Understanding Cryptocurrency ETFs:-
Without delving too deeply into the digital asset ecosystem, we will describe in this article how cryptocurrency ETFs work, the regulators’ ongoing concerns, the possible advantages for investors, and how this trend might affect individual traders wishing to enter the cryptocurrency market.Financial products known as cryptocurrency exchange-traded funds (ETFs) invest in assets linked to digital currencies in order to replicate their price movements. Crypto ETFs can be accessed through standard brokerage accounts because they are traded on major stock exchanges, just like traditional ETFs.
A growing number of cryptocurrency exchange-traded funds (ETFs), also known as crypto ETFs, started providing exposure to bitcoin in early 2024. After almost ten years of regulatory delays, this change was made. In early 2024, the U.S. Securities and Exchange Commission (SEC) finally authorized the first spot crypto ETFs in response to a 2023 ruling by the D.C. Circuit U.S. Court of Appeals.
This innovation gives regular investors access to cryptocurrency prices without requiring them to purchase or hold digital assets. By eliminating the headache of setting up wallets or interacting with cryptocurrency exchanges directly, it streamlines cryptocurrency investing.
However, compared to traditional funds, these ETFs have higher fees. Furthermore, the cryptocurrency markets on which ETFs rely are frequently unregulated, even though the ETFs themselves are. The SEC has expressed worries about improper oversight and market manipulation. It is difficult to identify fraud or guarantee fair pricing in the underlying cryptocurrency markets without surveillance-sharing agreements with regulated platforms.
Without delving too deeply into the digital asset ecosystem, we will describe in this article how cryptocurrency ETFs work, the regulators’ ongoing concerns, the possible advantages for investors, and how this trend might affect individual traders wishing to enter the cryptocurrency market.
- Cryptocurrency exchange-traded funds (ETFs) provide investors a convenient way to tap into the crypto market—without the hassle of directly buying or securely storing digital coins.
- Instead of holding actual cryptocurrencies, these ETFs follow crypto price movements by investing in futures contracts. This lets investors benefit from price trends without direct exposure.
- Spot ETFs, which invest in the actual cryptocurrency itself, have faced tougher approval processes. That’s mainly because the U.S. Securities and Exchange Commission (SEC) has been cautious, citing potential risks to investors.
- The ProShares Bitcoin ETF made headlines in October 2021 as the first and largest U.S.-listed crypto futures ETF to begin trading.
- After much anticipation, the SEC finally gave the green light to the first 11 U.S. spot crypto ETFs in January 2024—marking a major shift in the industry.
Crypto ETFs follow digital currencies in two main ways, whereas many traditional ETFs track indexes by holding a variety of underlying assets. Spot ETFs are those that hold the cryptocurrency directly. The performance of the digital assets included in these funds is intended to be closely mirrored. However, futures contracts—prearranged agreements to buy or sell a particular cryptocurrency at a predetermined price and date—are the foundation of some cryptocurrency exchange-traded funds (ETFs).
Due to their structure, these ETFs’ prices change in response to shifts in cryptocurrency futures rather than the actual coins. As a result, the share price of these ETFs fluctuates in tandem with changes in the value of cryptocurrency futures. But synthetic crypto ETFs, which use derivatives instead of real crypto, are riskier. Limited regulation and possible valuation problems in the cryptocurrency exchanges these funds deal with are major causes of this.
U.S. regulators resisted approving crypto ETFs for a number of years. The SEC rejected roughly 20 proposals for spot-based crypto ETFs between 2018 and 2023. In the meantime, such products were previously available to investors in Canada and Europe. The first U.S. crypto futures ETFs were not approved by the SEC until October 2021, and the first spot crypto ETFs were approved in January 2024.
Fast Fact
The first cryptocurrency ETF, the ProShares Bitcoin ETF (BITO), started trading in October 2021. This is an ETF that tracks bitcoin futures prices.
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How Crypto Futures ETFs Operate
The first cryptocurrency ETF to be introduced to U.S. markets, the ProShares Bitcoin ETF, provides a clear example of how crypto futures-based ETFs operate. Nearly half of the fund’s assets are allocated to Chicago Mercantile Exchange (CME) bitcoin futures contracts that expire at the end of the current month, with the other half being invested in CME bitcoin futures that mature the following month.
The fund does a rollover as the contract expiration dates approach, selling the contracts that are about to expire and buying new ones for the following month. The ETF’s performance may differ from the real price movements of the underlying cryptocurrency as a result of these rollover fees.
Similar to its bitcoin counterpart, ProShares also provides an Ether futures ETF (EETH), which uses futures contracts to replicate the price movement of ether. ProShares offers exchange-traded funds (ETFs) that combine bitcoin and ether for broader exposure. The ETFs use market-cap-weighted or equal-weighted strategies to balance the investment.
Inverse ETFs, such as the ProShares Short Bitcoin ETF (BITI), also seek to provide the opposite of the daily performance of bitcoin. These funds give investors the chance to make money when the cryptocurrency markets decline.
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Spot Cryptocurrency ETFs
Cryptocurrencies can now be directly held and traded by investment funds. Investors can buy and sell shares of spot crypto ETFs, which are exchange-traded funds that buy and securitize digital currencies, just like they can with regular ETFs. These funds give institutional and retail investors easy access to the cryptocurrency market by issuing and redeeming shares.
Asset managers have been advocating for the approval of spot Bitcoin ETFs since 2014. The SEC received more than 3,500 applications pertaining to cryptocurrency funds between October 2022 and October 2023. The SEC’s approval of 11 spot Bitcoin ETFs in January 2024 marked a significant turning point and suggested that similar cryptocurrency investment vehicles may be accepted more widely.
Important:-
The SEC authorized the first eleven spot bitcoin ETFs for U.S. markets in January 2024. They had a trading volume of roughly $4.6 billion on their first trading day.2.
In May 2024, the SEC made a significant move in favor of approving spot Ether ETFs. It authorized a significant rule change that makes it possible for eight spot Ether ETFs to be listed and traded, paving the way for Ethereum-backed ETFs to become more widely accepted in the financial industry.
The SEC had expressed concerns regarding Ethereum’s staking mechanism prior to this ruling. The commission cited concerns about fraud, market volatility, and insufficient investor protections, just as it had done with Bitcoin in the past.
By locking up ETH to verify network transactions, staking—a fundamental component of Ethereum’s proof-of-stake system—allows users to receive rewards. Due to the ambiguous tax structure, this revenue-generating feature, which was first introduced in 2022, generated discussion regarding taxation and reporting and added another regulatory barrier for spot Ether ETFs.
Crucially, even though the SEC’s rule change lays the groundwork for Ether ETFs, it does not guarantee instant trading approval. Fund managers still need to get final clearances and go through additional application reviews.
It is expected that the SEC will take a more pro-crypto position in the future under former President Donald Trump. Its precise effect on the development of crypto ETFs, however, is still unknown and will rely on changing regulatory strategies.
Advantages of Crypto ETFs
Since cryptocurrency exchange-traded funds (ETFs) are a new asset class, the market may change in the future due to regulatory uncertainty. However, there are some benefits to owning cryptocurrency ETF shares when it comes to trading in the cryptocurrency markets.
Gain Crypto Exposure Without Direct Ownership
One of the biggest advantages of cryptocurrency ETFs is the ability to gain exposure to digital currencies without actually owning them. This means investors can tap into the potential of crypto markets without dealing with the hassle—or the risks—of storing coins in a digital wallet.
Owning cryptocurrencies directly often comes with custodial fees, and many secure wallets charge annual maintenance costs. These fees can accumulate fast. Additionally, crypto transactions carry network and gas fees, which can be complex and costly. With ETFs, these expenses are bundled into the fund’s expense ratio, making them far more manageable for investors.
Simplifying Crypto for the Average Investor
The complex and technical language of cryptocurrencies—terms like blockchain, halving, and proof-of-stake—can be intimidating. For new investors, this jargon creates a steep learning curve and deters many from getting started.
By investing in a crypto ETF, you bypass the need to understand every technical detail. ETFs simplify the experience, allowing investors to benefit from crypto’s growth while learning gradually—without needing to become a blockchain expert overnight.
Enhanced Security and Peace of Mind
Security has always been a top concern in the world of cryptocurrency. From exchange hacks to compromised wallets, the risks are real—and often hard to manage for individual investors.
Crypto ETFs offer a safer alternative. These funds are typically managed by trusted financial institutions that implement high-level security protocols. As a result, investors don’t need to worry about private keys, cold storage, or exchange vulnerabilities.
Cost-Effective and Convenient Diversification
With over 9,000 cryptocurrencies in circulation, building a diverse crypto portfolio can be expensive and time-consuming. Each platform has its own rules, regional availability, and fee structure, making global access challenging.
Cryptocurrency ETFs offer a solution by giving investors diversified exposure to multiple digital assets through a single investment. No need to hop across platforms or deal with multiple wallets. ETFs streamline the process and reduce the transaction costs, making crypto investment more accessible and budget-friendly.
Disadvantages of Crypto ETFs
One of the disadvantages of cryptocurrency exchange-traded funds (ETFs) is their novelty, especially since it is still unclear how regulations in this field will change. There will probably be more cryptocurrency exchange-traded funds (ETFs) in the future, so it’s critical to understand any potential problems.
Tracking Error Risk
Crypto ETFs don’t always mirror the exact price movements of the digital assets they’re based on. This is especially noticeable with ETFs that rely on cryptocurrency futures contracts. These funds must continuously renew their positions as contracts expire, which can cause performance to deviate from the actual price of the underlying token.
Higher Fees Than Traditional ETFs
Although crypto ETFs offer an easier way to gain crypto exposure without directly buying digital coins, they come with their own set of fees. Many are actively managed, leading to higher expense ratios. For instance, the ProShares Bitcoin ETF charges an expense ratio of 0.95%. In contrast, a more traditional ETF like the SPDR S&P 500 ETF charges just 0.09%.
Exposure to Crypto Market Volatility
Even though crypto ETFs make investing in digital currencies more accessible, they’re still heavily influenced by the high volatility of the cryptocurrency market. This makes them riskier than standard ETFs, especially for investors more familiar with stable, low-volatility options.
No Direct Ownership of Crypto Assets
When you invest in a crypto ETF, you don’t actually own the cryptocurrency. While ETFs offer ease of access and management, they don’t provide control over the digital assets themselves. As a result, features like decentralization and privacy—key appeals of crypto—don’t apply to ETF investors.
Trade on stock exchanges using regular brokerage accounts
Provide exposure to crypto without direct ownership
Avoid crypto custody and trading expenses
Reduce the learning curve
Regulatory uncertainty
Elevated fees and expenses
Subject to volatility in crypto markets
No direct ownership or control over underlying cryptocurrency
Alternatives to Cryptocurrency ETFs
Investors can invest in a number of other ETF-like products for cryptocurrency exposure in addition to futures and spot ETFs. Let’s examine these possibilities.
Understanding Crypto Trusts, ETPs, and ETFs: Smarter Ways to Invest in Digital Assets
Although the SEC has only cautiously approved a limited number of crypto ETFs, investors have had access to a similar option for years: bitcoin investment trusts. These trusts are closed-end funds that function similarly to the spot crypto ETFs now being proposed. Essentially, they hold bitcoin on behalf of investors, and their shares are traded on over-the-counter (OTC) markets.
However, these trusts are not the same as ETFs. They are typically restricted to institutional investors, accredited individuals, or high-net-worth investors (HNWIs), meaning everyday retail investors can’t easily access them. Additionally, they usually require a high minimum investment and come with lockup periods that prevent investors from selling shares immediately.
What Are Crypto ETPs?
ETFs are just one type of exchange-traded product (ETP). When it comes to crypto, ETPs usually refer to securities backed by debt issued from special-purpose vehicles (SPVs) that hold actual crypto assets. These SPVs use the crypto as collateral to issue the ETPs, which are then listed and traded on public exchanges.
Crypto ETPs are regulated under the Securities Act of 1933, not the Investment Company Act of 1940, which means they are subject to fewer investor protections than ETFs. Shareholders in crypto ETPs don’t get the same safeguards that ETF investors typically enjoy.
Another key difference is liquidity and pricing. Crypto ETFs can create or redeem shares based on supply and demand, helping their prices stay close to their net asset value (NAV). In contrast, crypto ETPs often have a fixed number of shares that trade at market value, which may differ significantly from the value of the underlying crypto.
Investing in Companies That Hold Cryptocurrency
If you want exposure to cryptocurrency without buying digital tokens directly, consider investing in companies that hold crypto on their balance sheets. Several publicly traded companies have made significant investments in bitcoin. For instance, as of April 2025, MicroStrategy (MSTR) held over 528,000 bitcoins. Other notable companies with bitcoin holdings include Galaxy Digital Holdings (BRPHF) and Tesla (TSLA).
Crypto-Focused ETFs
There are also a number of ETFs that provide exposure to the broader crypto and blockchain industry. These funds typically invest in companies developing blockchain technologies or participating in the crypto ecosystem. A well-known example is the Amplify Transformational Data Sharing ETF (BLOK), which holds a diverse mix of firms involved in blockchain innovation.
FAQs
Should You Invest in a Crypto ETF? Here’s What You Need to Know
Crypto ETFs (Exchange-Traded Funds) aim to mirror the performance of cryptocurrencies, offering investors a way to experience major price movements without directly owning digital assets. While this can be appealing, it’s important to recognize that the crypto market is highly volatile. As a result, crypto ETFs carry a significant level of risk. If you’re thinking about adding them to your portfolio, it’s wise to consult a financial advisor to ensure it aligns with your financial goals and risk tolerance.
How Are Taxes Different for Crypto ETFs vs. Direct Crypto Holdings?
When it comes to taxes, crypto ETFs are often treated differently from directly holding cryptocurrencies. In many countries, profits from crypto ETFs are considered capital gains, which might be taxed at a lower rate than direct crypto transactions. Since tax laws can vary widely depending on your location and personal situation, it’s a good idea to talk to a qualified tax professional before investing.
Are There Crypto Index Funds Available?
Yes, several crypto index funds exist, including options like the Bitwise 10 (BITW) and the Galaxy Crypto Index Fund. However, access to these funds can be limited. They’re typically available to non-U.S. investors or only offered to accredited investors within the United States.
Can You Short Crypto ETFs?
Absolutely. Like other ETFs, crypto ETFs can be shorted. This means investors can potentially profit when the value of the ETF falls. However, short selling in the crypto market is especially risky due to its unpredictable nature. This strategy can lead to large—and even unlimited—losses, so make sure you fully understand the risks before attempting it.
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