What is a cryptocurrency ETF?
Key points
- A cryptocurrency ETF is an exchange-traded fund whose price tracks one or more digital assets. Such funds make crypto exposure simpler for stock‑market investors, both institutional and retail.
- The most keenly awaited product is a bitcoin ETF listed in the United States. The regulator has not yet approved any such application.
- ETFs tied to bitcoin futures and to shares of crypto companies are already trading.
What is an ETF?
An ETF—“exchange‑traded fund”—is a fund whose shares trade on an exchange. The fund is a legal vehicle that holds an asset or a portfolio assembled to specific criteria. Its holdings can include securities, commodities, bonds, currencies, stock indices and more.
Each ETF share represents a claim on a slice of the fund’s assets. Thus an ETF holder gains exposure to the portfolio without owning the underlying assets directly.
Specialist firms create and manage ETFs, rebalancing and keeping records as needed. The largest operators globally include BlackRock, Vanguard, State Street, Invesco, iShares and Charles Schwab.
How popular are ETFs?
ETFs are now a staple of investing. According to Informa Financial Intelligence, in November 2021 assets in ETFs topped $10trn, up from $5trn in 2018.
For institutional investors they are a convenient vehicle for passive investing. Unlike active strategies, ETFs spare holders from custody and trading of the assets, come with simple legal structures and tend to deliver steadier long‑term outcomes.
For retail investors, ETFs offer quick and efficient diversification thanks to the breadth of assets within a fund. Finally, ETF operators charge much lower management fees than active investment funds.
Why launch a crypto ETF?
Many large investors are not ready to buy digital assets directly because of patchy legal frameworks and the complexities of custody. An ETF, by contrast, offers a familiar and simple way into the crypto market.
An ETF is a standard legal structure that operates within traditional financial infrastructure. It is a highly liquid instrument that can be listed quickly on major stock exchanges, opening crypto exposure to both institutions and retail users. The ETF operator is responsible for safeguarding the underlying asset.
Which crypto ETFs already trade?
ETFs linked indirectly to the blockchain industry trade in various countries—for example, funds whose price tracks baskets of publicly listed crypto companies. Attention, however, is centred on ETFs backed by the cryptocurrencies themselves: in that case the operator buys digital assets for the fund, adding demand to the crypto market. The price of such instruments follows spot crypto prices.
The United States is seen as the main potential market for a spot crypto ETF. Since 2018 many firms have filed with the SEC to register one. The regulator has yet to approve any such instrument.
The first spot bitcoin ETF in North America was launched in Canada in February 2021. Called the Purpose Bitcoin ETF, it trades on the Toronto Stock Exchange. Assets in the fund exceed $800m.
Other ETFs with indirect crypto exposure also trade in multiple countries.
Among the best known is ProShares’ Bitcoin Strategy ETF (BITO). In late 2021 it received SEC approval and listed on the New York Stock Exchange. BITO’s underlying exposure is to bitcoin futures contracts that have traded on the Chicago Mercantile Exchange since 2017. As of late May 2022 the fund’s assets were about $1bn.
Similar ETFs were launched by VanEck and Valkyrie Investments after SEC approvals in late 2021. In April 2022 the regulator approved a bitcoin futures ETF from Teucrium.
Grayscale manages an ETF called Future of Finance (GFOF), which holds shares of public companies working in blockchain and cryptocurrencies. In May 2022 it listed a GFOF analogue on European exchanges.
BlackRock has also launched an ETF based on crypto‑industry companies. Samsung Asset Management plans to list a blockchain‑company fund on the Hong Kong Stock Exchange.
ETFs based on altcoins also exist. For instance, early in 2022 Brazil began trading an ETF built on DeFi‑token indices.
How to buy a crypto ETF
To buy such funds you need access to exchanges in the countries where crypto ETFs trade. That typically requires a bank account and a licensed broker. ETFs are treated like ordinary shares, so a wide range of investors can buy them.
Another route is to use a trading platform that offers access to many markets, such as Interactive Brokers or Freedom Finance.
What are the prospects for crypto ETFs?
Analysts expect spot crypto ETFs to launch within one to two years. The SEC is reviewing several filings. One from Grayscale seeks to convert its bitcoin trust into an ETF. ARK and 21Shares also want to launch crypto exchange‑traded funds.
In March 2022 Charles Schwab, one of America’s largest brokers, filed with the SEC to launch an ETF based on its own “crypto economy index”. The underlying, the firm says, would be “companies that benefit from the mining or use of cryptocurrencies and other digital assets”.
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