There’s currently one way to buy cryptocurrency exchange-traded funds in the U.S. — through the Bitcoin Strategy ETF that deals in Bitcoin futures traded on the Chicago Mercantile Exchange. More such possibilities are on the horizon stateside, but these products have already gained popularity around the world. As these products gain traction domestically, consider working with a financial advisor as you explore investing in digital assets like cryptocurrencies.
What Is a Crypto EFT?
An exchange-traded fund (ETF) is a fund-based financial product that lists its shares on mainstream stock exchanges alongside traditional equities. This gives them far more liquidity than mutual funds. You can buy and sell shares in an ETF as easily as you can buy and sell shares of stock, while mutual funds generally have strict trading rules that somewhat limit their liquidity.
As a fund-based product, an ETF is made up of a collection of assets. The fund will invest in a portfolio of securities selected around a specific theme. For example, you might create a technology ETF, in which case the fund will be made up of assets in and around high-technology companies. Or you might have an S&P 500 fund, which would hold a mix of assets designed to track the S&P 500 index.
The return of any given ETF is based on the overall return of its various assets. This return will generally be more stable than investing in a single asset. You lose the potential for runaway gains that you might have if a single stock takes off, but you also mitigate the risks of that single stock losing significant value.
A cryptocurrency ETF is a fund that takes its value from the cryptocurrency markets. This can mean one of two main things:
- The fund might invest exclusively in cryptocurrencies. It will be made up exclusively of products such as Bitcoin and Ethereum tokens and, as a result, the value of the fund will reflect the value of the cryptocurrencies that it holds.
- The fund might invest in cryptocurrencies as an asset class. This means that the fund might hold some direct investments in cryptocurrencies, but it will also invest in companies around the crypto marketplace. For example, it might hold shares of stock in cryptocurrency marketplace companies or companies which make crypto wallets and other trading tools. Or the fund might invest in futures and options contracts built around cryptocurrencies. The overall goal will be to reflect the value of cryptocurrency as an asset, while avoiding some of the risks involved with buying specific products.
How Can You Invest in Cryptocurrency ETFs?
On October 19, ProShares launched its Bitcoin exchange-traded fund, the nation’s first ETF linked to the $1.1 trillion cryptocurrency. The fund, which trades under the ticker symbol BITO, offers investors exposure to Bitcoin without having to purchase the highly volatile digital currency. Rather than mimicking the price of Bitcoin, the ProShares ETF tracks the price of Bitcoin futures – contracts between two parties to buy or sell the cryptocurrency at an agreed-upon price.
Holding BITO in your portfolio will come at a premium. With an expense ratio of 0.95%, investors will pay $95 to ProShares each year for every $10,000 they have in the fund. That’s considerably higher than the average mutual fund or ETF. In 2020, the asset-weighted average expense ratio of all U.S. open-end mutual funds and ETFs was 0.41%, according to Morningstar.
Once you have an account, determine how many shares of BITO you want to purchase and at what price you’re comfortable buying. Shares of the BITO fund began trading at $40.88 during its October 19 debut, while Bitcoin surged more than 4% to over $63,800 later in the day.
But you don’t have to go it alone. A financial advisor can execute trades on your behalf and provide expert advice beyond just buying and selling shares of BITO.
Cryptocurrency is famously decentralized. There is no central trading authority. That leads to more instability and price fluctuation than the market would experience with a single, central trading floor. A Bitcoin ETF stablizes things a bit. The ETF itself still participates in the decentralized market of crypto, but individual investors have a central body with which to work.
This has the potential help increase liquidity in the market and make it easier for individual investors to get into cryptocurrency. In particular it can allow people to invest in cryptocurrency through their ordinary investment portfolio, as opposed to the current system which requires investors to learn an entirely new trading language.
The ProShares fund may be the first ETF linked to Bitcoin, but it likely won’t be the last. Grayscale Investments and the New York Stock Exchange are seeking to convert the $40 billion Grayscale Bitcoin Trust into an ETF, but will need federal approval first. If the move is approved, investors would have access to an ETF that invests directly in Bitcoin, not just futures contracts.
The Bottom Line
Crypto ETFs are exchange-traded funds built out of cryptocurrency assets or assets of cryptocurrency-adjacent industries. These ETFs are not currently legal for trade in the United States, although many investors and some brokerages have begun advocating for that. One of the reasons for familiarizing yourself with cryptocurrency ETFs now is because they may soon be traded in the U.S.
Tips on Investing
- Consider working with a financial advisor as you fine tune your investment portfolio’s asset allocation. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use the SmartAsset investment calculator to get a good idea of how your investments will do over time.
Photo credit: ©iStock.com/JuSun, ©iStock.com/CasPhotography, ©iStock.com/insta_photos