What are crypto ETFs?

If you pay attention to crypto news at all—or even traditional investing news—you might have heard about crypto ETFs. There are many varying opinions about how exchange-traded funds could impact crypto prices and adoption. But, I’m getting ahead of myself. First thing’s first: what the heck are ETFs? 

What’s an ETF?

If you’re strictly a crypto investor, as many millennials and zoomers are, perhaps you don’t even know what exchange-traded funds are or why they could be important to the crypto market. Here’s a basic overview. 

Cross between index funds and stocks

An ETF is an investment vehicle on traditional stock market exchanges that looks like an index fund, but acts like a stock. Like an index fund, ETFs are baskets of diversified assets. These can be market ETFs, bond and commodity ETFs, and even sector ETFs. The difference between ETFs and index funds, though, is that ETFs can be traded multiple times per day like a stock, while index funds can only be traded once a day.

Highly liquid

Because they can be traded in and out of quickly and easily, ETFs are quite liquid. They also streamline investing in a diversified set of assets without having to individually buy into every asset you want. Because many ETFs are passively traded based on formulas, they tend to have lower fees than mutual funds or other actively managed assets.

Pros and cons of crypto ETFs

If you don’t own any exchange-traded funds, you may not know why you’d want one at all, let alone a Bitcoin ETF. Of course, we’re judging ETFs from our vantage point as crypto investors. If you have the option to just buy some crypto or get a crypto ETF on traditional exchanges, what are some of the pros and cons?

Pro: ETFs are custodial

I put this as a pro from the perspective of traditional investing, but most crypto investors see it as a con, of course. When you buy ETFs, they’re held in the custody of your brokerage. On one hand, you have someone to blame if anything happens to them—on the other hand, who do you blame if the thing that happened to them was the custodian itself? (*ahem* This is largely why crypto was invented in the first place).

Con: goes against the principle of crypto

Beyond just being custodial, ETFs by their nature, are at odds with the original philosophy of crypto, which wanted to separate itself from the traditional banking system. Taking crypto assets and wrapping them up in an ETF to trade on traditional, centralized stock exchanges kind of defeats the purpose of blockchain and decentralization.

Pro: easy to get for anyone

On the other hand, we’re still in the early days of crypto. It still has a complicated and confusing user experience. Many investors are either too hesitant or too overwhelmed to buy in, even if they’re interested. Creating an easily accessible way to get crypto exposure could warm people and institutions up to the idea. Plus, some institutions simply cannot hold crypto on their balance sheets yet, so traditional ways of investing are their only option.

Con: exchanges close

Unlike crypto exchanges, which are open 24/7, traditional stock exchanges close. If you’re looking to trade your ETF during really volatile times of the crypto market, you’re out of luck. This can really hurt your position if you miss out on the constant movement and excitement in Bitcoin and other cryptocurrencies.

Pro: insurance

Unlike losing your crypto keys (and therefore your crypto) because you didn’t follow proper safety procedures, ETFs on centralized exchanges often have insurance. Much like the custodial argument, this can be a pro or a con, depending on who you ask. 

What people think of crypto ETFs

As the pros and cons can be interpreted in multiple ways, the general takeaway regarding crypto ETFs has some variety. Some people are suspicious of exchange-traded funds because they’re so institutional, and so centralized, and so custodial, and so old-school. It feels wrong for some people to even consider getting crypto exposure through an ETF.

Others, however, take a bit more relaxed stance. There is an argument to be made that a widely accessible asset like a crypto ETF could drive up adoption and price. Crypto hit a total market cap of $3 trillion in 2021 and increased institutional investment through an ETF would definitely drive that up.

Are there any crypto ETFs?

So far, we’ve been talking rather hypothetically about crypto ETFs. You may be wondering if there actually are any. The answer is yes. There are a couple of Bitcoin ETFs in Canada. One with the ticker symbol BTCC and one launched by Fidelity as FBTC.  More recently, on January 10, 2024, the SEC approved 11 new spot bitcoin ETFs.

There are ETFs with indirect Bitcoin exposure as well. Some companies like MicroStrategy and Tesla hold Bitcoin on their balance sheets. Desperate investors can invest in ETFs that hold those companies and get Bitcoin exposure that way.

ETF competitor products

There are some other kinds of investment options that compete for investor dollars. Here are a few adjacent vehicles.

Grayscale trust

Accredited investors can buy into Bitcoin through the Grayscale Bitcoin Trust, which has more than $36 billion in assets under management. Don’t forget that it does have high management fees though. 

Blockchain and crypto company ETFs

There are ETFs that hold blockchain and crypto companies. Blockchain ETFs hold companies that use blockchain technology. Examples are BLOK and BKCH.

Index funds

There are also some index funds that hold more than just Bitcoin. Bitwise has BITW, which holds 10 different cryptocurrencies including Bitcoin, Ethereum, Solana, and Polygon. Just make sure you’re bullish on all of them before you invest.

Conclusion

Considering the SEC has already approved a futures ETF, Canada has spot ETFs, and earlier this year the SEC approved 11 new spot bitcoin ETFs – time will tell what impact this will have on the bitcoin market and the crypto industry as a whole. You can decide for yourself whether you think this is a net positive or negative for the future of the cryptosphere. Let me know your thoughts on crypto exchange-traded funds and where you see them going (or not going) in the future.