Introduction to Crypto ETFs
An exchange-traded fund (ETF) that invests in cryptocurrencies and crypto-related assets is known as a crypto ETF. These ETFs allow investors to gain exposure to the cryptocurrency market without having to directly invest in or hold cryptocurrencies themselves.
Definition of Crypto ETFs
A crypto ETF is a fund that tracks the price of one or more cryptocurrencies like Bitcoin and Ethereum or an index tied to cryptocurrency companies and crypto stocks. Crypto ETFs trade on exchanges just like regular stocks, making them easily accessible to most investors. They offer the advantages of cryptocurrency investments like Bitcoin without investors having to deal with crypto exchanges, wallets, and storage.
Benefits of Investing in Crypto ETFs
There are several key benefits that crypto ETFs can offer investors:
- Diversification – Crypto ETFs provide exposure to a basket of cryptocurrencies and crypto stocks rather than a single asset. This helps diversify risk.
- Liquidity – Crypto ETFs trade on major exchanges with high daily volumes, making them liquid investments. This makes it easy to buy and sell them.
- Low Cost – Crypto ETFs have relatively low expense ratios compared to actively managed mutual funds. This reduces costs for investors.
- Regulatory Oversight – Crypto ETFs must comply with regulatory requirements, providing investors with disclosures and transparency. Direct crypto investing does not have this.
- Secure Storage – Crypto ETFs eliminate the need for investors to set up wallets and securely store cryptocurrencies themselves. The ETF handles custody.
- Simplicity – Investing in crypto ETFs is as easy as trading stocks. There’s no need to engage with complex crypto exchanges and wallets.
Risks of Investing in Crypto ETFs
While crypto ETFs provide some advantages, they also come with certain risks:
- Volatility – Cryptocurrencies are highly volatile assets, subject to significant price swings. Crypto ETFs inherit this volatility.
- Tracking Error – Crypto ETF returns may not perfectly match the underlying cryptocurrency index or assets they track due to fees and other factors.
- Premiums/Discounts – The market price of a crypto ETF could trade above or below its net asset value, which can affect returns.
- Custody and Security Risks – Crypto ETFs rely on custodians to securely store crypto assets. Breaches could result in losses.
- Regulatory Uncertainty – Regulations around crypto continue to evolve, adding uncertainty to the future viability of crypto ETFs.
Top-Performing Crypto ETFs
When considering the variety of crypto ETFs available today, there are several that stand out as top performers:
- ProShares Bitcoin Strategy ETF (BITO)
- Valkyrie Bitcoin Strategy ETF (BTF)
- VanEck Bitcoin Strategy ETF (XBTF)
- Global X Blockchain ETF (BKCH)
- Bitwise Crypto Industry Innovators ETF (BITQ)
Overview of the Top-Performing Crypto ETFs
These ETFs invest in companies involved in crypto mining, blockchain technology, digital payments and more. Most utilize bitcoin futures rather than direct bitcoin holdings. They offer wide exposure to the growing crypto/blockchain sector.
Comparison of Expense Ratios
When comparing crypto ETFs, the expense ratio is an important factor as it impacts returns. Here are the expense ratios of the top performers:
- ProShares Bitcoin Strategy ETF (BITO) – 0.95%
- Valkyrie Bitcoin Strategy ETF (BTF) – 0.95%
- VanEck Bitcoin Strategy ETF (XBTF) – 0.65%
- Global X Blockchain ETF (BKCH) – 0.50%
- Bitwise Crypto Industry Innovators ETF (BITQ) – 0.85%
As shown, these ratios range from 0.50% to 0.95%. Lower is better.
Comparison of Holdings
The specific holdings and allocations also differentiate these ETFs:
- BITO focuses solely on bitcoin futures and money market funds.
- BTF holds bitcoin futures, cash equivalents, and short-term fixed income.
- XBTF invests in bitcoin futures and fixed income/cash equivalents.
- BKCH provides exposure to companies utilizing blockchain tech.
- BITQ offers a diverse basket of crypto economy companies.
Comparison of Diversification
Diversification levels vary among the ETFs based on their exposure:
- BITO and BTF have minimal diversification, focusing mainly on bitcoin futures.
- XBTF also has relatively low diversification with its concentration in bitcoin futures.
- BKCH and BITQ offer greater diversification across firms in crypto, blockchain, mining, etc.
Comparison of Investment Objectives
While the ETFs have overlap, they also have some differences in their investment objectives:
- BITO, BTF, XBTF aim to provide bitcoin exposure via futures.
- BKCH seeks to invest in global equity securities of companies utilizing blockchain tech.
- BITQ offers exposure to companies leading innovation in crypto and digital assets.
Comparison of Assets Under Management
The size of the ETFs, as measured by assets under management (AUM) also differs substantially:
- BITO – $1.2 billion
- BTF – $65 million
- XBTF – $56 million
- BKCH – $32 million
- BITQ – $54 million
BITO is by far the largest, which can help improve liquidity and trading volumes. The others are still relatively small in terms of AUM.
ARK Next Generation Internet ETF (ARKW)
The ARK Next Generation Internet ETF (ARKW) is an actively managed fund focused on companies expected to benefit from developments in technologies like blockchain, AI, cloud computing, cryptocurrencies and more.
Overview of ARKW
ARKW offers exposure to disruptive tech trends like crypto. It holds domestic and foreign stocks across multiple industries, including cryptocurrency firms and crypto-related stocks.
Holdings of ARKW
As of October 2022, ARKW held 43 total positions. Top holdings included Tesla, Roku, Zoom Video, and Coinbase. About 9.4% of the portfolio was in cryptocurrency stocks.
Performance of ARKW
ARKW has an inception date of September 30, 2014. For the 3-year period ending 10/31/2022, ARKW delivered an annualized return of 22.09% compared to 14.05% for the S&P 500 over the same period.
Pros and Cons of Investing in ARKW
- Exposure to high-growth innovative tech companies, including crypto firms
- Active management provides ability to adapt to changing dynamics
- Solid past performance history compared to S&P 500
- Higher expense ratio of 0.79%
- Narrow technology focus leads to higher volatility
- Concentration in Tesla and other top holdings
ProShares Bitcoin Strategy ETF (BITO)
The ProShares Bitcoin Strategy ETF (BITO) was the first U.S. bitcoin-linked ETF. It tracks futures contracts on bitcoin rather than investing directly in bitcoin.
Overview of BITO
BITO aims to provide exposure to returns on bitcoin futures markets by tracking the performance of the CF Bitcoin US Settlement Price Index. It does not invest directly in bitcoin.
Holdings of BITO
As of October 2022, the fund held roughly $900 million of bitcoin futures contracts along with cash and cash equivalents. It holds front-month bitcoin futures contracts traded on the Chicago Mercantile Exchange.
Performance of BITO
BITO dropped sharply alongside declining bitcoin prices since its launch in October 2021. Its price fell from over $40 per share to around $12 over the past year as bitcoin futures retreated.
Pros and Cons of Investing in BITO
- Provides exposure to bitcoin futures through a regulated ETF structure
- Eliminates complications of holding spot bitcoin
- Low minimum investment amount compared to bitcoin
- Does not invest directly in bitcoin, only futures contracts
- Subject to risks inherent in derivatives market
- Bitcoin futures tend to trade at a premium to spot bitcoin
VanEck Bitcoin Strategy ETF (XBTF)
The VanEck Bitcoin Strategy ETF (XBTF) is an ETF that invests in bitcoin futures contracts and seeks to track the MVIS® CryptoCompare Bitcoin Benchmark Rate Index.
Overview of XBTF
XBTF aims to reflect the performance of a benchmark index that measures the performance of bitcoin, as implied by the price of bitcoin futures contracts listed on the CME.
Holdings of XBTF
XBTF holds bitcoin futures contracts traded on the CME along with cash, cash equivalents and fixed income securities for margin/collateral requirements. As of October 2022, it held over $55 million in total assets.
Performance of XBTF
As a newer ETF launched in May 2022, XBTF does not have a long operating history. However, its performance will closely follow futures-based bitcoin prices and benchmarks. Bitcoin futures declined substantially along with spot bitcoin in 2022.
Pros and Cons of Investing in XBTF
- Provides exposure to bitcoin futures in an ETF vehicle
- Managed by established ETF provider VanEck
- Relatively low expense ratio of 0.65%
- Bitcoin futures can trade at a premium to spot bitcoin
- Still new with unproven track record
- Bitcoin futures are volatile and risky derivatives
The Valkyrie Bitcoin Strategy ETF (BTF)
The Valkyrie Bitcoin Strategy ETF (BTF) is an actively-managed ETF that aims to provide exposure to bitcoin by investing in CME bitcoin futures contracts and money market funds.
Overview of BTF
BTF seeks to provide investors with exposure to bitcoin price movements by benchmarking the value of fund shares against the price of the front month bitcoin futures contracts traded on the Chicago Mercantile Exchange.
Holdings of BTF
BTF holds bitcoin futures contracts as well as cash, cash equivalents and fixed income securities. As of October 2022, bitcoin futures contracts made up about 25% of its assets while the rest was held in money market funds and other short-term fixed income securities.
Performance of BTF
BTF only began trading in October 2021, so its performance history is limited. In its first year, it has closely tracked the declines in CME bitcoin futures in 2022 alongside the drop in bitcoin prices.
Pros and Cons of Investing in BTF
- Active ETF provides active management of bitcoin futures exposure
- Holdings include money market funds and short-term fixed income for stability
- Lower minimum investment than actual bitcoin
- Bitcoin futures can be volatile and exhibit contango losses
- Short unproven operating history
- High expense ratio of 0.95%
The Valkyrie Bitcoin Miners ETF (WGMI)
The Valkyrie Bitcoin Miners ETF (WGMI) is an equity ETF that invests in companies engaged in bitcoin mining and bitcoin mining infrastructure & equipment.
Overview of WGMI
WGMI holds global stocks of companies that generate the majority of their revenue from bitcoin mining operations. This provides leveraged exposure to bitcoin prices.
Holdings of WGMI
As of October 2022, WGMI held 23 equity positions. Top holdings included Hive Blockchain, Hut 8 Mining, and Bitfarms. Over 90% of the portfolio was concentrated in the top 10 holdings.
Performance of WGMI
In 2021, WGMI returned over 150% as bitcoin prices and mining profits surged. However, in 2022, WGMI has declined by over 60% as bitcoin prices retreated and energy costs rose.
Pros and Cons of Investing in WGMI
- Leveraged exposure to moves in bitcoin price
- Active ETF provides active management of miners
- Low expense ratio of 0.75%
- Concentrated portfolio lacks diversification
- Bitcoin miners have high operational risks
- Bitcoin mining industry still young and evolving
Bitwise Crypto Industry Innovators ETF (BITQ)
The Bitwise Crypto Industry Innovators ETF (BITQ) holds companies engaged in cryptocurrency transactions, mining, technology, and equipment.
Overview of BITQ
BITQ is one of the first crypto industry ETFs. It invests in firms operating crypto exchanges, miners, custodians, and semiconductor firms. BITQ avoids spot cryptocurrencies.
Holdings of BITQ
As of October 2022, BITQ held 50 equity positions totaling over $50 million in assets. Top holdings included Coinbase, MicroStrategy, Galaxy Digital, and Silvergate Capital.
Performance of BITQ
BITQ has declined over 50% in 2022, underperforming the broader S&P 500 but outperforming bitcoin itself. Long-term performance data is unavailable since BITQ only launched in December 2021.
Pros and Cons Investing in BITQ
- Exposure to picks-and-shovels crypto stocks without holding crypto
- Active ETF provides active management of holdings
- Holdings focused on crypto ecosystem infrastructure
- Very new with limited operating history
- Narrow focus leads to concentrated sector risk
- Crypto industry still young and evolving
Blockchain & Bitcoin Strategy ETF (BITS)
The Blockchain & Bitcoin Strategy ETF (BITS) invests in companies positioned to potentially benefit from continued advances in blockchain technology and the potential growth of bitcoin.
Overview of BITS
BITS seeks to provide investors with exposure to blockchain by holding global stocks across various sectors developing and using blockchain tech.
Holdings of BITS
BITS holds around 75 stocks across cryptocurrency, IT services, software, financial services, and more. Top holdings as of October 2022 included Coinbase, Silvergate Capital, and Crypto Finance AG.
Performance of BITS
As a newer ETF launched in April 2022, BITS does not have an extensive performance history. In its early trading, it has seen high volatility but has outperformed relative to the price of bitcoin itself.
Pros and Cons of Investing in BITS
- Exposure to blockchain technology adoption across various sectors
- Active ETF provides active management
- Holdings go beyond just crypto companies
- Very new ETF with unproven track record
- Narrow technology focus leads to risk
- Blockchain technology still evolving
Comparison with Analogues
Crypto ETFs have some parallels with other investment vehicles like mutual funds, individual cryptocurrencies, and direct crypto investing:
Comparison with Mutual Funds
Crypto ETFs differ from traditional actively managed mutual funds in key ways:
- Lower expense ratios than most mutual funds
- Offer more liquidity by trading intraday like stocks rather than at end of day NAV
- Require less minimum investment amount
- Provide access to niche themes like crypto and blockchain
However, mutual funds allow for somewhat more customization and control over holdings.
Comparison with Individual Cryptocurrencies
Compared to buying spot cryptocurrencies like bitcoin and ether, crypto ETFs provide advantages like:
- Eliminate need to set up wallet, keys, storage solutions
- Offer diversification across many cryptocurrencies or crypto stocks
- Require less technical knowledge than direct crypto investing
- Provide access within traditional brokerage account
But buying spot crypto has higher potential upside than futures-based crypto ETFs.
Comparison with Direct Crypto Investing
Direct investing in cryptocurrencies and tokens involves its own benefits and drawbacks:
- Direct ownership of crypto assets – no intermediaries
- Ability to participate in ICOs and DeFi protocols
- Full exposure to upside potential in crypto prices
However, it requires wallets, secure storage, managing keys, dealing with exchanges, and technical knowledge. Crypto ETFs are much easier vehicles for gaining exposure to the asset class.
Comparison of Expense Ratios
|ProShares Bitcoin Strategy ETF (BITO)||0.95%|
|Valkyrie Bitcoin Strategy ETF (BTF)||0.95%|
|VanEck Bitcoin Strategy ETF (XBTF)||0.65%|
|Global X Blockchain ETF (BKCH)||0.50%|
|Bitwise Crypto Industry Innovators ETF (BITQ)||0.85%|
Comparison of Holdings
|ProShares Bitcoin Strategy ETF (BITO)||Bitcoin futures, cash equivalents|
|Valkyrie Bitcoin Strategy ETF (BTF)||Bitcoin futures, money markets, fixed income|
|VanEck Bitcoin Strategy ETF (XBTF)||Bitcoin futures, cash, fixed income|
|Global X Blockchain ETF (BKCH)||Global crypto and blockchain stocks|
|Bitwise Crypto Industry Innovators ETF (BITQ)||Crypto exchanges, miners, custodians|
Comparison of Diversification
|ProShares Bitcoin Strategy ETF (BITO)||Very low|
|Valkyrie Bitcoin Strategy ETF (BTF)||Low|
|VanEck Bitcoin Strategy ETF (XBTF)||Low|
|Global X Blockchain ETF (BKCH)||Moderate|
|Bitwise Crypto Industry Innovators ETF (BITQ)||Moderate|
Comparison of Investment Objectives
|ProShares Bitcoin Strategy ETF (BITO)||Bitcoin exposure through futures|
|Valkyrie Bitcoin Strategy ETF (BTF)||Bitcoin exposure through active management of futures|
|VanEck Bitcoin Strategy ETF (XBTF)||Bitcoin exposure through futures tracking an index|
|Global X Blockchain ETF (BKCH)||Global blockchain technology stocks|
|Bitwise Crypto Industry Innovators ETF (BITQ)||Crypto ecosystem and infrastructure stocks|
Comparison of Assets Under Management
|ETF||Assets Under Management|
|ProShares Bitcoin Strategy ETF (BITO)||$1.2 billion|
|Valkyrie Bitcoin Strategy ETF (BTF)||$65 million|
|VanEck Bitcoin Strategy ETF (XBTF)||$56 million|
|Global X Blockchain ETF (BKCH)||$32 million|
|Bitwise Crypto Industry Innovators ETF (BITQ)||$54 million|
Tax Implications of Investing in Crypto ETFs
Taxes are an important consideration when investing in crypto ETFs. Here are some key tax factors:
Tax Efficiency of ETFs
ETFs can be more tax-efficient than mutual funds since most ETFs employ a creation and redemption process that minimizes capital gains distributions. However, this can vary based on the ETF structure and underlying holdings.
Taxable Events of ETFs
Owning an ETF itself does not trigger a tax liability. However, the following events are taxable with crypto ETFs:
- Selling the ETF at a profit
- Receiving dividends or capital gain distributions
- Receiving cryptocurrency hard forks
Expense Ratios and Tax Liability
Higher expense ratios reduce investment returns, which in turn lowers taxes owed. But expense ratios themselves do not directly impact tax liability.
Capital Gains Tax and Dividend Income Tax
Investors pay capital gains taxes on profitable crypto ETF sales based on their income tax bracket. Dividend income is also taxable at ordinary income tax rates.
Importance of Partnering with a Tax Professional
Given the complex nature of crypto tax rules, consulting a qualified tax advisor when investing in crypto ETFs is highly recommended.
Risks of Investing in Crypto ETFs
While crypto ETFs provide advantages, they also come with risks that investors should fully consider:
Volatility of the Cryptocurrency Market
High volatility is an inherent feature of the cryptocurrency market, leading to large price swings. Crypto ETFs with significant bitcoin or ether exposure inherit this volatility.
Ongoing regulatory uncertainty around cryptocurrencies poses risks. Any adverse regulations that develop could impact crypto ETFs.
While major crypto ETFs have good liquidity, smaller and newer funds can face lower trading volumes and wider bid-ask spreads.
Crypto ETFs rely on third-party custodians and derivatives counterparties, creating counterparty risks that could lead to losses.
Importance of Diversification
Concentrating holdings in just 1-2 crypto assets amplifies volatility risks. Diversification across many assets helps mitigate this, but does not eliminate it.
How to Invest in Crypto ETFs
For investors interested in gaining exposure to the crypto economy through ETFs, here is a step-by-step guide:
Choosing a Brokerage Account
Select a brokerage account that allows trading of ETFs. Top choices are Fidelity, Charles Schwab, Vanguard, TD Ameritrade, E*Trade and interactive Brokers.
Opening an Account
Open a taxable brokerage account on the platform of your choice. This involves providing personal info and funding the account.
Placing an Order
Search for the crypto ETF you want to buy on the brokerage platform. Enter the number of shares or dollar amount to invest and execute the trade.
Monitoring Your Investment
Track the performance of your crypto ETF investment over time. Rebalance periodically and evaluate whether adjustments are needed.
Summary of the Best Crypto ETFs
Based on all the research and comparisons, the Valkyrie Bitcoin Miners ETF (WGMI) stands out as one of the top options now for getting crypto asset exposure through an ETF due to its strong past performance and leveraged exposure to bitcoin. However, the Global X Blockchain ETF (BKCH) and the Bitwise Crypto Industry Innovators ETF (BITQ) are also compelling choices for their diversified holdings in the broader crypto/blockchain space.
Factors to Consider When Choosing a Crypto ETF
When selecting a crypto ETF, key factors to evaluate include the expense ratio, holdings, diversification level, AUM, performance history, and investment objectives. Considering your own risk tolerance, time horizon and goals is also crucial.
Importance of Conducting Due Diligence
Thorough due diligence is vital before investing in any crypto ETF. Fully research the fund provider, structure, track record, risks, fee breakdown, tax treatment and overall viability of the ETF to determine if it is right for your situation.
The Role of AI in Crypto ETFs
Artificial intelligence (AI) is starting to play an increasingly important role in cryptocurrency investing and crypto-based ETFs. Here are some of the key ways that AI is impacting crypto ETF landscape:
Portfolio Optimization and Rebalancing
AI algorithms can optimize crypto ETF portfolios by identifying the most efficient asset allocations that maximize returns while minimizing risk. As the market changes, AI systems can rebalance portfolio holdings through automated scripts executing trades.
Quantitative Trading Strategies
Quantitative trading powered by AI entails using data science, predictive modeling, and machine learning to implement rules-based trading strategies that aim to outperform benchmarks. Crypto ETFs are utilizing AI quant models for trade signal generation.
Analyzing market sentiment based on news, social media, and other data sources through natural language processing and text analytics techniques can help crypto ETFs forecast price movements and volatility.
Analysis of On-Chain Data
On-chain data from analyzing activity on public blockchains can provide valuable signals for assessing cryptocurrency valuations and risks. Crypto ETFs are utilizing AI to parse and extract insights from huge amounts of unstructured on-chain data.
AI programs can perform real-time monitoring of portfolio risks across a variety of parameters like volatility, liquidity, concentration, etc. This enables crypto ETFs to dynamically hedge risks as market conditions change.
High Frequency Trading
Some crypto ETFs are leveraging AI to engage in high frequency trading strategies that use ultra-fast automated algorithmic systems to capitalize on short-term inefficiencies across cryptocurrency exchanges.
The use of machine learning techniques to detect trading fraud, price manipulation, and other illicit activities within crypto markets can help crypto ETFs avoid losses and volatility from such events.
AI tools can analyze correlations between asset classes, expected returns, and other factors to create optimized crypto ETF portfolios according to a fund’s goals and investor risk preferences.
Robo-advisors powered by AI can provide automated guidance to investors on allocating funds across crypto ETFs in alignment with their financial situations and customized investment plans.
In summary, AI is quickly emerging as a critical tool for crypto ETFs seeking to outperform benchmarks, minimize volatility and risk, identify new opportunities, and optimize their overall investment processes through data-driven insights. The integration of AI in crypto investing is still in early stages but holds much promise going forward.
Final Thoughts and Recommendations
In summary, crypto ETFs allow easy, regulated exposure to cryptocurrency prices and the crypto ecosystem – but they are not without risks. Limiting position sizes, sticking to long time horizons, and maintaining a diversified investment portfolio with crypto ETFs can help mitigate the pronounced volatility of this emerging space.