The launch of cryptocurrency ETFs could bring an inflow of new money into the digital asset markets, which could lead to new all-time highs for many digital currencies and tokens. This is especially true after the U.S. Securities and Exchange Commission finally approved the first bitcoin-linked ETF.
In this article, we will introduce you to cryptocurrency ETFs and the alternative investment opportunities in this market.
What Is an ETF?
An exchange-traded fund is a security that tracks an index, a commodity, or a basket of assets. Unlike a mutual fund, shares in the ETF are tradable like stock. The best ETFs regularly outperform mutual funds, making these attractive options in the traditional market.
The idea of ETFs being available for digital assets would solve several of the problems blocking cryptocurrency’s mass adoption.
A managed asset would dampen some of the effects of volatility and the challenges in storing and maintaining a crypto portfolio and wallet. As some of the assets included in these ETFs would be crypto futures, it would also expand the options available for investors. Some traditional ETFs have allowed for speculation and hedging strategies, which could be useful in the digital asset market.
While digital currency is largely unregulated, regulators have been anxious over altcoins acting like securities. Finally, however, we saw the Proshares Bitcoin Strategy ETF (BITO) become the first bitcoin-linked ETF approved by the SEC.
Crypto Futures ETFs vs. Crypto Spot ETFs
Crypto futures ETFs are backed by crypto futures contracts rather than physical crypto. To understand this better: bitcoin futures are contracts that allow two parties to agree on buying or selling bitcoin at a predetermined price and date.
That said, the value of a futures ETF derives from the movement of the price of bitcoin futures. So, essentially, it tracks the price of bitcoin futures instead of tracking the price of bitcoin.
Conversely, crypto spot ETFs track the actual price of the crypto itself. The main idea behind spot ETFs is allowing non-crypto savvy investors to get exposure to crypto without having them own the actual asset, using a familiar and regulated product.
Other benefits to ETFs include relieving investors from the hassle of managing private keys, storing bitcoin, and most importantly, the ability to short bitcoin’s price. This is because it does not allow users to bet on the price of an ETF to go down.
The List of Crypto ETFs
Several crypto-focused funds can be purchased using online brokerage accounts. Currently available cryptocurrency ETFs focusing on stocks related to blockchain and cryptocurrency index funds include:
Grayscale Bitcoin Investment Trust (GBTC)
An early mover in the cryptocurrency space, GBTC is an index fund that gives investors exposure to changes in the price of bitcoin without buying the digital currency themselves. Launched in 2013, GBTC holds bitcoin directly, enabling investors to gain exposure to price movements in the digital currency without opening a digital wallet to store bitcoin. GBTC has an expense ratio of 2%, higher than is typically the case with ETFs.
An important point to note is that Grayscale Investment hired David Lavelle to spearhead the attempt to convert GBTC into an ETF. This will follow with a Bank of New York Mellon partnership for ETF services.
Assets under management: $42.0 billion
Expense ratio: 2.0%
Bitwise 10 Crypto Index Fund (BITW)
BITW is an index fund that offers exposure to bitcoin and other major cryptocurrencies. The fund attempts to match the return of an index made up of the ten most highly valued cryptocurrencies. The selected cryptocurrencies are screened and monitored for specific risks and weighted using market capitalization. As a result, the selected digital currencies rebalance monthly.
BITW has grown over ten times in assets since it became available over-the-counter in 2020 December. It was trading $120 million in assets then; currently, it has grown to $1.2 billion.
Assets under management: $1.2 billion
Expense ratio: 2.50%
Grayscale Digital Large Cap Fund (GDLC)
GDLC, an index fund that debuted in February 2018, offers investors exposure to various digital currencies. The fund offers investors the opportunity to gain exposure to the price movement of a basket of large-cap digital assets in a mutual fund vehicle, saving them the effort of buying and storing the assets themselves. The fund’s assets are distributed between the following four major cryptocurrencies on a market-cap-weighted basis: bitcoin, ether, bitcoin cash, and litecoin.
Assets under management: $614.6 million
Expense ratio: 2.5%
Blockchain ETFs vs. Crypto ETFs
These ETFs do not invest directly in cryptocurrencies, but in blockchain, the technology behind cryptocurrencies. (For more information, see our guide to Best Blockchain ETFs.)
The BLOK ETF offers exposure to companies involved in the blockchain and digital sharing sector. The fund invests globally, with at least 80% of its holdings dedicated to the equity securities of companies actively involved in developing and utilizing transformational data-sharing technologies.
- Assets under management: $1.7 billion
- Expense ratio: 0.71%
The BLCN ETF, on the other hand, looks to achieve long-term growth by tracking the investment returns of an index linked to the blockchain economy. The linked index is the Siren Nasdaq Nexgen Economy Index. The index is built to gain returns from companies focused on directing resources to developing, researching, supporting, innovating, or utilizing blockchain technology for their proprietary use or for others to utilize.
- Assets under management: $309.6 million
- Expense ratio: 0.68%
Lastly, LEGR endeavors to track the performance of companies that either use, invest in, develop, or have products expected to benefit from blockchain technology. It also invests in companies that stand to realize increased efficiency from the blockchain’s ability to improve the efficiency of various business processes.
- Assets under management: $142.0 million
- Expense ratio: 0.65%
Bitcoin Futures ETFs vs. Crypto ETFs
Instead of holding a crypto ETF, you could opt to hold a bitcoin futures ETF, which tracks the future price of bitcoin, through the convenience of an exchange-traded fund.
BITO launched on Oct 19, and it was a game-changer as it became the first ETF in the US that the SEC allowed trading on a major US exchange. BITO does not directly invest in bitcoin; instead, the fund invests in Bitcoin futures contracts. Fundamentally, BITO provides investors with exposure to bitcoin without owning the digital asset themselves.
The Commodity Futures Trading Commission regulates the future contracts that BITO invests. As a result, BITO has taken the market by storm as it has already amassed $1.4billion in assets.
- Assets under management: $1.4 billion
- Expense ratio: 0.95%
Valkyrie Bitcoin Strategy ETF launched three days after BITO went public. Like BITO, BTF does not invest directly in bitcoin. Similarly, the Commodity Futures Trading Commission regulates trades. BTF investors don’t have to file K-1 forms with the IRS as the investments are made through a Cayman Islands subsidiary.
While BITO instantly hit the ground running, BTF had a fairly slow start. This, however, has not fazed Valkyrie. In a Yahoo Finance Live interview, Valkyrie’s CEO Leah Wald said, “We believe that demand is strong enough to bring two or three Bitcoin futures ETFs to roughly the same AUM [Assets Under Management] given enough time, and then investors will ultimately decide which firm best fits their values and they’ll eventually pull ahead of the pack.”
- Assets under management: $59.2 million
- Expense ratio: 0.95%
Global X Blockchain & Bitcoin Strategy ETF launched on November 16th, 2021 as the ETF’s provider’s second blockchain-related ETF. The first is the Global X Blockchain ETF (BKCH). Similar to the bitcoin ETFs mentioned above, BITS is a fund that invests in bitcoin futures.
However, BITS additionally invests in blockchain-related equities found on Global X Blockchain ETF. Eric Balchunas, an ETF analyst, explains, “Global X is attempting to serve up the best of both worlds with a new ETF that could address advisers’ concerns by evenly dividing allocations between bitcoin-related equities and bitcoin futures in the middle of the curve. This eliminates any significant roll-cost issues while providing much more correlation to spot bitcoin than blockchain ETFs.”
- Assets under management: $10.6 million
- Expense ratio: 0.65%
The Future of Cryptocurrency ETFs
It will take time. Just as bitcoin ETFs took seven years, and countless applications, before the SEC approved one, expect crypto ETFs to follow the same path.
For now, investors can invest in a wide variety of bitcoin and blockchain ETFs, or of course buy and hold crypto directly. Use our guides below.
Further Reading
