What is a crypto ETF?

• Crypto ETFs offer investors a simplified way to gain exposure to cryptocurrencies like Bitcoin and Ethereum without the need for direct ownership or technical expertise.

• Two types of crypto ETFs exist: spot ETFs, which directly hold the underlying cryptocurrencies, and futures ETFs, which track cryptocurrency prices through futures contracts.

• While crypto ETFs can provide benefits like diversification and liquidity, they also carry risks such as counter-party risk and a lack of direct ownership.

Exchange-traded funds (ETFs) are financial vehicles similar to stocks that trade on traditional exchanges like the New York Stock Exchange (NYSE).

However, unlike stocks that represent direct ownership in a company, ETFs often represent a basket of assets like stocks, bonds, and derivatives like futures contracts. ETFs may also be used to track specific commodities like oil, gold and silver.

In some ways, ETFs are similar to mutual funds, with a few key differences:

• Greater liquidity: ETFs can be bought and sold throughout the trading day compared to mutual funds that are typically priced at the end of the day. 

• Lower investment minimum: ETFs trade like stocks and do not require a minimum initial investment like mutual funds, making them a more accessible entry point for investors.

• Lower fees: ETFs are passively managed and thus typically incur lower expense ratios than mutual funds, which are actively managed.

While hundreds of traditional ETFs exist in the market, a relatively new type of ETF is gaining significant interest from investors: the cryptocurrency ETF.

Crypto ETFs are designed to mirror the price movements of specific digital assets like Bitcoin (BTC) or Ethereum (ETH). 

Some traders may be able to purchase crypto ETF shares via selected traditional stock brokers or exchanges (subject to geographic restrictions).

A crypto ETF operates on the same principles as traditional ETFs, but is backed by one or more underlying cryptocurrencies — currently Bitcoin (BTC) or Ethereum (ETH), though other assets may become available in the future.

When investors buy shares in a crypto ETF, the ETF issuer purchases an equivalent amount of that cryptocurrency and holds it in reserves, often via a third-party custodian. 

This process is designed to ensure that the ETF share price tracks the price movement of the underlying cryptocurrency.

It’s important to note, owning ETF shares does not necessarily mean that investors can redeem them for the underlying cryptocurrency. As it currently stands, all crypto ETF shares are bought and sold using fiat currencies.

At press time, there are two types of Bitcoin ETFs tradable on the open market: spot and futures. 

Both give traders exposure to cryptocurrencies, but in different ways.

Spot crypto ETFs are products that give investors direct exposure to the price of bitcoin. When someone buys a share of the spot crypto ETF, the ETF issuer buys the underlying cryptocurrency on behalf of the investors and custodies the assets in reserve. This is done to ensure that the price of the crypto ETF shares follow the price of the underlying asset. 

Crypto futures ETFs, on the other hand, do not hold crypto directly and thus not are not intended to track the price of the underlying cryptocurrency. 

Instead, crypto futures ETF issuers hold futures contracts linked to the underlying asset. I.e. a Bitcoin futures ETF issuer would hold an amount of BTC futures contracts and offer shares to investors.

Futures contracts represent agreements between traders to buy and sell the underlying cryptocurrency (or transact the cash equivalent) at a certain price at a pre-defined date. 

Though the price of the crypto still affects the value of shares of these ETFs, crypto futures ETFs allow investors to bet on the price direction of the cryptocurrency without directly owning it.

Crypto ETFs and direct crypto investing both offer exposure to the digital asset market.

Crypto ETFs provide institutional and retail investors a way to gain indirect exposure to the crypto market without the burden of direct asset ownership and management. However, investing in crypto might appeal to those seeking direct exposure to the underlying asset and the opportunity to self-custody it in a crypto wallet that they exclusively control. 

Some other key differences between crypto ETFs and direct crypto investing include: 

• Tax treatment: Investing in crypto ETFs using tax-advantaged accounts (like IRAs or 401(k)s may defer or reduce taxes (such as capital gains tax).
• Liquidity: Stock exchanges typically guarantee higher liquidity than some dedicated crypto trading platforms. This can make it easier to buy or sell large volumes of shares during regular trading hours.
• Fees: Investing in ETFs incurs ongoing fees whereas investing in the cryptocurrency itself doesn’t. 
• Market opening times: Directly investing in cryptocurrencies can be done at any time, as markets remain open 24/7/365. ETF trading, however, is limited to traditional market opening hours.

On January 10, 2024, the SEC approved eleven spot Bitcoin ETFs after rejecting more than 20 applications between 2018 and 2024. 

On the first day of trading, Bitcoin ETF trading volume totaled $4.54, breaking the previous ETF record.

Within six months of trading, Bitcoin ETFs attracted over 600 institutional investors, including JPMorgan, Wells Fargo, UBS, BNP Paribas, and Royal Bank of Canada. 

For more information, check out our Kraken Learn Center guide, What is a Bitcoin ETF? 

Bitcoin ETF issuers include: 

• ARK 21Shares Bitcoin ETF (ARKB)
• Bitwise Bitcoin ETF (BITB)
• Fidelity Wise Origin Bitcoin Trust (FBTC)
• Franklin Bitcoin ETF (EZBC)
• Grayscale Bitcoin Trust (GBTC)
• Hashdex Bitcoin ETF (DEFI)
• Invesco Galaxy Bitcoin ETF (BTCO)
• iShares Bitcoin Trust (IBIT)
• Valkyrie Bitcoin Fund (BRRR)
• VanEck Bitcoin Trust (HODL)
• WisdomTree Bitcoin Fund (BTCW)

Of note, this list of Bitcoin ETFs is not exhaustive, and the landscape is expected to grow with more offerings in the future.

On July 22, 2024, the SEC approved spot Ethereum ETFs, which led to over $1 billion in trading volume on its first day of trading. 

Similar to the Bitcoin ETF, Ethereum ETFs track the price of Ether (ETH), the second-largest cryptocurrency by market cap at the time of writing.

Etherum ETF issuers include: 

• 21 Shares Core Ethereum ETF (CETH)
• Bitwise Ethereum ETF (ETHW)
• Fidelity Ethereum Fund (FETH)
• Franklin Ethereum Trust (EZET)
• Grayscale Ethereum Trust (ETHE)
• Grayscale Ethereum Mini Trust (ETH)
• Invesco Galaxy (QETH)
• iShares Ethereum Trust ETF (ETHA)
• VanEck (ETHV)

Similar to Bitcoin ETFs, the list of Ethereum ETFs is not exhaustive and may continue to grow in the future.

To invest in a crypto ETF, investors will first need to select and open an account on a brokerage platform like Fidelity or Charles Schwab. 

After funding their accounts and submitting the necessary documentation, investors may opt to research the available crypto ETFs (and considering factors like fees, liquidity, and performance), and submit a buy order by specifying the desired amount of ETF shares they wish to purchase. 

It is important for investors to monitor their investments regularly and stay informed about the market changes to adjust their strategy if needed.

While crypto ETFs offer investors an easy access to the crypto market, they do cary some risks, including:

• Lack of direct ownership – Owning a share of a crypto ETF means that investors do not directly own or control the asset. This could be a disadvantage to those seeking full control over their crypto investments.

• Higher ETF fees: Some ETFs carry higher fees compared to traditional ETFs due to the added complexities of managing them, potentially diminishing profits over time.

• Limited trading hours: Crypto is a 24/7 market. Because ETF trading is only possible during regular market hours, investors could be vulnerable to price movements outside of those time frames, particularly over weekends.

• Volatility – The crypto market is known for its volatility and crypto ETF share prices can fluctuate significantly as a result, making them a riskier investment than some traditional assets.

Understanding these risks is important for all investors wishing to purchase a crypto ETF. Individuals should align their investment choices with their risk tolerance and financial goals.

The excitement surrounding the launches of the Bitcoin and Ethereum ETFs may pave the way for other crypto ETFs going forward.

For example, some industry proponents have announced interest in exploring other crypto-based ETFs, including a Solana ETF. However, it remains unclear whether new cryptocurrency ETFs will be approved in the United States, or elsewhere.

Now that you understand how crypto ETFs work, you may feel that directly owning cryptocurrency is more suitable for you.

If so, Kraken makes it easy to buy and sell Bitcoin, Ethereum and hundreds of other cryptocurrencies.

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