What Is a Cryptocurrency ETF?
A cryptocurrency exchange-traded fund (ETF) works, in theory, like any other ETF. While most ETFs track an index or a basket of assets, a cryptocurrency ETF would track one or more digital tokens. Like other ETFs, digital token ETFs would trade like a common stock on an exchange, and they would be subject to changes in price throughout the day as investors buy and sell.
- ETFs could be a remedy to many of the barriers preventing mainstream investors from entering the cryptocurrency market.
- Cryptocurrency ETFs could track a single cryptocurrency or a basket of different digital tokens and currencies.
- Cryptocurrency ETFs are already trading in a number of countries, but so far regulators in the U.S. have denied multiple attempts to offer such products on exchanges.
- There are a number of alternatives on the market that allow for exposure to cryptocurrency without requiring investors to manage the digital assets themselves, however, these options are inferior in many regards to traditional ETFs.
- Blockchain funds enable investments in companies that are closely connected to the cryptocurrency market and thus allow indirect investment in the space.
How a Cryptocurrency ETF Works
In order for a cryptocurrency ETF to work properly, the organization managing the fund needs to own the underlying assets that it tracks. In other words, the ETF would have to own a commensurate stake of digital tokens. The ownership of these tokens would then be represented as shares, and by buying these shares investors in the ETF would indirectly own those tokens. ETF investors would then gain exposure to the upside potential of the underlying assets.
So where does cryptocurrency ETFs stand right now? So far, the Securities and Exchange Commission (SEC) has indicated that it will not approve cryptocurrency ETFs until the markets demonstrate a degree of stability and security. Nonetheless, the SEC’s stance has not stopped a number of parties from attempting to launch digital currency ETFs.
The Chicago Board Options Exchange (CBOE), which has launched bitcoin futures, has lobbied the SEC to reconsider its earlier blockage of digital token funds. Cameron and Tyler Winklevoss, the founders of popular digital currency exchange Gemini, continue to petition the SEC to approve a bitcoin ETF with no success.
Coinbase, an immensely popular digital currency exchange, launched an index fund offering exposure to four of the largest digital currencies, but that’s not quite the same as an ETF. Some ETFs even offer small exposure to GBTC, but these are not exclusively focused on cryptocurrencies.
The SEC has expressed openness to the possibility of cryptocurrency funds in the future, and this could continue to fuel investor optimism if cryptocurrency ETFs thrive in other parts of the world. Various markets in Europe and Asia, for instance, have introduced cryptocurrency ETFs thanks to differing levels of regulation. For the time being, though, U.S. investors will have to wait.
Cryptocurrency ETF vs. Bitcoin Investment Trust
There are no cryptocurrency ETFs currently trading publicly in the U.S. as of Nov. 2019. The closest thing is a fund known as the Bitcoin Investment Trust (GBTC). This trust acts like an ETF in many ways—it owns bitcoins on behalf of investors and allows them to trade in shares of the trust.
The sponsor of the fund, Grayscale Investment Trust, however, charges an annual management fee of 2% of the fund's assets, a price point significantly higher than most other ETFs. Furthermore, as the first trust of its kind, GBTC has experienced some odd fluctuations in price relative to the changes in the value of bitcoin. While one would expect GBTC to be correlated with the price of bitcoin, this has so far not always been the case. Overall, with a high expense ratio and lofty minimum investment, GBTC is not accessible to mainstream investors as of yet.
U.S. investors looking to take part in digital currency ETFs have limited options. Investing in international ETFs is one approach if they have access. If they meet the stringent requirements for investing in GBTC, that’s another possibility. For the time being, though, these investors may be best off looking toward a related group of ETFs—blockchain ETFs.
Blockchain technology supports the cryptocurrency space and is closely linked with digital tokens. There are a growing number of ETFs focused on blockchain-related companies. These can include computer processor developers and manufacturers that are closely connected to the cryptocurrency industry. ETFs like the Amplify Transformational Data Sharing ETF (BLOK) and the Reality Shares Nasdaq NextGen Economy ETF (BLCN) allow investors access to companies that focus on the blockchain space. Many of these ETFs have seen immense success already.
Benefits of Cryptocurrency ETFs
Some of the most successful cryptocurrencies have seen outlandish gains. However, the industry is still surrounded by uncertainty and plagued by heavy volatility. For this reason, many investors would prefer to use a vehicle like an ETF to participate in the cryptocurrency space.
Currency ETFs allow investors to take advantage of the opportunities that tokens present while leaving management and security to experts. Given that cryptocurrencies and digital token exchanges are still regularly the targets of thieves and scammers, it's understandable why investors might wish to take this extra precaution.
There are many benefits of a cryptocurrency ETF over straight-up cryptocurrency investments. First, as mentioned above, digital wallets and exchanges are highly susceptible to hacks and theft. Investors holding digital tokens run the risk of seeing their assets disappear with little or no recourse. An investor in a digital currency ETF, however, has an added layer of security in the custodian bank that supports the ETF.
Another benefit of a cryptocurrency ETF is that it can be used to track multiple digital tokens at once. The cryptocurrency world is highly compartmentalized, and investors looking to hold a basket of, say, 20 different tokens may have to own and operate multiple wallets and accounts across various digital currency exchanges.