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Cryptocurrency ETFs explained: A simple guide for investors (2023)

ETFs give you a convenient way of investing in cryptocurrency, but they may not be the most cost-effective.

Disclaimer: This information should not be interpreted as either an endorsement or recommendation of managed investment schemes, cryptocurrency or any specific provider, service or offering. Consider your own circumstances and obtain independent advice before acting on this information.

What is a cryptocurrency ETF?

An exchange-traded fund (ETF) is a collection (often called a "basket") of assets that are designed to track the performance of a particular index, commodity or asset. ETFs can be bought and sold on a stock market in the same way investors can trade stocks of a company.

For example, a gold ETF grants investors exposure to the value of gold without ever having to own any.

Cryptocurrency ETFs are designed to give investors exposure to the cryptocurrency market. These funds may track the price of one or more digital coins or tokens. This lets investors gain exposure to the value of crypto without the risks associated with owning any digital currency.

How do cryptocurrency ETFs work?

Cryptocurrency ETFs largely avoid most of these risks. Packaged within highly regulated investment vehicles, most ETFs can only be accessed through traditional outlets, such as stockbrokers.

These ETFs function as a bridge between traditional financial markets and the emerging digital asset class of cryptocurrencies. Here's a deeper look into their operation:

  • Tracking digital assets: These ETFs track one or multiple cryptocurrencies, allowing investors to gain exposure to crypto markets without the complexity of direct trading or ownership. Alongside cryptocurrencies, futures contracts can also be used to track underlying prices. These contracts are a type of derivative product that allow investors to "bet" on whether they think the price of a given cryptocurrency will rise or fall over a set period of time. Futures-based cryptocurrency ETFs were the first type to be approved by the SEC.
  • Trading mechanism: Similar to traditional ETFs, cryptocurrency ETFs are traded on stock exchanges. Their prices fluctuate based on market demand, just like stocks.
  • Regulated investment vehicles: Cryptocurrency ETFs operate within regulated financial frameworks. This regulation provides a level of security and legitimacy not always present in direct cryptocurrency investments.
  • Management and fees: These funds are managed by financial institutions, which charge management fees, which generally have lower fees compared to traditional managed funds (like a hedge fund), but higher fees than the cryptocurrency spot market. These fees are typically factored into the price of the ETF.
  • Accessibility: ETFs are accessible through standard brokerage accounts, making them a convenient option for traditional investors to enter the crypto market. Keep in mind that ETFs only trade during market hours, while cryptocurrency trades 24/7. This can lead to a discrepancy between the price of the fund and the spot market.
  • Diverse offerings: There are different types of cryptocurrency ETFs available, such as those tracking specific cryptocurrencies or a range of digital assets.

This structure allows investors to engage with the growing crypto market in a regulated and familiar format, mitigating some complexities and risks associated with direct cryptocurrency transactions.

Finder survey: Which crypto industries are Australians investing in?

Response75+ yrs65-74 yrs55-64 yrs45-54 yrs35-44 yrs25-34 yrs18-24 yrs
DAO or governance tokens1.92%1.16%0.56%
Gaming and metaverse1.92%0.62%0.65%2.91%6.7%4.79%1.96%
Layer-1s1.92%0.62%4.55%6.98%15.64%13.3%4.9%
Layer-2s1.92%2.6%1.74%4.47%3.19%
Memecoins1.92%1.95%2.91%7.26%3.19%0.98%
Bitcoin4.32%11.04%13.95%29.05%26.6%20.59%
Artificial Intelligence (AI)1.85%2.6%2.91%4.47%4.79%
I don't know1.85%5.19%5.81%5.59%5.85%2.94%
Stablecoins0.62%2.6%1.74%6.15%4.26%1.96%
DeFi1.95%2.91%3.91%4.26%1.96%
Exchange tokens0.65%2.91%2.79%3.19%1.96%
Source: Finder survey by Pure Profile of 1009 Australians, December 2023

Types of crypto ETFs

Broadly speaking, there are 3 types of cryptocurrency ETFs:

Physical-backed crypto ETFs

These hold actual coins and tokens to underpin the value of the ETF. If the value of the digital coins owned by the ETF rises, the value of each ETF share also increases.

  • Pros. Physical-backed ETFs are the most direct way of investing in crypto via a fund. The fund essentially holds coins on an investor's behalf and is a good proxy for people who cannot or do not want to own actual coins.
  • Cons. Physical-backed ETFs frequently lag behind the market and trading is restricted to market hours (unlike actual crypto which trades 24/7). Availability is also limited depending on what markets you have access to. For example, in Canada, retail customers can purchase physical ETFs, but in the US they are regulated to accredited investors.

Futures-backed crypto ETFs

With this type of ETF, shares in the fund aren't based on actual coins but on 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 allow investors to profit in both bearish and bullish markets. Futures-backed ETFs are typically used when holding the underlying asset would be problematic, such as storing barrels of oil or safely securing cryptocurrency.

  • Pros. This type of ETF is the first to receive approval for retail customers in the US as the fund is not directly exposed to the risks associated with storing cryptocurrency. It is currently the closest product that many retail investors have to a regulated crypto ETF.
  • Cons. Futures-backed ETFs can be expensive compared to a physical ETF or real crypto. On top of the ETF management fees is the risk of contango, where futures contracts cost more than the underlying asset. This can cause futures-based ETFs to trade at a premium compared to the spot market, making them worse value for money than purchasing actual coins.

Picks-and-shovels crypto ETFs

This type of ETF is quite different to the others as it is based on stocks of cryptocurrency or blockchain-related companies. The idea is to give exposure to the wider blockchain industry (the technology behind most cryptocurrencies) through a basket of stocks. For instance, the Bitwise Crypto Industry Innovators ETF is made up of publicly traded exchanges (Coinbase, Robinhood), hedge funds (Galaxy Digital), mining firms (Hut 8) and companies that hold crypto in their treasury (MicroStrategy, Tesla).

  • Pros. Stock-based ETFs provide a convenient way of gaining exposure to the wider industry through a mixture of companies. This type of ETF is also less volatile than ETFs that track the underlying value of cryptocurrencies.
  • Cons. However, less volatility also means there could be less room for growth. In addition, the cryptocurrency industry is still in the midst of regulation around the globe, which could negatively impact the prospects of some of the companies listed in these ETFs.

    Example of a crypto ETF in action

    To help understand ETFs a little better, let's take a look at a hypothetical example.

    The hypothetical XYZ ETF is designed to track the performance of the world's 5 biggest cryptocurrencies by market cap – Bitcoin, Ethereum, Binance Coin, XRP and Solana. The company that issues the ETF owns a specified amount of each of the 5 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 of the underlying digital currencies.

    Let's assume that the value of 1 unit of XYZ ETF is $50 and an investor decides 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 the total investment is now valued at $1,000.

    Had the investor taken a more traditional approach and decided to buy each of the 5 cryptocurrencies individually, they would have needed to create 1 or more cryptocurrency wallets and register 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.

    With a cryptocurrency ETF, it's easier and far less time-consuming to gain access to a diverse portfolio of crypto assets.

Benefits vs risks of cryptocurrency 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.

  • Simplicity. Learning how to buy and store cryptocurrency can be a difficult or nerve-racking process for some. ETFs make it simple to gain exposure to digital currencies without going through the hassle of owning any coins.
  • Accessibility. An increasing number of cryptocurrency ETFs are available through traditional stockbrokers and exchanges. In addition to making them easy to access, they also come with the legal and regulatory protections associated with such services.
  • Diversification. Some ETFs offer a basket of various cryptocurrencies that streamlines the process of building a diverse portfolio. It prevents the need to purchase several currencies, which could involve multiple exchange accounts, wallets and technical understanding.
  • Security. While direct ownership of cryptocurrencies involves risks like hacking and theft, investing in a crypto ETF can offer enhanced security. This is because the investor doesn't directly hold the digital coins, but rather units in a fund. This transfers the responsibility of securing the assets from the individual to the ETF provider, potentially offering a more secure investment vehicle.
  • Limited choice. There's limited choice available for anyone wanting to invest in cryptocurrency-related ETFs, although this is changing on a monthly basis. The world's most accessible ETF market, the United States, finally approved cryptocurrency-related ETFs in late 2021. It is likely that more ETF options will follow.
  • 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.
  • Crypto-specific risks still apply. Despite the added security layer for individual investors, it's important to note that the inherent risks associated with cryptocurrencies still exist. The assets held by the ETF are still digital currencies, which means they're subject to the same risks of hacking and theft. The ETF provider manages these risks, but they cannot be entirely eliminated. This means while individual investors might not directly face these risks, the overall value of their investment is still impacted by the security of the underlying assets.
  • Fees apply. On top of an annual management fee, investors will need to consider brokerage fees that apply when buying or selling ETF units.
  • International taxes. If an investor buys ETF units located in another country they need to be aware that foreign tax may apply.

Should you invest in an ETF or real crypto?

When deciding whether to invest in a cryptocurrency ETF or purchase real cryptocurrency directly, it's important to weigh the distinct advantages and disadvantages of each approach.

Cryptocurrency ETFs

Pros

  • Simplicity: ETFs provide an easier way for individuals unfamiliar with the crypto market to invest. They eliminate the complexities of buying, storing and managing cryptocurrencies.
  • Accessibility: Accessible through traditional stockbrokers and exchanges, ETFs offer the legal and regulatory protections of these platforms.
  • Diversification: Some ETFs allow you to invest in a basket of different cryptocurrencies, streamlining the diversification process.
  • Reduced security risks: Since you don't hold actual cryptocurrencies, there's a lower risk of losing your investment to hacking or theft.

Cons

  • Higher costs: ETFs often have management fees and sometimes higher brokerage fees compared to cryptocurrency exchanges.
  • Limited trading hours: ETFs are only tradable during market hours, which could mean potential delays in capitalising on cryptocurrency market changes that occur 24/7.
  • Indirect investment: Investing in an ETF means you don't own the actual cryptocurrencies, which could limit certain benefits like self-custody and using crypto for transactions.

Real cryptocurrency

Pros

  • Direct ownership: You have full control and ownership of your cryptocurrencies, with the freedom to use or trade them as you wish.
  • Market responsiveness: Direct investment in crypto allows for immediate action in response to market fluctuations, as the crypto market operates around the clock.
  • Potentially lower fees: Buying cryptocurrencies directly can incur lower transaction fees than those associated with ETF management and brokerage.

Cons

  • Complexity and security risks: Directly managing cryptocurrencies requires technical knowledge and comes with increased security responsibilities.
  • Volatility and regulatory concerns: Investing in cryptocurrencies is often more volatile and less regulated than traditional investments, presenting a higher risk level.

In conclusion, cryptocurrency ETFs are typically more suited for individuals seeking a simpler, more traditional investment vehicle, or those looking to adopt a longer-term investment strategy. Direct cryptocurrency investment, on the other hand, might appeal more to those comfortable with the technical aspects of crypto and who prefer having direct control over their digital assets.

Looking ahead to 2024

The cryptocurrency ETF landscape presents a mixed outlook. Several factors could influence the market's performance, including:

  • Institutional adoption: Increased participation from hedge funds and pension funds is a positive signal for the market, potentially providing further legitimacy and investment.
  • Regulatory developments: Some countries are adopting a more favourable stance toward cryptocurrency regulation. In the United States, the potential approval of a spot Bitcoin ETF may encourage greater institutional involvement.

As always, investors should be cautious as cryptocurrency ETFs come with elevated risks and the potential for significant short-term declines. In 2023, some of the top-performing crypto ETFs experienced more than 80% declines in 2022.

Staying informed and implementing a well-thought-out strategy remains crucial in the ever-changing crypto landscape.

How to invest in a cryptocurrency ETF

You essentially have 3 main avenues for investing in a crypto ETF, each with its own pros and cons. Keep in mind various ETFs are spread out over a number of providers, from brokers to privately managed funds. As a result, you will need to consider which markets you have access to and which underlying cryptocurrencies you want exposure to.

Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Other ways to invest in cryptocurrency without buying coins

There are several other ways to invest in cryptocurrency without purchasing the actual coins and tokens.

CFDs

Contracts for difference (CFDs) are a popular way of investing in almost any asset, as they simply track the price of the underlying asset, rather than representing ownership. CFDs allow investors to go long or short, with many CFD platforms also offering leverage.

Where to trade cryptocurrency CFDs

Futures and options

Futures contracts and options contracts track the price of an underlying asset, such as Bitcoin or Ethereum. These contracts are typically used to speculate on the future price of an asset. As such, they are better utilised in the hands of experienced traders rather than novice investors.

Stocks

There is a wide range of publicly traded companies with exposure to cryptocurrencies. These range from dedicated services such as cryptocurrency exchanges and mining companies, to investment funds, right through to loosely affiliated companies that use blockchain technology or have part of their treasury in cryptocurrencies.

Some of the more popular cryptocurrency stocks that are also included in stock-based ETFs include:

  • Coinbase (cryptocurrency exchange)
  • Robinhood (trading platform)
  • Galaxy Digital (hedge fund)
  • Riot Blockchain (cryptocurrency mining)
  • Hut 8 (cryptocurrency mining)
  • MicroStrategy (holds a portion of its treasury in Bitcoin)
  • Tesla (holds a portion of its treasury in Bitcoin)

Frequently asked questions


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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