All types of investors are now interested in cryptocurrency, and crypto ETFs are amongst the most popular investment instruments used by traditional investors. Although cryptocurrencies have been around for a while, crypto ETFs are still a new way to get market exposure to cryptocurrency. There is quite a bit you should know before you dive in. If you want to invest in crypto ETFs the right way, here is a quick guide that can help.
How to Get Started with Crypto ETFs - Quick Guide
- Research your crypto ETFs – from crypto ETFs that deal with blockchain technology or invest in cryptocurrencies, there are multiple ways to get crypto exposure with built-in diversification that doesn't require large amounts of capital.
- Define your strategy – trading lets you speculate on the price movement; dealing lets you take direct ownership of the funds.
- Take your position – create an account with us to start investing in crypto ETFs.
Let's explore the different kinds that are available for retail investors and ways to invest in cryptocurrency ETFs.
What is a crypto ETF?
A cryptocurrency exchange-traded fund (ETF) is a fund that consists of cryptocurrencies or stocks with an interest in cryptocurrency. Whereas a traditional ETF tracks an index or a group of stocks, a crypto ETF can track one or more digital assets.
Exchange-traded funds (ETFs) have exploded in popularity in the last 2 decades with investors looking for an alternative to mutual funds and individual assets. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.
As you’ll see, crypto ETFs may be very diverse, ranging from funds that follow companies that may own crypto, although their main business is different. For instance, Square provides payment services, and Tesla makes electric cars. Also, crypto ETFs offer diversity to meet all investment strategies and purposes. Companies like Riot Blockchain Inc. (RIOT) and Coinbase (COIN) are a few examples of companies included in crypto ETFs.
How Does a Cryptocurrency ETF Work?
Most investors prefer cryptocurrency ETFs because this investing option offers a few significant advantages. By investing in a crypto ETF, investors have significantly lower cryptocurrency ownership costs, and they eliminate the difficult learning curve necessary to trade cryptocurrencies.
Investors may find three types of cryptocurrency ETFs:
- ETFs backed by physical cryptocurrency
- ETFs tracking cryptocurrency derivatives
- ETFs tracking companies' stocks investing in cryptocurrencies
ETFs backed by physical cryptocurrency
A crypto ETF that is backed by actual cryptocurrency is an investment fund, whereas the manager purchases cryptocurrencies. Within the ETF, the ownership of the coins can be represented as shares. Investors will inadvertently own cryptocurrency when they purchase shares in the ETF. Owners can thus gain exposure to cryptocurrency without having to take on the risk of actually owning the digital asset or deal with any additional expense that may be incurred.
It's not surprising that most crypto ETFs track Bitcoin, as it is the most popular, liquid, and well-known cryptocurrency. As the market expands, issuers offer ETFs that give exposure to the price of Ethereum and Ripple, Bitcoin Cash, or Stellar. If the demand for crypto ETFs increases, we will most likely see more ETFs following the prices of specific cryptos.
Some crypto ETFs will own a set of different cryptocurrencies, offering investors exposure to a diverse array of crypto assets. This allows investors to gain exposure without having to bet on any specific cryptocurrency.
ETFs tracking cryptocurrency derivatives
These ETFs include futures contracts and currency exchange-traded products (ETPs). Most ETFs proposed to the U.S. Securities and Exchange Commission track the prices of bitcoin futures contracts that are traded at the Chicago Mercantile Exchange. ProShares Bitcoin Strategy ETF (BITO) was the first cryptocurrency ETF. It was created in October 2021. BITO is an ETF that tracks the prices of bitcoin futures.
ETF share prices mimic the price movements of derivatives and not actual cryptocurrencies. The price of shares in a crypto ETF rises when futures contracts’ prices increase. Similarly, the price of the ETF decreases when there is a corresponding decrease. Like other derivatives, synthetic cryptocurrency ETFs come with added risk as their operations might not always be transparent.
Some of the most popular types of ETFs that offer cryptocurrency exposure are crypto-themed ETFs or Blockchain ETFs.
These funds are similar to traditional stock ETFs, but they offer stocks of companies that are using or developing blockchain technology or that have invested in cryptocurrency. They are more likely to invest in a wider range of assets than Bitcoin ETFs and crypto ETFs which tend to focus on the price of specific cryptocurrencies.
Although cryptocurrencies such as Bitcoin and Ethereum remain the most popular digital assets for investors, the technology behind cryptos expands far more than a few cryptos. Blockchain technology that supports cryptocurrencies can be leveraged by companies to increase revenue and serve new market needs. Thus, the crypto space has the potential to be used for many other purposes.
These crypto ETFs invest in hundreds of public companies. While some crypto ETFs are more specific, others are broader. We can break them down into several broad categories, as follows:
- ETFs that offer stocks of companies that own cryptocurrency
- ETFs focus on crypto miners and cryptocurrency exchanges. Some examples include Marathon Digital, a Bitcoin mining company, and Coinbase (COIN), a major cryptocurrency exchange.
- ETFs focus on financial service firms. For instance, Galaxy Digital Holdings manages crypto assets. Global banks such as HSBC and BNP Paribas are currently developing their own blockchain applications.
- ETFs of tech companies. Microchip manufacturers like NVIDIA Corp (NVDA) or Advanced Micro Devices (AMD) provide hardware that can be widely used to support the blockchain hardware infrastructure. VMWare (VMW), a leader in cloud computing, offers a digital foundation for blockchain-focused software companies.
Crypto-themed ETFs are considered low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. Unlike the first two categories, they are not pure plays on the volatile crypto market.
Why Invest in Crypto ETFs?
The cryptocurrency ETFs market represents one of your best options to gain exposure to cryptocurrencies. There are many benefits of investing in cryptocurrency ETFs, including:
- No additional costs. The greatest benefit of cryptocurrency ETFs is their ability to provide exposure to crypto without additional costs. There are many extra expenses associated with the physical ownership of cryptocurrency. Custody charges are one example. Some digital wallets may even charge an annual fee for storing purchased cryptocurrencies. These fees add up to a substantial annual amount. Other hidden fees associated with cryptocurrency ownership include transaction and blockchain network charges. When investing in a crypto ETF, these expenses are outsourced.
- Lower investment threshold. The shares in cryptocurrency ETFs give you exposure to an asset class that is rapidly rising at a fraction of the cost of purchasing crypto. In the past couple of years, the price of cryptocurrencies has skyrocketed. These cryptocurrencies have become difficult to access for the average investor. An ETF that holds cryptocurrency is a great option for investors who want to invest in the asset class.
- Eliminate crypto-related worries. The technical jargon of cryptocurrency has been a constant roadblock for many. For average investors, it is difficult to understand the nature and operation of cryptocurrency. Crypto-speak can be confusing for investors who don't know much about blockchain technology. When investing in a crypto ETF, the learning curve for cryptocurrency ETF investors is outsourced to analysts.
- No hacking risks. Since their creation, cryptocurrencies have been repeatedly hacked. This raises serious questions about the security of this emerging asset class. Individual investors may not know enough about cryptocurrencies to ensure security. A crypto ETF that follows the price of cryptocurrency doesn’t have to deal with any of these security concerns.
- ETFs offer diversification. Thousands of cryptocurrencies are available on trading markets. As of now, the infrastructure for buying and selling all these cryptocurrencies and tokens has not been developed. Some coins may be available on some cryptocurrency exchanges while others are not. A cryptocurrency ETF will allow investors to diversify their portfolios without having to pay for each token.
The Most Popular Crypto ETFs
Some of the most popular crypto ETFs are:
- ProShares Bitcoin Strategy ETF
- Amplify Transformational Data Sharing ETF (BLOK)
- Bitwise 10 Crypto Index Fund (BITW)
- Siren Nasdaq NexGen Economy ETF (BLCN)
- First Trust Indxx Innovative Transaction & Process ETF (BLCK)
ProShares Bitcoin Strategy ETF (BITU)
The ProShares Bitcoin Strategy ETF is the first US crypto ETF that is directly linked to the price movements of Bitcoin. The BITU fund doesn't invest in bitcoin directly. The adviser of the fund seeks capital appreciation through managed exposure to futures contracts. The adviser to the fund will hold the bitcoin futures contracts during periods when bitcoin's value or bitcoin futures fall, as well as periods when bitcoin's value or futures rise. It must replace its futures contracts that are nearing expiration with futures contracts that have a later expiration date in order to keep exposure to bitcoin futures. This crypto ETF is not diversifiable.
The expense ratio for the ProShares Bitcoin Strategy ETF is 0.95%.
Amplify Transformational Data Sharing ETF (BLOK)
As of September 2022, the Amplify Transformational Data Sharing ETF has $283 million under management. It is one of the most significant funds focusing on cryptocurrency and the digital asset economy. Although it does not directly invest in cryptocurrency, it is a great place to start your search for the best crypto ETFs in the industry. For a $1,000 investment, the fund charges $7.10 in fees. The annual expense ratio of the BLOK fund is 0.71%.
BLOK includes over 40 stocks of companies. It was launched in January 2018. This makes it one of the longest-tenured ETFs. However, it is still a relatively new investment product. The fund's top holdings include Coinbase Global (COIN), a crypto trading platform, and Nvidia (NVDA), a company that designs GPUs that are needed for the blockchain’s infrastructure.
This ETF also features crypto mining stocks like Hut 8 Mining (HUT), HIVE Blockchain Technologies (HIVE), as well as top Bitcoin owners MicroStrategy (MSTR). These companies that own crypto allow indirect access for investors who don’t want to own crypto directly.
Bitwise 10 Crypto Index Fund (BITW)
Although it was initially a private placement fund, Bitwise 10 Crypto Index Fund shares can now be purchased and sold over the counter. It is actively managed and has a 2.5% expense ratio (or $25 annually deducted fees from fund performance for every $1,000 invested).
The Bitwise 10 Crypto Index Fund is an investment in the ten most popular cryptocurrencies as measured by market capitalization. It is rebalanced every month to adjust for fluctuations in crypto prices. Bitcoin and Ethereum are the two largest cryptocurrencies in terms of size. They make up 60% and 30%, respectively, of the underlying portfolio. As of September 2022, the BITW portfolio holds Bitcoin Ethereum, Cardano, Solana, Polkadot, Polygon Avalanche, Cosmos, Litecoin, and Chainlink.
This fund trades over-the-counter, so it can trade at a significant discount or premium to the crypto prices it owns, depending on demand for shares. Be cautious when investing. This fund is worth looking at if you are interested in investing in the most popular cryptocurrencies.
Siren Nasdaq NexGen Economy ETF (BLCN)
Another fund, the Siren Nasdaq NexGen Economy ETF, focuses on companies that use and develop blockchain technology. Although its assets under management are much smaller than Amplify’s crypto ETF, it offers a slightly different perspective on the space.
The ETF is comprised of popular company stocks. The ETF's focus has been broadened to include more general technology businesses, such as Paypal (PYPL), but it also includes shares of
Block Inc (SQ), MicroStrategy (MSTR), and Marathon Digital. The BLCN crypto ETF is a more diverse way to place a bet on the future of crypto. It comes with a cost ratio of 0.68%.
First Trust Indxx Innovative Transaction & Process ETF (BLCK)
If you’re looking for another bet on cryptocurrency, then you might want to consider the First Trust Indxx Innovative Transaction & Process ETF. This fund has 103 stocks making it one of the most diverse crypto ETFs. First Trust is a well-established company with a wide range of investment products. This might be a plus for investors who are concerned about the track record or reputation of fund managers. First Trust Indxx Innovative Transaction & Process ETF is one of the most affordable on the market, with a 0.65% annual expense ratio.
Investors should know that diversification is not always the best strategy. This crypto ETF has seen a 30% decline in value since its inception in 2018. It is also significantly lower than most crypto funds. It provides broad exposure to crypto, including many international companies, as over 10% of the portfolio is comprised of Chinese companies.
Ways to invest in crypto ETFs
There are two routes to investing in crypto ETFs: speculating on their prices using CFDs or buying the fund units in the hope they increase in value.
Trading crypto ETFs using CFDs
A CFD is a contract in which you agree to exchange the difference in the price of a cryptocurrency from when you first open your position to when you close it. You are speculating on the price of the market, rather than taking ownership of the metaverse coins or stocks. If you open a long position and the cryptocurrency ETF does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the same logic apply to a short position.
Before you can start, you would need to open a CFD trading account.
Buying cryptocurrency ETFs
Alternatively, you might decide to buy a cryptocurrency ETF, which means that you take ownership of a portion of the fund (units), with the intention of holding it with a brokerage and profiting if it increases in value.
Before you can start, you would need to open an investing account with a broker like CAPEX.com.
Each investor should research the available ways to invest in crypto ETFs before deciding what’s the best option for their situation. Remember that even if crypto ETFs may not be as volatile as cryptocurrencies, you shouldn’t invest more than you are willing to lose.
Here is how to buy crypto ETFs as well as crypto stocks through an online broker like CAPEX.com:
- Choose which type of strategy you want to use. Trading allows you to speculate on the price movements in both directions. Dealing allows you to buy fund units, but you’ll have to put all the amount upfront, unlike trading where you’ll only need to deposit the margin (collateral).
- Create an account. Regardless of your chosen strategy, you need to register and complete the KYC process to verify your identity. With CAPEX.com you can start trading and investing in minutes.
- Fund your account with fiat money. Before buying and trading any crypto ETFs, you need to fund your exchange account with U.S. dollars, Euros, or any supported fiat currency on the platform.
- Select your crypto ETFs. We strongly recommend that you thoroughly research the public ETFs that have crypto holdings or are somehow invested in the cryptocurrency space.
- Place a buy order for your chosen crypto ETF. Follow the steps required by the trading platform to submit and complete a buy order for one or more crypto ETFs.
When trading crypto ETFs, the CFDs (contracts for difference) are stored in your account and are far more liquid. However, you should be aware that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.
What is the best crypto ETF for you?
Each investor should clearly define their investment strategy before trading crypto ETFs. Also, investors should research and understand the risk of investing in crypto-related investment tools. Some of the most important risks associated with cryptocurrencies are volatility and lack of regulation from financial authorities.
ETFs that are focused on cryptocurrencies, which are still relatively new asset classes, are even younger. Expect volatility in cryptos as well as companies that are developing them.
Two important things to remember when investing in cryptocurrency. You should keep your exposure small and focus on the long-term potential of cryptocurrency and blockchain technology in general.
Free trading tools and resources
Remember, you should have some trading experience and knowledge before you decide to invest in crypto ETFs. You should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of crypto courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader.
Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFD trading works – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.