Cryptocurrency ETFs – What They Are and How to Invest in Them
Many wise investors recommend investing in ETFs for their general security, their stable growth patterns, and their accessibility. However, more people than ever before are looking to invest in cryptocurrencies like Bitcoin, Litecoin, and Ethereum.
It’s natural that people are wondering whether they can invest in cryptocurrency ETFs. Unfortunately, the answer is largely no; while there are a couple of exceptions, crypto ETFs are not truly supported on the US stock market at this time.
That being said, crypto ETFs are on the way, and there are a few ways in which you can invest in these unique investment vehicles right now, even before they’re approved by the SEC. This guide will break down what cryptocurrency ETFs are, why you might consider investing in them, and how to do so in detail.
What Are Cryptocurrency ETFs?
Cryptocurrency ETFs are just like regular exchange-traded funds, though they have some significant differences due to the relative newness of cryptocurrencies and the fact that crypto ETFs can’t be found on US stock exchanges.
An ETF is an investment security that tracks an index, commodity, sector, or any other financial asset. Investors can then purchase or sell shares of an ETF just like they can do so with shares of stock for a company. In essence, investors in ETFs invest in a shared basket of different shares or stocks rather than just one. The ETF’s value increases or decreases based on the value of the assets included in its fund.
Arguably the most well-known ETF is the SPY or SPDR S&P 500 ETF. As its name suggests, this ETF tracks the S&P 500 index.
So crypto ETFs, just like their regular ETF counterparts, track several digital tokens or cryptocurrencies. The value of crypto ETFs is contingent on the value of the coins they were comprised of.
At the time of this writing, crypto ETFs are not accepted for trading on the US stock exchange. However, crypto ETFs can be purchased or traded with offshore or legally gray trading platforms, as well as on the stock exchanges of other countries. For example, the digital currency exchange Coinbase currently has an index fund that offers exposure to four of the biggest digital currencies in the world (though this is not quite the same as a true ETF).
Crypto ETF Types
At this time, there are very few true crypto ETFs available for investment. For example, if you’re a US investor and have access to international markets, you may be able to invest in international ETFs. However, you can also invest in the GBTC (see more below) or in blockchain ETFs.
Pros and Cons of Investing in Crypto ETFs
Hypothetically speaking, crypto ETFs traded on US stock exchanges would be very valuable to a number of investors thanks to several key benefits. However, you should also understand the risks and downsides of investing in crypto ETFs so you’re prepared if and when these instruments come to US exchanges.
- Crypto ETFs would provide relatively safe vehicles for investors who want to participate in the cryptocurrency sphere, but who also don’t want to expose themselves to undue risk. Cryptocurrencies are still heavily volatile and are likely to stay that way for the foreseeable future
- Crypto ETFs will also let investors take advantage of the unique opportunities that digital tokens offer while leaving the management of the funds – and the security of their money– to the experts. In many ways, this is a similar benefit that regular ETFs provide to their investors
- Since digital wallets and crypto exchanges are very susceptible to hacking or theft, investors in crypto ETFs would not have as much risk as they would if they actually held digital tokens. All ETFs, after all, are supported by custodian banks
- Crypto ETFs could be used to track the performance of several digital coins at once. Not only would this be a great way to track the greater crypto market’s performance, but it would also be much easier for investors since they wouldn’t have to operate multiple wallets and individually invest in several different coins simultaneously
- As stated above, crypto ETFs aren’t truly available for US investors in the traditional sense. Crypto ETFs are not legal instruments on US stock exchanges, so your only options are through foreign channels or through potentially risky “ETFs” like Coinbase’s above-mentioned option
- Additionally, crypto ETFs are still likely to be volatile compared to other ETFs due to the inherent nature of digital currencies. Thus, crypto ETFs may never be a good idea for investors who can’t stomach watching the charts roller coaster up and down
- Above all else, the viability of cryptocurrency as a real financial force is still in question. Plenty of people claim that crypto is the future of money, while others think that crypto is still just a fad that is taking a long time to pass. It’s up to you to determine whether investing in crypto is truly a wise decision
Should You Invest in Crypto ETFs?
This is the big-ticket question: should you try to invest in crypto ETFs, either now with their limited options or in the future when they inevitably come to US stock exchanges?
No matter what, crypto ETFs will be heavily volatile and will likely not be stable investment vehicles compared to the ETFs that have been available for decades at this point. However, crypto ETFs present a new way to make money on the stock market if you understand how cryptocurrencies work and how Bitcoin’s value may rise in the future.
Bottom line: new investors should probably stay away from crypto ETFs, but individuals who want to get in on the crypto market without purchasing actual coins could use crypto ETFs to do so without exposing themselves to too much risk.
How to Start Investing in Crypto ETFs
While crypto ETFs may not be available on US exchanges at the moment, there are a couple of options if you want to start investing now rather than later. Note that we fully expect crypto ETFs to come to the US stock exchanges sometime in the near future. The winds of change are already noticeable – the Chicago Board Options Exchange, for example, has launched Bitcoin futures and is currently lobbying the SEC to reconsider the current block on listing digital token funds.
For starters, you can invest in crypto ETFs through Europe and Asia. Many of these markets have introduced crypto ETFs since they don’t have the same regulatory requirements as US exchanges. Note that you must have a suitable trading platform and an account with the brokerage in order to trade in these ETFs.
The Grayscale Bitcoin Trust
If you want to avoid investing in foreign markets (or are not able to do to licensing requirements), you might consider the Grayscale Bitcoin Trust or GBTC. While not an ETF per se, this trust acts very similarly to an exchange-traded fund.
In a nutshell, the GBTC owns Bitcoins on behalf of its investor group. The trust is on the stock market and you can trade in shares of the trust if you so choose. Note that there are some potential downsides, including:
- A mandatory 2% annual fee for managing the fund’s assets. This is high relative to the fees of other ETFs
- Regular price fluctuations since Bitcoin’s value, while steadily increasing, does oscillate more than many other types of financial assets
Should you choose to invest in the GBTC, you can do so over the QTCQX: one of the three marketplaces where you can trade stocks over-the-counter. This is the highest quality marketplace for over-the-counter trading.
You should be able to access this market and make trades through it using most online brokerages or trading apps.
Blockchain vs. Crypto ETFs
There’s another alternative to trading in crypto ETFs at this time: trading in blockchain ETFs instead. Unlike crypto ETFs, blockchain ETFs are legal in the US at the time of this writing, so you can find them on US stock exchanges.
For example, one of the most popular blockchain ETFs is BLOK, which holds assets related to blockchain development like software companies and financial service firms. Another is BLCN, which tracks an index that follows the performance of certain companies involved in blockchain support or development, like Canaan Inc.
As indicated by the above examples, blockchain ETFs involve you buying shares for funds that track the performance of crypto-related companies, not cryptocurrencies themselves. In this way, you can still partake in the increasing wealth and possible riches of the crypto market, all without having to buy crypto coins yourself or directly invest in crypto ETFs.
Ultimately, your options for investing in crypto ETFs are pretty limited right now. You can either invest in the GBTC or invest in foreign markets. However, there’s little doubt that crypto ETFs will eventually be available to American investors on US exchanges. When this occurs, consider your options wisely and remember that crypto ETFs, while possibly profitable, will not be a one-way ticket to instant riches.