Cryptocurrency exchange-traded funds explained

Cryptocurrency has long positioned itself as an alternative to traditional fiat currency, providing people and organizations with an alternative form of money.

Although the original promise of cryptocurrency It was as a replacement or alternative to fiat currency Like the US dollar, the reality is that it has seen more promise and activity as a speculative form of investment. The increase in value of different cryptocurrencies, in particular bitcoin has led to growing investor interest in the digital currency.

Bitcoin's value is extremely fluid and prices change dramatically over time. In July 2021, Bitcoin was valued at approximately $29,796. On the contrary, Bitcoin on March 11, 2024 exceeded $72,000.

Investors have had numerous ways to acquire and invest in cryptocurrencies, including directly purchasing cryptocurrencies. However, one of the simplest ways didn't emerge until January 10, 2024, with regulatory approval from the Securities and Exchange Commission (SECOND) in the US for spot Bitcoin exchange-traded funds (ETFs), providing an accessible and simplified approach for investors of all levels to enter the cryptocurrency market.

What are cryptocurrency exchange-traded funds (ETFs)?

At the most basic level, a cryptocurrency ETF is a broad term that refers to any ETF that provides exposure to cryptocurrencies or related cryptocurrency assets. Cryptocurrency ETFs can include various types of assets, such as actual cryptocurrencies, cryptocurrency futures contracts, or shares of companies involved in the cryptocurrency industry.

Cryptocurrency ETFs can offer exposure to a single cryptocurrency, such as Bitcoin, or a basket of different cryptocurrencies, such as Ethereum. The related concepts of spot ETFs and futures ETFs are also commonly included in the general category of cryptocurrency ETFs.

Spot ETFs invest in real cryptocurrencies and track their value. With the spot cryptocurrency ETF, investors can participate in the rise or fall of value of a cryptocurrencywithout purchasing or holding the actual cryptocurrency through an exchange.

Unlike a spot cryptocurrency ETF, which tracks the actual current value, a futures ETF tracks the potential value of a cryptocurrency with a futures contract. A futures contract is a financial instrument that provides an option to the contract holder to buy or sell an asset for a specified price, on a specific date. A futures contract does not convey ownership of the asset itself.

Cryptocurrency ETFs vs. Spot Cryptocurrency ETFs vs. Bitcoin ETFs

Understanding the difference between the various subcategories and types of cryptocurrency ETFs can be confusing. The following chart provides a simplified explanation of each type of cryptocurrency ETF.

These are the main differences between cryptocurrency ETFs, cryptocurrency spot ETFs, and Bitcoin ETFs.

How do ETFs work?

An ETF is a form of equity investment that trades on a public stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq.

An ETF trades on a public exchange similar to an individual stock. However, rather than simply being a financial vehicle to track the performance of a single company, an ETF typically owns a group of different assets or individual stocks. Some ETFs track specific industries, such as banking or healthcare, as well as ETFs that track a stock index, such as the S&P 500.

ETFs generally have some financial overhead, which is built into the cost of the ETF as a management expense ratio.

An ETF is similar to a mutual fund, which also owns a group of stocks or securities. However, a mutual fund does not trade on a public stock exchange, while an ETF does trade on stock exchanges, making it more accessible to purchase and trade.

Cryptocurrency Stock ETFs

A cryptocurrency stock ETF can hold and invest in any number of different cryptocurrencies and related assets, such as financial activities in a block chain.

There are a growing number of cryptocurrency ETFs on the market. Below are five popular examples, based on assets under management (AUM), that provide a measure of the financial size of a given ETF.

  • Amplify Transformative Data Sharing ETF (NYSE: BLOCK). Invest in companies involved in blockchain technology and cryptocurrency-related businesses.
  • Bit by Bit Crypto Industry Innovators ETF (NYSE:BITQ). Provides exposure to cryptocurrency mining, exchanges, and other cryptocurrency-related services.
  • First Trust SkyBridge Crypto Industry and Digital Economy ETF (New York Stock Exchange:CRPT). Invest in companies involved in the cryptocurrency industry and the digital economy.
  • Global X Blockchain ETF (NASDAQ:BKCH). Invest in companies that are developing or using blockchain technology.
  • VanEck Digital Transformation ETF (NASDAQ:DAPP). Invests in companies involved in digital assets, blockchain technology and digital infrastructure.

Bitcoin ETF

Bitcoin ETFs are ETFs that invest solely in Bitcoin.

Bitcoin ETFs can refer to any exchange-traded fund that provides exposure to Bitcoin and are often used interchangeably with the term Bitcoin futures ETF. Prior to January 2024, this class of ETF did not directly own Bitcoin and was primarily engaged in investing in Bitcoin futures contracts. After January 2024, when the SEC allowed spot cryptocurrency ETFs, the category may also include ETFs invested directly in Bitcoin. This list focuses specifically on those who hold and invest in Bitcoin futures.

Among the largest Bitcoin ETFs based on AUM:

  • Bitwise Bitcoin Strategy Optimum Roll ETF (NYSE:BITC).
  • Hashdex Bitcoin Futures ETF (NYSE: DEFI).
  • ProShares Bitcoin Strategy ETF (NYSE:BITO).
  • Simplify Bitcoin Strategy MORE Income ETF (NASDAQ:MAXI)
  • Valkyrie Bitcoin Strategy ETF (NASDAQ:BTF).

Crypto Spot ETF

Crypto Spot ETFs are the newest category and were only granted approval by the SEC in January 2024. A Crypto Spot ETF invests directly in cryptocurrencies and as of March 2024, the only cryptocurrency allowed is Bitcoin, although Ethereum will likely be added in the future.

Spot ETFs aim to track the real-time or "spot" price of Bitcoin, providing more direct exposure to a cryptocurrency's market movements. Spot ETFs are considered a purer form of Bitcoin investing because they reflect the current market price of Bitcoin without the potential discrepancies that can occur with futures contracts.

When the SEC first allowed spot cryptocurrency ETFs on January 10, 2024, it approved the following 11 ETFs:

  1. ARK 21Shares Bitcoin ETF (NYSE:ARKB).
  2. Bitcoin Bit by Bit ETF (NYSE: BITB).
  3. Fidelity Wise Origin Bitcoin Fund (NYSE: FBTC).
  4. Franklin Bitcoin ETF (NYSE: EZBC).
  5. Grayscale Bitcoin Trust (NYSE:GBTC).
  6. Hashdex Bitcoin Futures ETF (NASDAQ:DEFI).
  7. Invesco Galaxy Bitcoin ETF (NYSE: BTCO).
  8. iShares Bitcoin Trust (NYSE: IBIT).
  9. Valkyrie Bitcoin Fund (NASDAQ: BRRR).
  10. VanEck Bitcoin Trust (CBOE:HODL).
  11. WisdomTree Bitcoin Fund (CBOE: BTCW).

Advantages of cryptocurrency ETFs

Cryptocurrency ETFs offer several advantages for investors looking to gain exposure to the cryptocurrency market. Among the advantages are the following:

  • Exhibition without direct ownership. Investors in cryptocurrency ETFs can gain exposure to cryptocurrencies without the need to directly own, manage, or hedge the digital assets.
  • Simplified investment process. Unlike purchasing cryptocurrency directly through an exchange, cryptocurrency ETFs can be bought and sold through traditional brokerage accounts, improving accessibility for average investors.
  • Liquidity benefits. ETFs trade on public stock exchanges and can typically offer more liquidity than holding cryptocurrencies directly, allowing for easier buying and selling.
  • Accessibility in retirement accounts. Cryptocurrency ETFs can potentially be included in traditional retirement accounts, such as 401(k)s and IRAs, which would not otherwise be possible with direct cryptocurrency holdings.
  • Regulated investment vehicle. Cryptocurrency ETFs traded on public stock exchanges are regulated financial products, which can offer a sense of legitimacy and security to investors.

Disadvantages of cryptocurrency ETFs

Cryptocurrency ETFs, while offering a bridge for traditional investors into the digital currency space, have their own drawbacks.

  • Lack of direct ownership. Investors in cryptocurrency ETFs do not directly own the underlying digital assets. This is particularly true of cryptocurrency futures ETFs.
  • Restricted business hours. The major public stock exchanges are not open 24/7 where ETFs are traded. On the contrary, the various cryptocurrency exchanges are open 24/7.
  • Market volatility. While public equity markets always carry risks, cryptocurrency ETFs are also subject to the high volatility of cryptocurrency markets.

Remember to watch out for cryptocurrency scams. Check out some of the most popular types of cryptocurrency scams.

Alternatives to Cryptocurrency ETFs

For investors looking for alternatives to cryptocurrency ETFs, there are multiple options available that offer exposure to the cryptocurrency and blockchain space, including:

  • Direct investments in cryptocurrencies. It remains an option to purchase various cryptocurrencies directly through cryptocurrency exchanges, providing the investor with full control over the digital assets.
  • Public cryptocurrency companies. Another option is to directly buy individual shares of companies active in the cryptocurrency market.
  • Cryptocurrency mutual funds. This type of mutual fund invests in a portfolio of companies involved in the cryptocurrency and blockchain industry. Instead of trading on a public exchange where prices fluctuate daily, a mutual fund is more strictly held and the price is determined at the end of the trading day.
  • Cryptocurrency mining. It is still possible to go through the mining process and "mine" cryptocurrencies directly with the right hardware. However, Bitcoin mining It is computationally intensive and may not be the best approach for the average investor.

Sean Michael Kerner is an IT consultant, technology enthusiast, and tinkerer. He has used Token Ring, configured NetWare and is known for compiling his own Linux kernel. He consults with industry and media organizations on technology issues.

Leave a Comment


No comments yet. Why don’t you start the discussion?

Leave a Reply

Your email address will not be published. Required fields are marked *