A beginner’s guide to cryptocurrency ETFs

If you want to speculate on the price of Bitcoin and other cryptocurrencies without actually buying any digital coins, cryptocurrency ETFs offer one way to do this. ETFs allow you to track the price of an underlying asset or index.

However, cryptocurrency ETFs carry a great degree of risk. And beyond the Ontario Securities Commission (OSC) which recently approved the Evolve Bitcoin ETF, none of the major regulators like the US Securities and Exchange Commission (SEC) have approved these highly volatile investment vehicles.

Compare cryptocurrency ETFs

It’s important to note that many of the assets listed are actually exchange-traded notes (ETNs), which are different from ETFs.

An ETN is a bond issued by a financial institution, which agrees to pay investors their principal plus the return of a certain index after a certain period. But if the financial institution goes under, investors may not get anything back. ETFs actually exist as separate companies. So even if the financial institution behind the ETF fails, the ETF iself and the securities held in it will remain and investors can still benefit from it. Moreover, some are pink sheets, which are known for fraud due to the minimal reporting these companies must disclose.

Find out more about cryptocurrency funds in our 101 guide

What is a cryptocurrency ETF?

An ETF is a basket of assets such as stocks and bonds that can be bought and sold on a stock market in much the same way that investors trade ordinary shares in a company. ETFs are investment funds designed to track the performance of a particular index, such as the S&P 500, or a specific commodity like gold.

An ETF is a basket of assets such as stocks and bonds that can be bought and sold on a stock market in much the same way that investors trade ordinary shares in a company. ETFs are investment funds designed to track the performance of a particular index, such as the S&P 500, or a specific commodity like gold.

For example, a gold ETF allows you to invest in the value of gold without ever having to own any gold or find somewhere to store it.

A cryptocurrency ETF is designed to give investors exposure to the cryptocurrency market. Commonly referred to as bitcoin ETFs, they track the price of one or more digital coins or tokens, providing exposure to cryptocurrency price movements without some of the risks and drawbacks associated with actually owning any digital currency.

The most basic way for a crypto ETF to track the price of a digital currency is to purchase and store that currency, and then divide shares in the ownership of those coins up between stakeholders. However, another model is for the ETF to own bitcoin futures.

The history of crypto ETFs

The history of cryptocurrency ETFs has been brief but controversial. Throughout 2017 and 2018, there was been a fair bit of media coverage focused on the efforts of multiple ETF providers to get the US Securities and Exchange Commission (SEC) to approve their proposals for a crypto-based ETF.

As of March 2021, the SEC is yet to approve any bitcoin or cryptocurrency ETFs, citing security concerns. It has rejected several crypto ETF proposals in the past, most notably shutting down applications from the Winklevoss twins in 2017 and 2018.

In late August 2018, the SEC rejected nine further applications for bitcoin ETFs because the proposals did not meet the necessary legal requirements. Specifically, the following statement was included in all nine rejections:

…the Commission is disapproving this proposed rule change because, as discussed below, the exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

However, the market for crypto has matured since then and popular investing apps like Robinhood have brought crypto into the mainstream. Could 2021 be the year the SEC approves crypto ETFs?

If crypto ETFs can receive approval from the SEC and are launched in the US, this could mean a step forward in cryptocurrency’s battle for widespread adoption. Properly regulated and professionally managed ETFs could represent a safer option for investors concerned about the risks of buying digital currency, plus help bridge the gap between the world of crypto exchanges and more traditional investment tools.

What are my bitcoin ETF options?

Just because there are no crypto ETFs approved by the SEC doesn’t mean investors can’t gain access to cryptocurrency exchange-traded products and index funds. There are several options around the world from the following providers:

How to invest in a cryptocurrency ETF

ETFs are traditionally designed to be bought and sold on securities exchanges, which means you can trade them via your regular online brokerage account. You may wish to sign up for an online trading account through your regular financial institution, or open an account with a specialist broker.

However, with exchanges like Huobi and OKEx now launching their own index funds, you may need to register for an account on the relevant crypto exchange in order to trade these funds. Many U.S. based trading accounts don’t offer access to overseas exchanges.

Finally, if you’re interested in the potential of the technology behind blockchain, you may also want to consider ETFs focused on blockchain companies. Blockchain technology is one of the key innovations introduced by Bitcoin and closely associated with the wider cryptocurrency industry, so it may be worth researching tech-focused ETFs and whether they provide any exposure to blockchain-related investments.

Benefits vs risks of bitcoin ETFs

Just like any other type of investment, cryptocurrency ETFs have a range of pros and cons. It’s essential that you weigh the potential benefits against the risks involved before deciding whether you should invest in any crypto ETF.

• Benefits of crypto ETFs
• Risks of crypto ETFs

Compare cryptocurrency ETFs

FAQs

• What do bitcoin ETFs have to do with the SEC?

  The US Securities and Exchange Commission is a federal government agency responsible for protecting investors and promoting fairness in securities markets. It also has the responsibility of approving ETFs to be listed for trade on US stock exchanges. The SEC is yet to approve any crypto ETFs and has rejected several applications in the past, but it has delayed making a decision on the latest round of proposed crypto ETFs.

• What’s the difference between passive ETFs and active ETFs?

  Most ETFs are “passive” investments this means they track the value of an underlying asset or index. Meanwhile, active ETFs are those where the fund manager is actively trying to outperform the market or achieve an objective other than just tracking a particular index.

• Do ETFs have a minimum investment limit?

  Yes, but this varies from product to product and depends on whether the ETF is targeted at wholesale or retail investors.