Cryptocurrency ETFs are exchange-traded funds that have some exposure to cryptocurrency assets and can be purchased on major stock exchanges.
But while ETFs can be attractive for people who are looking for managed investments with relatively low fees, your options are limited when it comes to cryptocurrency. That’s because U.S. regulators have not yet approved any ETFs that hold actual cryptocurrency.
If you’re still looking for a cryptocurrency ETF, there are a few options you can consider:
Cryptocurrency stock ETFs are made up of the stock of multiple companies that own cryptocurrency or have some business in the world of cryptocurrency.
Bitcoin ETFs are based on Bitcoin and can be purchased on public markets, but they do not actually hold Bitcoin. Instead, Bitcoin ETFs tend to contain derivatives, such as futures contracts that reflect expectations of the price of Bitcoin at a later date.
Actual crypto funds that have been previously sold only to accredited investors are now available on some over-the-counter exchanges. But they are not sold on traditional public markets such as the New York Stock Exchange.
Why might you want a crypto ETF?
ETFs can be helpful tools for investors who want to build a diversified portfolio but who don’t have the time, expertise or confidence to assemble their own basket of investments.
Sure, cryptocurrencies will rise and fall together at times due to broader market conditions, but individual assets within the crypto space might also move separately. This is a new technology, and projects linked to specific cryptocurrencies can fail or take off with little warning.
There are ways to diversify your crypto portfolio without an ETF. For instance, you could work with an investment advisor who has some expertise in crypto. Or you can do the research and buy cryptocurrency yourself.
But ETFs offer a level of simplicity and cost-effectiveness that are attractive to many investors. For instance, you can generally buy ETFs through a traditional brokerage account.
The SEC and crypto ETFs
If you’re considering investing in a cryptocurrency ETF, it might be helpful to understand why the options are so limited.
The simple reason is that the U.S. Securities and Exchange Commission has been reluctant to approve the public listing of ETFs based on the spot prices of Bitcoin, let alone those of other, less established cryptocurrencies.
The SEC has set a high bar for cryptocurrency ETFs. The agency argues that the novelty of the space makes it hard for fund managers to comply with federal laws “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
Cryptocurrency ETF alternatives:
It’s anybody’s guess when, or even whether, the SEC might shift its position on cryptocurrency ETFs, so you’ll have to make some trade-offs if you want a comparable product. Here are a couple of options.
Cryptocurrency stock ETFs
There are ETFs available that are linked to the world of crypto, but they do not actually own crypto. Instead, they hold shares in companies that have invested in crypto or in which the business involves cryptocurrency trading, mining or other services.
There are many such ETFs to choose from, but one of the largest is the Amplify Transformational Data Sharing ETF, which is focused on blockchain technology and had nearly $525 million in net assets as of mid-June 2022.
Some of the cryptocurrency stocks in the Amplify fund’s portfolio include CME Group, a financial services company that works with products including Bitcoin and Ethereum, and Silvergate Capital, which provides banking services in the crypto space.
Keep in mind that each ETF has its own approach, cost structure and investment mix. You should review any investment product carefully before you make a decision.
You can also get some exposure to Bitcoin through publicly traded Bitcoin ETFs. But there’s a catch. These funds don’t actually hold Bitcoin. They hold derivatives linked to Bitcoin, which means their value may not be directly tied to the current market value of the largest cryptocurrency.
The first Bitcoin ETF debuted in late 2021 to significant excitement in the crypto world. Many saw the move as a sign that digital assets were becoming increasingly mainstream.
It’s worth noting, however, that Bitcoin ETFs don’t give you diversified access to the crypto world, because they only have exposure to one cryptocurrency. If you’re interested in exposure to Bitcoin, another option is to simply buy Bitcoin (though you might not be able to do that with your brokerage account).
There are some funds that look a lot like ETFs and actually hold cryptocurrencies, but you’ll have to find them on over-the-counter markets.
These are exchanges where brokers connect individual parties with one another to buy and sell investments that do not meet listing standards for traditional stock exchanges. While this means such investments are available to more people, over-the-counter trading may not provide the same consumer protections as public markets.
Some investment companies have packaged together baskets of promising cryptocurrencies and sold them privately, rather than to the general public. And some of those buyers are willing to sell them in over-the-counter transactions.
One example is the Grayscale Digital Large Cap Fund, which holds some of the most valuable cryptocurrencies and had more than $190 million under management in mid-June of 2022. Other funds, including some by Osprey Funds, hold blocks of individual cryptocurrencies in trust.