to invest. Instead of buying a small slice of each company in the S&P 500, investors can purchase a single S&P 500 index ETF like SPY. And instead of buying a physical gold bar, investors can buy shares in SGOL.
Cryptocurrency ETFs have the same basic goal: To give investors exposure to cryptocurrency without having to buy and manage actual crypto tokens.
There are many cryptocurrency ETFs in the works, but only a few have obtained regulatory approval in the U.S.
As of early 2022, most crypto ETFs focus on Bitcoin. There are not yet many ETFs that track the price of altcoins, such as Ethereum, Solana, or Cardano.
The way that these crypto ETFs create exposure to digital assets differs a bit depending on the ETF.
Some ETFs function as trusts, directly buying crypto and then allowing investors to buy into the ETF.
Others buy crypto futures — a type of financial contract that’s used to trade commodities — instead of buying actual crypto.
And others may simply invest in publicly traded companies that themselves have exposure to crypto-assets.
For more information, see the types of cryptocurrency ETFs section below.
There are both advantages and disadvantages to investing in crypto ETFs.
There are several main styles of crypto ETFs, each with its own unique pros and cons. Here’s a breakdown.
Crypto futures ETFs invest in futures contracts for specific crypto-assets. The ProShares Bitcoin Strategy ETF (BITO) was the first ETF of this type and remains the most popular.
Essentially, these ETFs invest in futures contracts that are linked to Bitcoin or other cryptocurrencies. Futures contracts are a type of derivative that obligate the parties to exchange a specific asset at a predetermined price, and on a predetermined future date.
For example, a commodity trader could purchase a contract to buy X barrels of crude oil at X price in January 2023.
Bitcoin ETFs like BITO purchase futures contracts for Bitcoin and continually “roll them over” — by buying more contracts and selling the old ones before the existing contracts expire. In this way, these funds have exposure to the price changes of Bitcoin without actually ever owning Bitcoin itself.
Futures are more regulated than cryptocurrencies, so ETFs like BITO have gained regulatory approval before ETFs seeking to invest directly in cryptocurrencies.
However, futures ETFs won’t exactly track the price of Bitcoin. ProShares, the manager of the popular BITO ETF, warns about this directly:
“The price and performance of Bitcoin futures should be expected to differ from the current “spot” price of Bitcoin.”
With that said, at this point in time, these futures-linked ETFs are likely one of the simplest options for investors to gain exposure to Bitcoin in a normal brokerage account.
Cryptocurrency “trusts” can be set up and traded on public stock exchanges, just like stocks, bonds, and ETFs.
However, trusts are not technically ETFs. They are typically traded on OTC stock markets and can be bought and sold through any brokerage account — but their legal and regulatory structures are different from exchange-traded funds.
Trusts essentially buy the underlying asset directly and then sell “shares” in the trust to investors. Trusts are popular for precious metals like gold and silver.
There are some crypto trusts set up, as well. The Greyscale Bitcoin Trust (GBTC) is currently the most popular.
However, these trusts have problems of their own. For one, fees are quite high — Greyscale has an expense ratio of 2% on their trust.
And, partially because of these fees, trusts can trade at a premium or a discount to the underlying asset. For instance, GBTC may trade at 5% above the spot price of Bitcoin or 5% below the true price of Bitcoin.
The goal of ETF managers is to come out with a “spot” crypto ETF that directly tracks the “spot price” of the underlying cryptocurrency. In other words, an Ethereum ETF that directly tracks the market price of Ethereum.
Due to regulatory hurdles, there are currently no spot crypto ETFs available in the U.S. However, we expect this to change in the coming years as regulations move forward.
This is another category of ETF that doesn't directly invest in crypto or futures. It instead invests in publicly traded companies that are involved in the crypto or blockchain world.
For instance, an ETF may invest in a basket of companies that have exposure to the crypto world. This could include blockchain technology companies, crypto miners, crypto exchanges, and companies that hold a significant portion of actual cryptocurrencies on their balance sheets.
Examples of these blockchain ETFs include BITQ, BLOK, and SATO.
These ETFs may feel more familiar to investors, as they buy shares in publicly traded companies that are highly regulated. However, these ETFs won’t necessarily follow the price of Bitcoin or other cryptocurrencies.
Essentially, these ETFs are a highly indirect way to get a bit of exposure to digital assets.
There are now several ETF options for U.S. cryptocurrency investors. At this time, most ETFs focus on Bitcoin rather than other tokens — but the selection should increase as more ETFs gain regulatory approval.
As of early 2022, here are some top crypto ETFs available in the U.S.
Expense ratio: 0.95%
Type: Bitcoin futures contracts ETF
The ProShares Bitcoin Strategy ETF is the first U.S. Bitcoin-linked ETF that uses futures contracts to roughly track the price of Bitcoin. It does not directly invest in Bitcoin but rather uses rolling futures contracts to create exposure to the asset class. It launched in October 2021.
Expense ratio: 0.95%
Type: Bitcoin futures ETF
The Valkyrie Bitcoin Strategy ETF is another futures-linked ETF that’s quite similar to BITO. It launched just a few days after ProShares launched its ETF. However, Valkyrie’s offering is smaller and less liquid — and has the exact same expense ratio.
Expense ratio: 0.65%
Type: Bitcoin futures ETF
The VanEck Bitcoin Strategy ETF is another futures-linked Bitcoin ETF that launched recently. It has a lower expense ratio than its competitors, but it’s also smaller and may be a bit less liquid.
Interestingly, this ETF is set up as a C-corporation, which VanEck claims results in more efficient tax treatment for long-term investors. You should speak with your tax advisor about any potential crypto ETF tax implications.
Expense ratio: 0.71%
Type: “Crypto-adjacent” equity ETF
The Amplify Transformational Data Sharing ETF is an equity ETF, meaning it primarily invests in stocks of publicly traded companies. However, the purpose is to generate indirect exposure to the crypto world by investing in blockchain companies, crypto miners, exchanges, and “support industries” for the cryptocurrency industry.
Some top holdings of BLOK include Coinbase (a crypto exchange), Marathon Digital (a Bitcoin miner), and NVIDIA (a microchip manufacturer that stands to potentially benefit from the growing crypto market).
BLOK also holds MicroStrategy, which has a substantial amount of Bitcoin on its balance sheet, as well as several Canadian ETFs that directly invest in Bitcoin.
Ticker: ETHE and GBTC
Expense ratio: 2.5%, and 2%, respectively
Type: Trust (not a true ETF)
These trusts provide direct exposure to the top two cryptocurrencies. Unfortunately, their expense ratios are very high at 2.5% for ETHE and 2% for GBTC.
And because of their structure and fees, these trusts may trade at substantial premiums or discounts to their underlying assets.
The alternative to investing in a crypto ETF is to directly buy cryptocurrencies. In most cases, this will be done via a cryptocurrency exchange.
Some of the most popular and trusted crypto exchanges include:
Exchanges provide a centralized place to buy and sell cryptocurrencies. They are somewhat like a stockbroker, although their regulation requirements are different.
We explain exactly how to go about buying crypto in our introduction to cryptocurrency guide. But for the purpose of this article, let’s look at what investors should consider when choosing between buying crypto directly vs. buying an ETF.
Crypto exchanges offer direct ownership. When you buy crypto on an exchange, you own the actual cryptocurrency tokens and can transfer them to your own wallet, spend them, stake them, etc. With an ETF, you don’t truly own the underlying asset.
Crypto ETFs don’t exactly track the price of crypto. The goal of a Bitcoin ETF is to track the price of Bitcoin. However, the end result is not necessarily the same. Because of the ongoing expenses associated with managing and investing in these funds, the long-term price returns of a Bitcoin ETF may differ from the actual long-term performance of Bitcoin itself.
Crypto exchanges offer more options. Most crypto ETFs focus on Bitcoin. But there are literally thousands of cryptocurrencies out there. If you would like to invest in altcoins, exchanges are a better option at this time.
Crypto exchanges require a bit more effort. If you buy crypto directly, you’ll need to familiarize yourself with the basics of crypto safety. And you’ll need to set up an account directly with an exchange.
Crypto ETFs can be held in retirement accounts. If you want to hold crypto in tax-advantaged accounts, a cryptocurrency ETF may be the best option. Direct ownership of crypto cannot generally be facilitated in a retirement account. You may be able to achieve this through a self-directed IRA, but it’s complex and pricey to do so.
Crypto ETFs have no yield/dividend. By default, directly owning crypto won’t earn you interest, either. However, advanced users can “stake” their cryptocurrency in order to earn yield or even lend it through a platform like Gemini Earn.
In other words, crypto you own directly can earn you a yield if you put in some effort. Crypto ETFs cannot earn yield or interest at this time.
Note: Staking and loaning crypto should be reserved for experienced users. It’s important to understand the risks before starting.
Both methods have fees, but they differ significantly. You can’t buy any type of crypto without paying a fee — but the type and amount of these fees vary significantly.
With an ETF, you’ll pay an expense ratio, which is a yearly fee that’s automatically subtracted from the performance of the ETF. So you won’t necessarily see the fee, but rest assured it’s being charged.
Most crypto ETFs charge about 0.6% to 1% each year. In addition, your broker may charge you a small fee when you buy or sell (but most brokers now offer commission-free trades).
With crypto exchanges, you’ll only pay fees when you buy or sell. Fees vary substantially but are often around 0.25% to 1% of the purchase (or sales) price. Since this is a one-time fee rather than an annual fee, buying crypto directly may be cheaper for long-term investors.
Crypto presents an exciting opportunity for investors — it’s essentially an entirely new asset class to explore. And as crypto adoption grows, it’s likely that we’ll see even more crypto ETFs launch.
These ETFs are a good option for some investors, but it’s important to realize the differences between investing in an ETF and actually owning cryptocurrencies directly.