Table of Contents
What is a Cryptocurrency ETF?
Let’s start from the basics, like what is an ETF and what is cryptocurrency. Exchange Traded Fund, or ETF for short, is a type of investment fund designed to track an index while cryptocurrency. Cryptocurrency is a digital form of currency, measured in tokens or coins, that is exchanged and distributed via decentralized networks using blockchain technology, enabling digital payments without the need of third-party intermediaries.
Thus, an ETF for cryptocurrency, as opposed to other types of pooled investment like Index funds which track an index or a basket of assets, tracks the performance of one or more digital tokens. Just like stocks, Crypto ETFs are traded on a daily basis, however cryptocurrency ETFs are relatively new to the market, and were first traded on the market at the end of 2021 with the launch of the ProShares Bitcoin Strategy ETF.
One of the benefits of cryptocurrency ETFs, and ETFs in general, is that they offer investors exposure to cryptocurrency with decreased ownership fees and, since the investor is invested in the fund managed by an investment firm, ETFs cut out the steep learning curve required for trading cryptocurrencies.
For crypto ETF UK investors looking to invest in ETFs, unfortunately, we have some bad news… there are no UK cryptocurrency ETFs in the UK. However, according to Reuters, Grayscale is investigating the possibility of launching a UK blockchain ETF, so you may be able to add UK crypto ETF exposure to your investment portfolio in the coming months.
How do Cryptocurrency ETFs Work?
There are two different kinds of cryptocurrency ETFs traded on the market today. The first is based on the actual cryptocurrency, meaning that the ETF’s fund managers purchase cryptocurrency, with ownership of the coins divided according to investor shares. Investors thus indirectly own the coins when purchasing shares in the ETF. The second type of crypto ETF is based on derivatives such as futures contracts or crypto exchange traded products (ETPs). As explained by Investopedia, the first cryptocurrency ETF, ProShares Bitcoin Strategy ETF (BITO), tracks the prices of bitcoin futures. In this case, the price of the ETF share is based on derivatives rather than current cryptocurrency prices. Thus, as the prices in futures contracts rise and fall, so too does the price of shares in the crypto ETF.
If you’re interested in buying crypto, it’s always a smart move to make sure you read more about cryptocurrency predictions in the short, medium and long terms before buying.
What are the benefits of Cryptocurrency ETFs?
As previously established, cryptocurrency ETFs are a burgeoning asset class, whose market is still developing, as new regulation emerges. Despite this, crypto ETFs are a great way for investors to gain exposure to the crypto market without having to directly buy the tokens, which is a benefit in itself, considering the slew of additional costs investors must bear when they buy cryptocurrencies directly: custody and network fees, annual digital security fees, transaction fees and more. But these costs are borne by the ETF managers in exchange for less onerous expense ratios.
Since there are usually no minimum buy-ins for investing in ETFs, investing in crypto through the funds constitutes a more accessible means of gaining exposure to cryptocurrency, especially considering how the price of the tokens has skyrocketed in recent months. A cryptocurrency exchange-traded fund (ETF) is a cost-effective way for investors to invest in the asset class. Cryptocurrency ETFs allow investors to diversify their holdings without having to pay for each coin individually.
In addition, tracking and understanding the operation and risk of cryptocurrency requires technical competency that many investors don’t have. As such, there is a steep learning curve for investors who are unfamiliar with technology and the specific jargon associated with trading cryptocurrency. Investing in cryptocurrency ETFs leaves the technical management of the currencies to the fund managers, taking out the learning curve for investors.
The digital security of the cryptocurrency is also something to be considered. Given the nature of the currency, the SEC has raised concerns regarding the security of the asset class against hackers and market manipulation. For inexperienced investors, ensuring the security of the asset can prove to be more difficult or costly than expecting. Investing in cryptocurrency ETFs leaves the security to the more experienced fund managers.
What’s the latest on Cryptocurrency ETF Regulation?
While the creation of crypto exchange traded funds (ETFs) is an exciting first step for the development of the crypto market, more regulation is needed if the currency is to continue to develop. For crypto enthusiasts, ETFs may be particularly exciting, since they offer greater access to investing in cryptocurrencies. As Investopedia explains, prior to 2021, the SEC had rejected applications for crypto-based ETFs, citing as its main concerns the lack of transparency surrounding the pricing of the tokens, issues to cryptocurrency taxation (even in the UK) and susceptibility to market manipulation and hacking. But, the SEC has since changed its tune – the cryptocurrency market has changed, and crypto trade has increased dramatically, and the first cryptocurrency ETF is now publicly traded.
Are there any cryptocurrency ETFs?
As previously mentioned, the only cryptocurrency ETF trading in the United States market is the ProShares Bitcoin Strategy ETF, however, investors can invest in a variety of ETF-like products to gain exposure to the cryptocurrency market. However, after the successful launch of the ProShares Bitcoin Strategy ETF, other companies like Valkyrie have started working on launching their own cryptocurrency ETFs.
What are the investment alternatives to Cryptocurrency ETFs?
A close alternative to the only crypto ETF on the market, investors who are interested in gaining exposure to cryptocurrency without directly purchasing a token should consider crypto trusts or investing in equity of companies holding bitcoin.
For example, the Bitcoin Investment Trust managed by Grayscale works similarly to an exchange-traded fund (ETF) in that it owns bitcoins on behalf of investors and trades on over-the-counter (OTC) markets. While the Trust is not accessible to the general public, (it is only available to investment firms, accredited investors, and high-net-worth individuals) it works similarly to an ETF, where investors may purchase shares and must pay the firm a management fee. However, it has a high minimum investment requirement, and each acquisition of its shares is subject to a lock-up period. While Grayscale’s Bitcoin Investment Trust is not the only solution on the market, Bitwise manages, among others, two cryptocurrency funds tracking tokens like Ethereum and Uniswap, the approach is the same: a high minimum investment is required to purchase shares in the funds and they are only available to accredited investors.
Another approach to engage in cryptocurrencies without direct ownership is to invest in companies that have bitcoin on their balance sheet. Some publicly traded corporations have started buying bitcoin. One of the most well known examples of this is Tesla: the electric car company purchased billions in bitcoin in 2021. However, there are other publicly traded companies still that have bitcoin on their balance sheets. Since the performance of their tokens impacts the capital of the company, investing in the equity of one of these companies provides indirect exposure for investors. Some investment firms have formed funds containing shares of companies that use or are connected with blockchain, the underlying technology behind most cryptocurrencies, in the hopes of capitalizing on investor enthusiasm for the technology. Bitwise created an ETF tracking stocks of important publicly listed companies invested in the crypto sector in its Bitwise Crypto Industry Innovators ETF, providing a solution for investors who are interested in a more concentrated exposure to the industry.
How can you invest in crypto ETFs?
In the past, one of the most difficult parts of investing in cryptocurrency was figuring out how and where to buy them. Cryptocurrency ETFs make it easy for investors to gain exposure, since they are traded like stocks and can be bought through general investment accounts. While there is only one cryptocurrency ETFs on the market, there are other options for investing in crypto-related ETFs.
The most obvious way to gain exposure to cryptocurrency ETFs would be to invest in ETFs that directly own and manage crypto. Otherwise, the second best way is to invest in a bitcoin futures ETF, though these types of ETFs do not invest in bitcoin directly, but instead track the performance of bitcoin in future bitcoin sale contracts.
Alternatively, for those who are able, cryptocurrency trusts, which invest directly in cryptocurrency, is a good option for accredited investors looking to gain crypto exposure.
Finally, investing in ETFs that track companies that hold bitcoin, investing in bitcoin indirectly, can be an interesting option for investors who are not enticed by the other options. Investing in companies that hold Bitcoin or other cryptocurrencies on their balance sheets or profit from crypto transactions are a great way to get indirect exposure to cryptocurrencies. In that way, Blockchain & Bitcoin Strategy ETF (BITS) gives investors exposure to both Bitcoin futures contracts and blockchain-related enterprises. Cryptocurrency mining firms, organizations involved in digital asset exchanges, and companies with blockchain applications and software services are among the stocks held by the BITS fund.