Crypto investing has gotten increasingly popular among both individual investors and financial advisors. In fact, a recent survey revealed that, in the wake of the 2024 elections, 56% of financial advisors surveyed indicated they were more likely to invest client assets in crypto as a result of the election.1
In addition, the percentage of surveyed advisors with an allocation of crypto in client accounts doubled in 2024 to 22% versus 11% in the 2023 survey, and 96% of the advisors surveyed reported that they’ve received questions from clients regarding crypto investments.
So it’s no surprise that the number of crypto ETFs is growing. But what exactly is crypto? Does it belong in your portfolio? Let’s dig in.
What is crypto?
Cryptocurrencies, such as bitcoin, ethereum, litecoin and others, are all forms of digital currencies. Unlike traditional currencies (also called fiat currencies), like the U.S. Dollar or the British Pound, that also exist in a physical form and are issued and guaranteed by governments, cryptocurrencies exist only on a digital network and have no institutional backing.
While fiat currencies can also be used to buy and sell things online, cryptocurrencies exist on specialized computer networks called blockchains that track and execute transactions. We won’t get into the technicalities that power blockchain; the important thing to know is that blockchain allows data and transactions to be recorded permanently and immutably. The data and transactions are also transparent, so participants in the database can see any and all transactions.
Ultimately, blockchain makes it possible to exchange anything that has value.
Why invest in crypto?
One reason investors are interested in crypto is that its correlation to traditional stocks and bonds is relatively low, making it a form of alternative investment that can help diversify risk in a portfolio.
Many investors believe crypto has solid upside potential. This is based on their perception (or hope) that this type of investing is the wave of the future and that crypto investing truly catches on. Belief in crypto’s upside potential includes advancements in the technology surrounding crypto, increased adoption by investors, and market sentiment towards crypto.
At the same time, many investors still believe crypto is a risky investment, perhaps due to varying levels of volatility over time or a lack of understanding how crypto works.
Those investors who are interested in investing in crypto directly have to contend with differentiating between cryptocurrencies such as bitcoin, ethereum and others. These various cryptocurrencies have unique features that investors should understand.
While some cryptocurrencies are available on traditional brokerage platforms, some are only available on specialized platforms like Gemini or Coinbase.
Just as investing in equity ETFs can both make investing easier and offer diversification among and across asset classes, crypto ETFs can make it easier to invest in cryptocurrencies.
Introducing crypto ETFs
There are many different kinds of crypto ETFs, just as there are many different kinds of equity ETFs. A crypto ETF might track the performance of a single type of cryptocurrency, such as bitcoin or ethereum; it might track a basket of several types of crypto; it might invest in crypto futures; or it might invest in shares of crypto-related companies or technologies.
Let’s look at some of the most popular.
Spot crypto ETFs
One of the biggest developments in the area of crypto ETFs was the approval of 11 spot Bitcoin ETFs by the SEC in January of 2024. This was the culmination of a long struggle by several ETF issuers to obtain this approval.
Spot crypto ETFs invest directly in the specific cryptocurrency. This helps tie the price movement of the ETF more directly to price fluctuations of the underlying crypto asset. At the same time, investing via an ETF offers investors liquidity, which is not always present for all cryptocurrencies.
Crypto-related ETFs
There are a number of ETFs that invest in crypto-related areas. Two examples:
- Blockchain ETFs invest in companies that are involved in the development and use of blockchain technologies.
- Crypto miner ETFs invest in companies that use hardware and software to crunch data in order to compete to officially enter transactions into the blockchain. Companies that are the first to succeed are rewarded for this success.
Just like the people who sold the picks and shovels often had a better chance of gaining wealth than the people directly prospecting for gold, crypto-related ETFs believe that focusing on the infrastructure of cryptocurrencies has significant upside potential.
Crypto futures ETFs
Futures contracts provide the buyer of the contract the right to buy or sell a set quantity of the underlying asset at a set price over a specified period of time. There are futures contracts for everything from fiat currencies to orange juice, all betting on what the future price for the asset might be.
Crypto futures ETFs invest in futures contracts of cryptocurrencies such as bitcoin or ethereum. These ETFs may focus on futures of a specific type of crypto or a combination of crypto assets.
Crypto futures ETFs may be more volatile than ETFs that invest directly into a specific cryptocurrency, because they involve not only the volatility of the underlying crypto asset, but also the potential volatility of the futures contract.
Pros and cons of crypto ETFs
The pros and cons of investing in crypto ETFs are substantially similar to the pros and cons of investing in equity ETFs.
Pros:
- Liquidity. Crypto ETFs may offer a level of liquidity that investors may not be able to attain via direct investment in one of more specific cryptocurrencies.
- Diversification. A crypto ETF can be a way for investors to gain exposure to a basket of multiple crypto holdings and eliminate the concentration risk that can arise from direct investment in only one or two types of crypto assets.
- Simplicity. Crypto ETFs are easy to buy and sell, especially compared to crypto wallets or tokens, as direct investment might require.
- Professional management. Like other ETFs, crypto ETFs are professionally managed. The manager and their team monitor the underlying crypto holdings and determine when to buy and sell any holdings inside of the ETF in the case of active ETFs. In the case of passive crypto ETFs, they rebalance the fund periodically to ensure it tracks the underlying index.
Cons:
- Fees and transaction costs. ETFs have management fees which can eat into the net gains an ETF investor might realize.
- Tracking error. The performance of a crypto ETF may differ from the performance of the underlying crypto assets, due to the expenses associated with the ETF—as well as issues relating to rebalancing of the underlying assets.
- Volatility. Even when investing through an ETF, crypto is still a volatile asset class.
There is a particular challenge of investing in crypto ETFs, though, that is different from investing in other kinds of ETFs: regulatory uncertainty. The regulatory rules around cryptocurrencies of various types are still evolving and this could affect all investments in crypto.
The rise of crypto ETFs
Crypto ETFs are a relatively new phenomenon. Only one ETF out of 100 in the Morningstar U.S. Fund Digital Assets category has at least ten years of history, and only eight have at least five years.
The increased interest in cryptocurrencies as an investment means we’re likely to see more ETFs issued over time. At the same time, because crypto is (to a certain extent) unregulated, we may or may not see additional legislation or restrictions that would affect investments in crypto.
Because of these complexities, it may be helpful to consult with a financial advisor as you consider investing in crypto, whether directly or in ETFs.
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