Cryptocurrency ETFs allow investors to get exposure to digital currencies without actually having to buy the cryptos themselves.
As we enter 2024, cryptocurrencies remain highly popular yet complex assets. For those new to this realm, crypto ETFs offer a more straightforward way to tap into the potential upside while limiting risk.
In this guide, we will explain crypto ETFs, the top options to consider in 2024, the pros and cons of investing through an ETF versus owning the currencies outright, and tips for getting started. Whether you're an experienced crypto trader or completely new, crypto ETFs present an appealing opportunity today.
What is Crypto ETF?
A crypto ETF, short for cryptocurrency exchange-traded fund, allows regular investors to gain exposure to the cryptocurrency market without buying and selling the digital currencies themselves directly.
Just like with a regular ETF that tracks stocks or bonds, a crypto ETF provides a simple way to invest in an underlying basket of cryptocurrency assets like Bitcoin and Ethereum. The crypto ETF handles all of the complex storage and security requirements associated with cryptocurrencies on the back end.
So, for example, if you bought shares of a Bitcoin ETF when the price of Bitcoin was $20,000, you'd benefit if the price of Bitcoin rose from there without having to set up your own Bitcoin wallet and take on the risks of holding Bitcoin yourself.
The launch of the first US Bitcoin ETFs in 2021 by fund managers like ProShares brought crypto ETFs mainstream as an easy on-ramp to crypto for all types of investors.
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Pros of Investing through a Crypto ETF
Investing in Crypto ETFs, or Exchange-Traded Funds, offers several advantages that can make it appealing to investors looking to dip their toes into the cryptocurrency market without diving in headfirst.
Here are four notable pros:
1. Diversification:
One significant advantage of Crypto ETFs is diversification. These funds typically hold a variety of cryptocurrencies within their portfolio. For instance, a Crypto ETF might include popular cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc.
By investing in a Crypto ETF, you spread your investment across multiple digital assets rather than concentrating it all in one. This diversification helps mitigate the risk associated with investing in a single cryptocurrency.
If the value of one cryptocurrency drops, the impact on your overall investment may be lessened by the performance of others within the ETF.
2. Accessibility and Convenience:
Investing in Crypto ETFs is often more accessible and convenient than buying individual cryptocurrencies. Instead of navigating the complexities of various cryptocurrency exchanges and wallets, investors can buy and sell shares of Crypto ETFs through traditional brokerage accounts.
This streamlined process simplifies investing for those who may find the technical aspects of cryptocurrency trading daunting. Additionally, investors can monitor their investment in Crypto ETFs alongside their other traditional investments, providing a consolidated view of their portfolio.
3. Risk Management:
Crypto ETFs offer a level of risk management that can appeal to investors. While cryptocurrencies are known for their volatility, investing in a diversified Crypto ETF can help reduce the impact of price fluctuations in any single cryptocurrency.
Since the ETF holds a basket of digital assets, the performance of one cryptocurrency is unlikely to affect the fund's overall value significantly. This risk mitigation strategy may appeal to investors seeking exposure to the potential growth of the cryptocurrency market while managing the associated risks.
4. Regulatory Oversight and Transparency:
Another advantage of investing in Crypto ETFs is the regulatory oversight and transparency that come with them. Unlike investing directly in cryptocurrencies, which may operate in a relatively unregulated environment, crypto ETFs are subject to regulatory scrutiny.
This oversight can provide investors with greater confidence in the integrity of the fund's operations and adherence to established standards.
Additionally, Crypto ETFs must disclose their holdings and performance regularly, offering investors transparency into the assets they are investing in and the fund's overall performance.
Cons of Investing through Crypto ETFs
Investing through Crypto ETFs offers convenience, but it's important to consider potential drawbacks:
1. Limited Control:
When you invest in a Crypto ETF, you're entrusting your money to the fund managers who decide which cryptocurrencies to include. This means you don't have direct control over which specific cryptocurrencies are bought or sold within the ETF.
For instance, if you strongly believe in a particular cryptocurrency's potential but it's not included in the ETF, you can't directly invest in it through that ETF. This lack of control might lead to missed opportunities or investments in cryptocurrencies you don't believe in.
2. Fees and Expenses:
While Crypto ETFs provide a diversified way to invest in cryptocurrencies, they also come with fees and expenses. These costs can eat into your investment returns over time.
For example, there are management fees that the fund managers charge for their services, as well as operational expenses for maintaining the ETF.
Additionally, some Crypto ETFs may have higher expense ratios compared to traditional ETFs or mutual funds, reducing your overall returns. It's important to carefully review the fees associated with any Crypto ETF before investing to ensure they align with your investment goals.
3. Counterparty Risk:
Crypto ETFs often rely on third parties, such as custodians or exchanges, to hold the underlying cryptocurrencies.
This introduces counterparty risk, meaning there's a chance that these third parties could experience issues like hacks, fraud, or bankruptcy, which could affect the value of your investment.
Even though the ETF itself might not directly hold the cryptocurrencies, problems with the custodian or exchange could still impact the ETF's ability to operate effectively. It's crucial to research the reputation and security measures of the entities involved in managing the Crypto ETF to mitigate this risk as much as possible.
Top Options for Crypto ETFs in 2024
1. BlockFi Bitcoin ETF (BKCH):
The BlockFi Bitcoin ETF (BKCH) is tailored for investors seeking exposure solely to Bitcoin, the pioneering cryptocurrency. Bitcoin's soaring popularity and adoption have made it a prominent investment choice.
BKCH offers a regulated investment avenue, enabling investors to benefit from Bitcoin's price movements without directly purchasing or storing the digital currency.
By investing in BKCH, individuals gain access to Bitcoin's potential upside while mitigating some of the security and regulatory concerns associated with direct cryptocurrency ownership.
2. Bitwise 10 Crypto Index Fund (BITW):
Bitwise 10 Crypto Index Fund (BITW) presents investors with a diversified portfolio comprising the top ten cryptocurrencies by market capitalization. This approach spreads risk across various cryptocurrencies, including Bitcoin, Ethereum, Ripple, and others.
Diversification is a crucial strategy to manage risk in the volatile cryptocurrency market. BITW offers exposure to the broader cryptocurrency market, allowing investors to capitalize on the potential growth of multiple digital assets.
3. Global X Blockchain ETF (BKCH):
While not directly investing in cryptocurrencies, Global X Blockchain ETF (BKCH) focuses on companies engaged in blockchain technology.
Blockchain, the underlying technology powering cryptocurrencies, has applications beyond digital currencies, including supply chain management, identity verification, and smart contracts.
BKCH allows investors to participate in the growth of blockchain technology by investing in companies that develop or utilize blockchain in their operations. This ETF offers exposure to a diversified portfolio of blockchain-related companies, providing investors with an alternative approach to cryptocurrency investing.
4. Crypto Index ETF:
A Crypto Index ETF tracks the performance of a specific cryptocurrency index, offering investors exposure to the overall cryptocurrency market or a particular segment of it. These indexes are constructed using various criteria, such as market capitalization, liquidity, and trading volume.
A Crypto Index ETF provides investors with a convenient way to gain exposure to the cryptocurrency market without the complexities of directly investing in individual digital assets. Investors can choose from a range of Crypto Index ETFs tailored to their investment objectives and risk preferences.
5. First Trust Indxx Innovative Transaction & Process ETF:
The First Trust Indxx Innovative Transaction & Process ETF focuses on companies involved in innovative transaction and process technologies, including blockchain and cryptocurrency-related businesses. This ETF offers exposure to companies at the forefront of technological innovation, leveraging blockchain and cryptocurrency technologies across various industries.
While not exclusively focused on cryptocurrencies, this ETF provides investors indirect exposure to the cryptocurrency market through companies developing innovative blockchain and digital payment solutions.
Investing in the First Trust Indxx Innovative Transaction & Process ETF allows investors to capitalize on the potential growth of companies driving advancements in transaction and process technologies.
Tips for getting started with Crypto ETFs
1. Choose a Regulated Brokerage:
Ensure you select a regulated brokerage when venturing into crypto ETF investing. These ETFs trade on major US stock exchanges and can be purchased through established, SEC-regulated brokerages like Fidelity, Charles Schwab, and Interactive Brokers.
Opting for well-known platforms provides safe access to the market, especially for beginners. It's advisable to initially steer clear of lesser-known crypto-specific brokers, prioritizing security and reliability.
2. Begin with Small Amounts:
Start your crypto ETF investment journey cautiously by initiating trades with small dollar amounts. Consider starting with investments of $100 or less per trade.
This conservative approach allows you to gain exposure to the market while minimizing downside risk as you familiarize yourself with the dynamics of crypto assets.
Given the inherent volatility of cryptocurrencies, adopting a dollar-cost averaging strategy over time, in small increments, is prudent, rather than attempting to time the market with large, single purchases.
3. Diversify Across Assets:
Opt for diversified exposure across multiple crypto assets by selecting a fund like the Bitwise 10 Crypto Index Fund. This fund offers exposure to a basket of cryptocurrencies, including Bitcoin, Ethereum, and others.
Diversification is crucial in mitigating some of the volatility associated with the crypto market. Over time, consider adding single-asset funds for more targeted exposure to specific cryptocurrencies, expanding your investment portfolio strategically.
4. Use tax-advantaged accounts:
Maximize tax efficiency by holding crypto ETFs within tax-advantaged retirement accounts, such as IRAs and 401ks, after consulting with your tax advisor. Doing so can shield your investments from capital gains taxes in the future, potentially enhancing your after-tax returns over the long term.
Leveraging tax-advantaged accounts can be a valuable strategy to optimize your investment outcomes within the framework of your overall financial plan.
5. Review Portfolio Allocation:
Maintain a prudent portfolio allocation strategy by aiming to keep your crypto ETF exposure within the range of 2-5% of your total investment portfolio when starting out. Cryptocurrencies are generally considered a higher-risk asset class due to their volatility and regulatory uncertainties.
Keeping your exposure modest initially allows you to manage risk effectively while gaining insights into the market's patterns and cycles over time. Consider adjusting your allocation gradually as you gain experience and confidence in navigating the crypto investment landscape.
Challenges of Crypto ETFs
- Volatility: As cryptocurrencies themselves tend to be highly volatile assets, the values of crypto ETFs can swing wildly up and down as well. This makes timing entries and exits difficult. Having a strong stomach is a must.
- Tracking error: Crypto ETFs don't always perfectly track the actual cryptocurrencies they aim to mirror. The complexity of custodianship and derivative holdings can cause lag or diverge from the underlying crypto prices.
- Fees: Crypto ETF expense ratios can be higher than broad stock and bond ETFs, meaning fee drag eats more into potential returns over time. However, costs are coming down.
- Security risks: While regulated crypto ETFs have strong protections in place, cyber-attacks or technical snafus at custodians could still put investor assets at risk in rare worst-case scenarios. Solid fund selection is key.
- Evolving regulations: Rules governing crypto ETFs remain fluid globally. Any bans or limitations imposed could suddenly affect certain products. Policy uncertainty persists.
Crypto ETFs' convenience trades off with volatility, tracking error risks, and costs. But crypto ETFs offer the simplest gateway into this rapidly evolving asset class for most individual investors versus owning cryptocurrencies directly.
Going Forward
While their emergence is still recent, crypto ETFs have swiftly demonstrated strong demand amongst investors seeking smoother access to the potential of digital currencies. Total assets under management in crypto ETFs now top $25 billion in the US alone and are poised for further growth.
However, the crypto wild west remains volatile given the market's nascency and oft-changing regulatory outlooks. Crypto ETFs look to curb some extremes through diversified baskets and derivatives – though uncertainty persists.
Ultimately, crypto ETFs promise investors the option to prudently tap into the rising trajectory of blockchain networks like Bitcoin and Ethereum with the convenience of conventional stock investing.
Their ongoing proliferation across brokerages provides a regulated on-ramp for gaining diversified crypto exposure fast. Though never a smooth, straight line, blockchain's increasing real-world utility from finance to supply chains bodes well for long-term crypto industry growth.
Savvy investors would do well to keep an eye on crypto ETF developments even if dipping in a toe carefully to start within overall balanced portfolios. The ease and accessibility they unlock offer the potential to fine-tune strategies as the market matures in the years ahead.