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A beginner’s guide to cryptocurrency ETFs
The 101 on Bitcoin and cryptocurrency ETFs (exchange-traded funds).
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Cryptocurrency has become quite a prominent asset that many investors are considering adding to their portfolio. That said, the blockchain market is associated with wild swings and extreme volatility.
If you want to speculate on the price of Bitcoin and other cryptocurrencies without actually buying any digital coins, cryptocurrency ETFs offer one way to do this. ETFs allow you to track the price of an underlying asset or index. This can be appealing, as investors are able to invest in a regulated stock company while still gaining exposure to assets like Bitcoin.
Throughout cryptocurrency's history, the U.S. Securities and Exchange Commission (SEC) and other government regulators have typically rejected applications for Bitcoin-based ETFs. Because of this, there hasn't been a breadth of options for investing in such an index.
However, after years of lobbying, the SEC finally greenlighted official Bitcoin exchange-traded funds in October 2021. It's likely that other countries will follow suit in allowing crypto ETFs to be listed on traditional stock markets.
What is a cryptocurrency ETF?
An ETF is a collection (often called a "basket") of assets that can be bought and sold on a stock market the same way investors can trade ordinary shares in a company. ETFs are investment funds designed to track the performance of a particular index, such as the NASDAQ 100's QQQ, or a specific commodity or asset.
For example, a gold ETF allows you to invest in the value of gold without ever having to own any gold or find somewhere to store it.
As you might have already predicted, a cryptocurrency ETF is designed to give investors exposure to the cryptocurrency market. These indexes track the price of one or more digital coins or tokens. This lets investors add the value of crypto to their portfolio without some of the risks associated with actually owning any digital currency.
The simplest way for a crypto ETF to track the price of a digital currency is for the ETF company to purchase and store that crypto, and then divide shares in the ownership of those coins between stakeholders. However, another model is for the fund to own Bitcoin futures. These contracts allow investors to essentially "bet" on whether they think the price of Bitcoin will fall or rise in a set period of time.
ETFs are best suited to people who do not want to or cannot own real Bitcoin for various reasons. This is because purchasing Bitcoin directly, through a specialised cryptocurrency exchange or broker is more cost-effective than investing via an ETF. In addition to brokerage fees, ETFs charge a management fee (included in the cost of the ETF) and can only be traded during market hours, unlike cryptocurrency exchanges which operate 24/7. By purchasing an ETF instead of actual Bitcoin, you also miss out on the things that make Bitcoin valuable – such as the option for self-custody, using it as a global currency, and earning interest.
Compare cryptocurrency ETFs
| ETF name | Offered by | Symbol | Type | Retail or wholesale? | Minimum investment | SEC-approved? | Other features | Listed on | Date of launch |
|---|---|---|---|---|---|---|---|---|---|
| ProShares Bitcoin Strategy ETF | ProShares | BITO | Futures contracts | Retail | 1 share | Yes | Tracks BTC futures contracts | NYSE | 19 October 2021 |
| Valkyrie Bitcoin Strategy ETF | Valkyrie | BTF | Futures contracts | Retail | 1 share | Yes | Tracks BTC futures contracts | Nasdaq | 22 October 2021 |
| VanEck Bitcoin Strategy ETF | VanEck | XBTF | Futures contracts | Retail | 1 share | Yes | Tracks BTC futures contracts | Cboe BZX Exchange | 23 October 2021 |
| Purpose Bitcoin ETF | Purpose Investments | BTCC | Investment trust | Retail | 1 share | No | Traded on the Toronto Stock Exchange | Toronto Stock Exchange | 18 February 2021 |
| Evolve Bitcoin ETF | Evolve ETFs | EBIT | Investment trust | Retail | 1 share | No | Traded on the Toronto Stock Exchange | Toronto Stock Exchange | 29 September 2021 |
| CI Galaxy Bitcoin ETF | CI Investments and Galazy Digital | BTCX | Investment trust | Retail | 1 share | No | Traded on the Toronto Stock Exchange | Toronto Stock Exchange | 5 March 2021 |
| 3iQ CoinShares Bitcoin ETF | 3iQ and CoinShares | BTCQ | Investment trust | Retail | 1 share | No | Traded on the Toronto Stock Exchange | Toronto Stock Exchange | 19 April 2021 |
| Bitcoin Tracker One | XBT Provider | COINXBT | Exchange-traded note | Retail | 1 share | No | Nasdaq/OMX Stockholm | 18 May 2015 | |
| Bitcoin Tracker Euro | XBT Provider | COINXBE | Exchange-traded note | Retail | 1 share | No | Nasdaq Stockholm | 9 October 2015 | |
| Ether Tracker One | XBT Provider | COINETH | Exchange-traded note | Retail | 1 share | No | Nasdaq Stockholm | 9 October 2017 | |
| Ether Tracker Euro | XBT Provider | COINETHE | Exchange-traded note | Retail | 1 share | No | Nasdaq Stockholm | 9 October 2017 | |
| OK06ETT | OKEx | OK06ETT | Index fund | Retail | ~US$100 | No | OKEx exchange | 5 June 2018 | |
| CoinJar Digital Currency Fund - Bitcoin Class | CoinJar | - | Index fund | Wholesale | AU$50,000 | No | Only available to wholesale investors | 2 August 2018 | |
| CoinJar Digital Currency Fund - Mixed Class | CoinJar | - | Index fund | Wholesale | AU$50,000 | No | Only available to wholesale investors | 2 August 2018 | |
| Coinbase Index Fund | Coinbase | CBIFS | Index fund | Wholesale | US$250,000 | No | Accredited US investors only | GDAX | 7 March 2018 |
| Bitcoin Investment Trust | Grayscale Investments | GBTC | Investment trust | Wholesale | US$50,000 | No | Only available to SEC-accredited investors | Grayscale | 25 September 2013 |
| Bitcoin Cash Investment Trust | Grayscale Investments | BCHFUND | Investment trust | Wholesale | US$25,000 | No | Only available to SEC-accredited investors | Grayscale | 15 March 2018 |
Find out more about cryptocurrency funds in our 101 guide
How do cryptocurrency ETFs work?
Broadly speaking, there are two types of ETFs:
- Physical-backed crypto ETFs. Any digital coins the ETF is designed to track are owned by the fund itself, and you buy units or shares in the ETF. If the value of the digital coins owned by the ETF rises, the value of your investment unit also increases.
- Futures-backed crypto ETFs. With this type of ETF, shares in the fund aren't based on actual coins but on Bitcoin futures contracts. A futures contract is an agreement that sets a fixed price and date for buying or selling an asset. As a result, they potentially allow investors to profit in either bearish or bullish markets, while also eliminating the fund's risk of having their crypto assets stolen or hacked.
ETF units can be bought and sold on securities exchange markets, but brokerage fees apply. Just like shares traded on an exchange, the price of an ETF fluctuates throughout the day as investors buy and sell units.
You'll also need to pay a management fee to the ETF issuer, but ETFs generally have lower fees compared to traditional managed funds (like a hedge fund).
Case study: How crypto ETFs work
To help you understand ETFs a little better, let’s take a look at a hypothetical example.
The XYZ ETF is designed to track the performance of the world's five biggest cryptocurrencies by market cap – Bitcoin, Ethereum, XRP, Cardano and Binance Coin.
The company that issues the ETF owns a specified amount of each of the five currencies, and the ownership of these tokens is divided into shares. Investors then buy and sell those ETF shares on stock exchanges in the hope of benefiting from price increases to the underlying digital currencies.
Let's assume that the value of 1 unit of XYZ ETF is $50, and you decide to purchase 10 units for a total of $500. After 12 months of growth for global crypto markets, the XYZ ETF unit price has risen to $100, meaning your total investment is now valued at $1,000.
Had you taken a more traditional approach and decided to buy each of the five cryptocurrencies individually, you would have needed to create one or more wallets, registered for an account on a crypto exchange, paid brokerage fees for each individual crypto trade, and then tracked the price movements of each coin across the past year.
But with a cryptocurrency ETF, it's easier and far less time-consuming to gain access to a diverse portfolio of crypto assets.
What are my Bitcoin ETF options?
Just because there are no ETFs listed on the ASX doesn't mean Australian investors can't gain access to cryptocurrency-related exchange-traded products and index funds. There are several options available in Australia and around the world from the following providers:
How to invest in a cryptocurrency ETF
ETFs are traditionally designed to be bought and sold on securities exchanges, which means you can trade them via your regular online brokerage account. In the past, potential investors would have to find niche platforms in order to purchase cryptocurrency ETFs.
With the SEC approving crypto-based ETFs, you may now be able to buy these funds through everyday trading accounts on the stock exchange. You may wish to sign up for one of these online trading accounts through your regular financial institution, or open an account with a specialist broker.
Compare online brokers to buy ETFs
Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
However, this is not your only option. With exchanges like Huobi and OKEx launching their own index funds, you can register for an account on the relevant crypto exchanges to invest.
Finally, if you're interested in the potential of the technology behind blockchain, you may want to consider ETFs focused on blockchain companies. Blockchain technology is one of the key innovations introduced by Bitcoin and is closely associated with the wider cryptocurrency industry. It may be worth researching tech-focused ETFs and whether they provide any exposure to blockchain-related investments.
These indexes don't actually track the price of Bitcoin or other digital assets, but the share prices of the FinTech companies that develop the technology. Examples include BLOK and BLCN.
Benefits vs risks of Bitcoin ETFs
Just like any other type of investment, cryptocurrency ETFs have a range of pros and cons. It's essential that you weigh up the potential benefits against the risks involved before deciding whether you should invest in any crypto ETF.
- Simplicity. Learning how to buy and store cryptocurrency can be a confusing and daunting process. ETFs make it simple to gain exposure to digital currencies without going through the hassle of owning any coins.
- Create a diverse portfolio. The compartmentalised nature of the crypto industry means that acquiring and holding a large collection of currencies all at once is complicated and time-consuming. You may have to open several wallets and maintain accounts on multiple crypto exchanges. However, cryptocurrency ETFs allow you to track multiple digital coins and tokens all at once, saving you a whole lot of time and effort.
- Avoid the risk of hacking. Cryptocurrency exchanges and wallets are susceptible to hacking attacks and theft. Buying units in a crypto ETF protects you against these risks as you don't actually own any digital coins.
- Lower fees. ETFs generally have lower fees than traditional managed funds, making it possible to build a diversified portfolio at reduced expense.
- Limited choice. There's currently limited choice available for anyone wanting to invest in cryptocurrency-related ETFs. However, now that the SEC has approved its first crypto ETF application, this will likely soon change. It will be worth watching your own country's regulatory body to see if they follow in the SEC's footsteps.
- Volatility. Cryptocurrencies are famous for their volatility and can experience substantial price fluctuations in a short space of time. If the market moves against you, the value of your crypto ETF units could take a sharp dive.
- Lack of risk diversification. Traditional ETFs often include an extensive range of securities to help achieve diversification. They sometimes include government bonds and debt to mitigate market risk. However, most versions of crypto ETFs only provide access to a limited range of digital currencies. When you also consider the correlation between the performance of Bitcoin and the value of altcoins, this only increases the level of risk.
- Crypto-specific risks still apply. Just because you don't have to deal with any of the risks of owning digital currency, that doesn't mean these risks cease to exist. Issues such as hacking will still need to be managed by the ETF provider.
- Fees apply. On top of an annual management fee, you'll need to consider brokerage fees that apply when you buy or sell ETF units.
- International taxes. If you buy ETF units located in another country (such as XBT Provider's funds), be aware that foreign tax may apply.
Other crypto-themed investments
Buying coins is the most direct way to invest in the crypto market. But it's not your only option. Here are 3 ways you can invest in crypto without diving headfirst into coins.
1. Blockchain ETFs: These exchange-traded funds track the performance of companies that develop or use blockchain technology. That's the tech that enables cryptos like bitcoin. So you're getting exposure to the tech that allows crypto to operate.
First Trust Indxx Innovative Transaction & Process ETF (LEGR)
- Total net assets: $138,066,278
- Closing NAV (10/15/21): $43.83
- 52-week high: $43.88
- 52-week low: $30.84
- Expense ratio: 0.65%
- Outstanding shares: 3.15 million
- Notable holdings: Oracle Corp (1.31%); IBM (1.3%); Salesforce (1.38%)
Siren Nasdaq NexGen Economy ETF (BLCN)
- Total net assets: $285,452,990
- Closing NAV (10/15/21): $47.18
- 52-week high: $53.31
- 52-week low: $32.88
- Expense ratio: 0.68%
- Outstanding shares: 6.05 million
- Notable holdings: PayPal Holdings (1.91%); IBM (2.08%); SAP (1.89%)
Amplify Transformational Data Sharing ETF (BLOK)
- Total net assets: $1.156 billion
- Closing NAV (10/15/21): $50.86
- 52-week high: $62.94
- 52-week low: $24.54
- Expense ratio: 0.70%
- Outstanding shares: 26.15 million
- Notable holdings: Square (4.71%); NVIDIA (3.81%); Coinbase (3.63%)
2. Crypto platform stocks: If you want to invest in crypto-adjacent stocks, you might want to check out listed crypto trading platforms. This doesn't provide you with direct exposure to crypto, but much like the blockchain ETFs, you'll get exposure to some of the technology that enables the market. Here are some notable stocks:
Coinbase: This crypto platform went public in April of this year. The platform's financials are strong. Year-over-year, it saw revenue skyrocket by 1,097% and net income soared by 4,879%, according to its second-quarter earnings released in June. For more on Coinbase, check out our guide.
- Closing stock price (10/18/21): $293.34
- Percentage change (from 10/15/21): +4.54%
- 52-week high: $429.54
- 52-week low: $208.00
- Average volume: 3.993 million
- P/E ratio: 21.60
Robinhood: Robinhood went public back in July, and the platform launched its crypto access in September, so it's a fairly new player in the crypto game. Having said that, its revenue has improved year-over-year, climbing by 131.49%, according to its second-quarter earnings report released in June. Even so, net income plummeted by 971.19% year-over-year. For more on Robinhood, check out our guide.
- Closing stock price (10/18/21): $40.65
- Percentage change (from 10/15/21): -0.93%
- 52-week high: $85.00
- 52-week low: $33.25
- Average volume: 17.938 million
- P/E ratio: N/A
The history of crypto ETFs
The history of cryptocurrency ETFs has been brief but controversial. Throughout 2021 there's been a fair bit of media coverage focused on the efforts of multiple ETF providers to get the U.S. Securities and Exchange Commission (SEC) to approve their proposals for a crypto-based ETF.
Up until October 2021, the SEC refused to approve Bitcoin or cryptocurrency ETFs, citing security concerns. It has rejected several crypto ETF proposals in the past, notably shutting down applications from the Winklevoss twins in 2017 and 2018.
The following statement has been included in the vast majority of SEC rejections:
...the Commission is disapproving this proposed rule change because, as discussed below, the exchange has not met its burden under the Exchange Act and the Commission's Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange's rules be designed to prevent fraudulent and manipulative acts and practices.
The SEC ruled against a further crypto ETF application, a joint venture between investment firm VanEck and fintech company SolidX, on 29 December 2018. In 2021, regulators in the SEC finally began to change their tune and demonstrate a willingness to accept crypto-based ETFs. This culminated in the SEC approving and listing BITO – ProShares' Bitcoin Strategy ETF – on public stock exchanges in October 2021. This was the first ever SEC-accepted Bitcoin ETF in America. According to Sarah Bergstrand, COO of Bitbull Capita, the long-awaited approval will "give BTC the additional validation and regulatory support it needs as an alternative investment asset class".
Achieving regulatory success is a big step forward for the cryptocurrency industry and may have an impact on wider adoption. Properly regulated and professionally managed ETFs could represent a safer option for investors concerned about the risks of buying digital currency, plus help bridge the gap between the world of crypto exchanges and more traditional investment tools.
According to Sarah Bergstrand of the approval of an ETF in the US will "give BTC the additional validation and regulatory support it needs as an alternative investment asset class."
At time of writing, there are no cryptocurrency ETFs listed on the Australian Securities Exchange (ASX). That said, the ASX are performing a 2021 review on a number of crypto-based ETF applications and have shifted their attention to the digital asset class. If approval is ultimately granted in the US, there's a good chance Australian ETF providers will follow suit and launch their own products.
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Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
Disclosure: At the time of writing the author holds ADA, ICX, IOTA and XLM.
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