ETF on a stock report screen for decentral publishingIf you pay attention to crypto news at all—or even traditional investing news—you might have heard some rumors about crypto ETFs that the SEC keeps hemming and hawing about. There’s all kinds of speculation about if and when the SEC will eventually approve a Bitcoin spot ETF since the only one they’ve so-far approved is a futures ETF. And, as usual, 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

ETF man writing ETF on window for decentral publishingIf 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. Well, that’s where the answer gets a little muddy. Yes, kind of? There are a couple of Bitcoin ETFs in Canada. One with the ticker symbol BTCC and one launched by Fidelity as FBTC. But these are not accessible on all exchanges internationally so they’re not super easy to invest in.

Meanwhile, in the US, the SEC has continued to reject or delay applications for Bitcoin spot ETFs, despite many attempts by various custodians to get them approved. In October of 2021, however, the first Bitcoin futures ETF was approved by the SEC. This is different from a spot ETF in that it doesn’t actually hold Bitcoin as an underlying asset, it just tracks the price with futures contracts. Ahead of its approval, the price of Bitcoin surged to $60,000 but didn’t sustain and continue up, as many thought it would for the rest of the year.

There are some 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.

Why we haven’t seen a Bitcoin spot ETF

It’s been widely speculated that, eventually, the SEC will have to approve a crypto spot exchange-traded fund. Especially after approving the first futures ETF, people became optimistic that a spot ETF would be coming. Why haven’t we seen that happen yet? Well, your guess is as good as mine, but there are some theories floating around.

Crypto is not a mature asset

A relatively predictable excuse that you can get directly from the SEC is that Gary Gensler prefers futures ETFs because they provide “significant investor protections” from manipulations in the spot market. Nevermind the fact that the futures market can also be manipulated—that’s apparently irrelevant. There’s also the argument that crypto is not a mature asset in the grand scheme of investing options. Spot ETFs could be difficult and unpredictable to manage.

Doesn’t benefit banks

There’s also the slightly more cynical idea that a spot ETF would take profit opportunities away from Wall Street. And we definitely know that banks and the government are for sure, not in any wayyyyy, colluding to benefit each other like a cartel! *wink wink* The institutions that get fees and percentages for creating and managing regulated futures ETFs would lose out on more profits with a spot ETF that was simply backed by Bitcoin.  

ETF competitor products

While there isn’t yet a Bitcoin spot ETF in the US, there are some other kinds of investment options that compete for investor dollars. Here are a few adjacent vehicles.

Grayscale trust

ETF bitcoin coins on a table in black and white for decentral publishingAccredited 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

Even if you can’t get a cryptocurrency ETF, there are ETFs that hold blockchain and crypto companies. Blockchain ETFs hold companies that use blockchain technology. Examples are KOIN and LEGR.

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 and Canada has spot ETFs, it’s certainly plausible that the US will eventually get a Bitcoin spot ETF—and perhaps other crypto ETFs as well. Only time will tell. 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.