Cryptocurrencies burst onto the global scene with their decentralized approach, aiming to disrupt the concept of money and the financial market. However, while cryptocurrencies have the potential to yield high returns, their extreme volatility also exposes investors to significant risks.
For those who have steered clear of crypto for its inherent risks, crypto ETFs are a new investment vehicle to hop onto. Crypto ETFs provide exposure to a diverse range of cryptocurrencies while mitigating some of the risks associated with direct crypto investment. Let’s understand how you can maintain a diversified and balanced portfolio with crypto ETFs while also taming the lurking risks that come hand in hand.
What is an ETF?
Exchange-traded funds (ETFs) have gained immense popularity in the financial world due to their unique blend of benefits that make them highly useful for investors of all types.
A regular equity ETF enables investors to participate in a predefined collection or assortment of securities, typically consisting of stocks from specific industries. Certain ETFs can be exceptionally specialized, targeting specific market niches, whereas others maintain a broader focus, encompassing well-performing companies across various sectors.
A dedicated management team is responsible for the day-to-day execution of stock trading on an organized market using the aggregated funds from the ETF. Of course, this service incurs a management fee; however, this fee is consistently modest when compared to the security provided by a sound ETF investment and the profits that are distributed among all participants.
What is a Crypto ETF?
Cryptocurrency exchange-traded funds (ETFs) provide investors with an opportunity to diversify their investments across multiple cryptocurrencies, usually aligning with the most promising options available in the cryptocurrency market at the time.
A cryptocurrency ETF functions similarly to a traditional ETF. The distinction lies in the fact that a crypto ETF doesn’t mirror an index or a selection of conventional assets like stocks; rather, it follows the price movements of various cryptocurrencies.
Within the realm of crypto ETFs, certain funds may focus on a singular cryptocurrency, commonly Bitcoin or Ethereum, while others may encompass a range of well-established digital currencies.
Why Crypto ETFs?
As cryptocurrency solidifies its position within the closely-knit traditional market, it is also capturing a large share of global investments. Let’s delve into why cryptocurrency ETFs are drawing the attention of both novice and seasoned investors alike.
Diversification and Risk Mitigation
One of the primary benefits of crypto ETFs is their ability to offer diversification within the volatile cryptocurrency market. Rather than investing solely in a single cryptocurrency like Bitcoin or Ethereum, investors can gain exposure to a diverse basket of digital assets.
This diversification helps mitigate the risk associated with the price volatility that is often observed in the cryptocurrency space. By spreading investments across multiple cryptocurrencies, the impact of a sharp decline in any one asset’s value is reduced, enhancing overall portfolio stability.
Regulatory Compliance and Accessibility
Crypto ETFs operate within the framework of traditional financial markets, which can alleviate concerns related to regulatory uncertainty that often plague direct ownership of cryptocurrencies. These ETFs are often listed on established stock exchanges, making them accessible to a broader range of investors. This accessibility extends to both retail investors and institutional players, who may be more comfortable with the regulated structure of ETFs.
Convenience and Liquidity
Investing in cryptocurrencies can be challenging for those unfamiliar with the technical aspects of wallets, private keys, and exchanges. Crypto ETFs provide a user-friendly alternative, as they can be bought and sold just like regular stocks through brokerage accounts. This eliminates the need to manage complex digital wallets and navigate various cryptocurrency exchanges.
Additionally, the liquidity of ETFs ensures that investors can easily enter or exit their positions without facing the liquidity challenges often associated with some smaller cryptocurrency markets.
Exploring the Best Cryptocurrency ETFs of 2023
Navigating crypto investments can be perplexing due to their high volatility and extensive product offerings. To help you embark with confidence, we present a compilation of the top crypto ETFs and their associated advantages. Get ready for a well-guided kickstart into the world of cryptocurrencies.
1. Bitwise Crypto Industry Innovators ETF (BITQ)
Designed with passive investors in mind, this fund tracks the Bitwise Crypto Innovators 30 Index, which comprises top companies in the crypto and blockchain sectors. For investors seeking exposure beyond Bitcoin, BITQ offers a broader perspective on the cryptocurrency ecosystem.
With approximately $89.6 million in assets under management, this ETF invests in a portfolio of stocks representing the cryptocurrency industry. These companies often hold significant Bitcoin reserves or facilitate cryptocurrency trading on their platforms.
Given its concentration on crypto-related stocks, this ETF might experience the characteristic volatility of crypto prices. Its annual expense ratio stands at 0.85%. The underlying holdings encompass Bitcoin miners, equipment suppliers, financial services, and crypto-associated businesses.
2. VanEck Bitcoin Strategy ETF (XBTF)
Introducing the VanEck Bitcoin Strategy ETF (XBTF), the inaugural U.S.-linked crypto ETF launched on November 15. With a 0.76% expense ratio, it stands as the most cost-effective choice among Bitcoin futures ETFs.
Operated on the Cboe exchange, it offers trading exclusively through a direct brokerage account, extending portfolio management and diverse investment possibilities. This structure empowers investors with the flexibility to oversee their investments. Distinguished as a C-corporation, this crypto ETF prioritizes a tax-efficient experience for its users.
Beyond Bitcoin futures, the ETF diversifies holdings to include equities, fixed-income assets, and cash. The daily portfolio encompasses both bonds and BTC futures, denoted by the ticker symbol BTCH2. XBTF has over $46 million in assets under management.
3. ProShares Bitcoin Strategy ETF (BITO)
The ProShares Bitcoin Strategy ETF, trading as BITO, was launched on October 19 as the first approved Bitcoin ETF in the U.S. Within two days, it amassed an impressive $1 billion and currently holds $65 billion in assets.
This premier crypto ETF primarily invests in Bitcoin futures rather than spot Bitcoin. Unlike directly buying futures contracts, it pools investors’ funds to invest in these futures, offering dividend-accruing shares.
The ETF also has the flexibility to invest in short-term U.S. Treasury Bills and Repurchase Agreements for cash positions, and it can utilize leverage. Its expense ratio is 0.95% due to derivatives usage and frequent turnover. Notably, it focuses on cash-settled front-month Bitcoin futures, which have the shortest time to maturity, all within the regulatory framework of the Commodity Futures Trading Commission.
4. Valkyrie Bitcoin Strategy ETF (BTF)
The Valkyrie Bitcoin Strategy ETF is among the latest crypto ETFs introduced last year, debuting merely three days after ProShares’ Bitcoin futures ETF launch. It doesn’t directly invest in Bitcoin. Instead, it places its investments in Bitcoin futures through a Cayman Islands subsidiary on the Chicago Mercantile Exchange. Notably, investors are exempt from filing K-1 forms with the IRS.
BTF aims to secure futures contracts equivalent to 100% of its net assets whenever feasible. These contracts are then divided into tradable shares that are purchasable and sellable at market prices. Consequently, BTF investors acquire shares of the fund rather than engaging in direct futures trading or Bitcoin ownership.
Most recently, Valkyrie filed to transform its existing Bitcoin investment fund into an innovative fund that will encompass investments in both Bitcoin and Ether. The proposed conversion is scheduled to take effect on October 3. Its expense ratio stands at 0.95% with over $28 million in assets.
5. Amplify Transformational Data Sharing ETF (BLOK)
With assets under management exceeding $400 million, the Amplify Transformational Data Sharing ETF (BLOK) stands as one of the most significant funds concentrating on the cryptocurrency and digital asset sector. While it doesn’t directly invest in cryptocurrencies, it includes 45 company stocks.
The ETF, launched in January 2018, boasts an impressive tenure, featuring a 0.75% annual expense ratio, equivalent to $7.50 in fees per $1,000 investment. It has over $469 million in assets under management.
Rather than investing in digital currencies, this actively managed fund primarily allocates investments to companies engaged in developing and utilizing transformational blockchain data-sharing technologies. Approximately 80% of its net assets are invested in such equities, with the remaining 20% dedicated to companies associated with the fund.
The fund’s portfolio is structured with around 43.7% in large companies, 26.7% in mid-cap companies, and 29.7% in small-cap companies, providing diversified exposure to the blockchain sector.
6. Fidelity Advantage Bitcoin ETF (FBTC)
One of the most appealing attributes of this particular Fidelity Advantage Bitcoin ETF (FBTC) is its near-complete asset backing by actual Bitcoin. This unique feature allows for direct investment in BTC itself, distinguishing it from numerous other Bitcoin ETFs that primarily track its price movements. With its holdings securely stored in cold wallets, investor concerns about asset safety are mitigated.
While the management fee is competitively low, fixed at 0.40%, it’s important to note the existence of an expense ratio of 0.96%. While there are more sizable crypto ETFs, these often revolve around blockchain and crypto-related companies rather than the cryptocurrencies directly. This characteristic makes them better suited for conventional ETF investors seeking diversification within their portfolios. It has over $66 million in assets.
7. First Trust Indxx Innovative Transaction & Process ETF (LEGR)
First Trust Indxx Innovative Transaction & Process ETF (LEGR) stands out due to its remarkable diversification, featuring a portfolio that encompasses more than 100 stocks—a notably high count within the realm of such ETFs. Functioning as a tracker for companies with ties to blockchain technology, this cryptocurrency funds ETF focuses on businesses listed on exchanges that are involved in investing, owning, or developing products and services leveraging blockchain technology.
The portfolio’s diversity is further evident in the fact that the ten largest holdings constitute approximately 14% of the total assets. Among these top holdings are internationally renowned corporations like Intel, Nvidia, Alibaba, Baidu, Microsoft, Amazon, Samsung, and Salesforce.
It’s worth highlighting that this ETF stands out for its cost-efficiency as well, with a relatively low total expense ratio of 0.65%, positioning it as one of the most economical options within the cryptocurrency ETF landscape. It has $110 million in assets under management.
Conclusion:
As the cryptocurrency market continues to evolve, crypto ETFs have emerged as a compelling option for investors seeking exposure to digital assets without the challenges of direct ownership. Each discussed ETF offers distinct approaches to crypto investment. From direct exposure to Bitcoin to diversified portfolios and blockchain industry engagement, these ETFs cater to various investment preferences and risk appetites.
