Cryptocurrencies have made several people into millionaires all by investing in the right coin at the right time. However, there is an even larger number of people that have lost fortunes in these markets, owing to their wild volatility. The best way to split the difference is to invest in a crypto exchange-traded fund (ETF). This way, you gain exposure to this highly profitable market while still alleviating some of the risks associated with it.
About crypto ETFs
A crypto ETF tracks the prices of one or more digital assets. These exchange-traded funds do not hold actual crypto tokens. Instead, they invest in futures contracts of these assets, which enables them to gain exposure to their prices without actually holding the coins themselves. The first such ETF to gain SEC approval was ProShares Bitcoin Strategy ETF (BITO). BITO was launched in October of 2021 at the New York Stock Exchange. It holds BTC futures.
Some ETFs, rather than holding derivatives of cryptocurrencies, invest in blockchain companies. This is to means they hold stocks of a variety of companies involved in crypto mining or those that have the majority of their holdings in crypto.
Why you should invest in crypto ETFs
- They are passively managed
These funds typically have professional fund managers, which means you do not have to actively evaluate the performance of each component of the ETF. By involving a variety of companies or digital assets, they allow you to hold several profitable assets in a single trade. It is also less risky than trading individual cryptos on the market.
- They promote portfolio diversification
By sheer virtue of holding an ETF, your portfolio becomes instantaneously diversified. This is because, in essence, you hold multiple digital assets or company stocks. For this reason, you should ensure you examine each of the assets contained before settling on any one ETF.
- They are not prone to malicious cyber attacks
Owners of digital assets often lose their holdings to hackers, especially if these assets were stored on exchanges or in hot wallets. By investing in ETFs, you completely eliminate this risk as no cyber threat can transfer ownership of your stake of the fund.
- They are tax-efficient
Cryptocurrencies remain largely unregulated in most countries of the world. For that reason, the taxation of these digital assets is not well defined. To that end, most pension funds and tax havens do not allow the direct purchase of cryptos. Since ETFs are regulated, they can give such funds exposure to the highly profitable crypto market.
Top Crypto ETFs of 2022
- Bitwise Crypto Industry Innovators ETF (BITQ)
BITQ is a passively managed fund that tracks the performance of the top 30 crypto Innovators index by Bitwise. This index contains stocks of 30 companies involved in blockchain operations such as crypto mining, manufacturing mining equipment, and providing financial services.
Each of the companies in this index holds at least 75% of their net assets in crypto. These companies account for 85% of the fund’s holdings. The remainder, 15%, contains stocks of companies that hold at least $100 million in crypto. The fund’s top holdings include stocks listed below.
- Silvergate Capital finances blockchain-related businesses.
- MicroStrategy offers cloud computing solutions and has the majority of its holdings in BTC.
- Coinbase Global is a company behind a popular centralized crypto exchange.
This ETF has a 0.85% expense ratio and holds assets amounting to $82 million.
- Global X Blockchain ETF (BKCH)
This passively managed fund invests in blockchain companies, exchanges, and firms running crypto mining operations. It features a 0.50% expense ratio, with a total AUM (assets under management) of $86 million. The portfolio contains 25 to 40 stocks of these blockchain companies.
Here are some of them.
- Coinbase Global is a market leader in the crypto exchanges space.
- Riot Blockchain Inc owns the largest crypto mining plant in the United States.
- Marathon Digital is a renowned Bitcoin mining firm.
- Siren Nasdaq NexGen Economy ETF (BLCN)
BLCN is a crypto ETF that was launched in 2018. It tracks the Nasdaq Blockchain Economy Index, which contains leading companies that utilize blockchain technology in their operations. At the time of writing, the fund consists of 63 stocks. To achieve true diversification, the managers ensure that none of the fund’s top 10 holdings accounts for more than 3% of its AUM.
The fund features a 0.68% expense ratio and a total AUM of $209 million. Some of its top holdings are listed below.
- IBM is a renowned technology company that’s switching to blockchain business solutions.
- Baidu Inc is a Chinese tech firm that produces blockchain products.
- JD.com is a Chinese e-commerce company that provides blockchain solutions to its business clients.
- Amplify Transformational Data Sharing ETF (BLOK)
This was the first ETF to invest in blockchain-related companies. It launched in 2018 and currently holds $906 million in AUM and features a 0.71% expense ratio. The portfolio mainly comprises crypto mining companies, exchanges, and developers of blockchain apps. By year-end 2021, this portfolio’s allocation was 38% transactional blockchain companies, 23% crypto miners, and 11% of various crypto venture firms.
Some of these companies include:
- NVIDIA Corp, which produces processors used in mining.
- Coinbase Global Inc.
- Silvergate Capital Corp.
- ProShares Bitcoin Strategy ETF (BITO)
As aforementioned, this was the first ETF that holds Bitcoin futures to gain SEC approval in 2021. It features an annual expense ratio of 0.95%, which means your expenses will be $95 for every $10,000 you invest. It holds about $1 billion in AUM.
Conclusion
Exchange-traded funds in the crypto space offer investors exposure to this highly volatile market, all the while reducing the risk that would otherwise be involved in trading the cryptos themselves. However, ETFs are still speculative financial assets, and as such, they still carry some risk. Therefore, proper due diligence is necessary before investing in any of these vehicles. To that end, any recommendations in this article do not in any way constitute investment advice.
