What is a crypto ETF?

A crypto ETF is a regulated investment fund that tracks the price of one or more cryptocurrencies, allowing you to buy crypto exposure through a traditional brokerage account.

Just like a stock index ETF tracks the S&P 500, a crypto ETF tracks the performance of a specific coin or a basket of coins. You don't need to deal with crypto wallets, private keys, or unfamiliar exchanges. For beginners, this makes it one of the easiest ways to invest in the crypto market.

How do crypto ETFs work?

Crypto ETFs work by pooling investor money to hold either actual digital coins (spot ETF) or futures contracts tied to crypto prices (futures ETF).

A spot Bitcoin ETF holds physical Bitcoin in custody for investors, so its price closely follows the real-time market price. A futures ETF, on the other hand, invests in regulated Bitcoin futures contracts, which can sometimes trade at a different price than the spot market. Both trade on traditional stock exchanges like the NYSE or Nasdaq.

Why are crypto ETFs important for beginners?

Crypto ETFs are important for beginners because they offer a simple, regulated way to gain crypto exposure without managing digital wallets or private keys.

Key benefits for beginners:

  • Simplicity: Buy through your existing brokerage account.
  • Security: The fund custodian holds the crypto securely.
  • Regulation: ETFs are approved by financial regulators like the SEC.
  • Liquidity: You can buy and sell during regular market hours.

When did the first crypto ETFs launch?

The first US-listed crypto ETF was a Bitcoin futures ETF, which launched in October 2021.

That fund, the ProShares Bitcoin Strategy ETF (ticker BITO), gave investors indirect exposure to Bitcoin through futures. Spot Bitcoin ETFs followed in January 2024 when the SEC approved multiple funds after years of rejections. Since then, spot Ethereum ETFs have also launched, expanding the category.

Crypto ETF vs. buying crypto directly: which is better?

A crypto ETF is often better for beginners than buying crypto directly because it avoids wallet management and exchange risk, but direct ownership gives you more control.

Here's a quick comparison:

  • Control: Direct ownership means you hold the actual tokens; ETFs are a security that represents your share of the fund.
  • Costs: ETFs charge management fees, while direct purchases may have trading and withdrawal fees.
  • Taxes: ETFs are taxed like securities in many countries; direct crypto may be treated differently.
  • Access: ETFs trade on traditional stock exchanges and can be held in retirement accounts.

What are the pros and cons of crypto ETFs?

The main pros of crypto ETFs include convenience, regulation, and diversification, while the main cons include management fees and lack of direct ownership.

Pros:

  • Easy to buy via traditional brokerage
  • No need to manage private keys
  • Backed by a regulated fund provider
  • Can be held in tax-advantaged accounts

Cons:

  • Ongoing expense ratios
  • Not direct ownership of the coins
  • Possible tracking error versus spot price
  • ETF prices can trade at a premium or discount

How to buy crypto ETFs?

To buy a crypto ETF, you need a standard brokerage account, then search for the ETF ticker and place a buy order just like you would with a stock.

Here's a step-by-step guide:

  1. Open a brokerage account at a platform like Fidelity, Charles Schwab, or Robinhood.
  2. Fund your account with cash.
  3. Search for the ticker of a crypto ETF, such as IBIT or BITO.
  4. Enter the number of shares you want and place a market or limit order.
  5. Monitor your investment through the brokerage's app or website.

What are the best crypto ETFs?

The 'best' crypto ETF depends on your goals, but popular options include spot Bitcoin ETFs like IBIT, FBTC, and ARKB, as well as diversified crypto ETFs.

Some well-known funds include:

  • Spot Bitcoin ETFs: iShares Bitcoin Trust (IBIT), Fidelity Wise Origin Bitcoin Fund (FBTC), ARK 21Shares Bitcoin ETF (ARKB)
  • Spot Ethereum ETFs: Fidelity Ethereum Fund (FETH), Grayscale Ethereum Trust (ETHE)
  • Futures ETFs: ProShares Bitcoin Strategy ETF (BITO)

When choosing, compare expense ratios, tracking accuracy, and the fund provider's reputation. Always do your own research before investing.

Final Thoughts

Crypto ETFs have made it much easier for beginners to invest in digital assets through traditional financial accounts. They combine the innovation of cryptocurrencies with the familiarity and regulation of exchange-traded funds.

By understanding how they work, their pros and cons, and how to buy them, you can decide whether a crypto ETF fits your investment strategy. As with any investment, it's essential to assess your risk tolerance and consult with a financial advisor if needed.