A cryptocurrency exchange-traded fund lets you invest in a cryptocurrency, such as bitcoin or ether, without having to buy or store the coins yourself.
An exchange-traded fund, or ETF, is a pooled investment that trades on a stock exchange. You buy and sell shares of it through a brokerage the same way you'd buy a share of stock.
The fund company does the hard part. It buys the cryptocurrency, or crypto and stores it with a regulated custodian. The ETF’s share price then rises and falls with the coin.
Most bitcoin and ether funds are set up as trusts rather than traditional funds. Technically, they’re called exchange-traded products, but they’re commonly known as ETFs, even by their issuers.
How a Spot Bitcoin ETF Works
Bitcoin is the largest cryptocurrency by market value. The biggest bitcoin fund is the iShares Bitcoin Trust ETF. It’s a spot fund, which means it holds the actual coin at the current market price.
Say you invest $1,000 in the iShares Bitcoin Trust. Your investment is a small part of a large pool of bitcoin that the ETF holds on investors' behalf.
If bitcoin climbs 20% over the next year, your shares should rise roughly 20%, to about $1,200. If bitcoin falls 20%, your shares drop to about $800.
ETFs generally charge an operating fee called an expense ratio. iShares Bitcoin Trust’s is 0.25%, or $2.50 a year on that $1,000. Fees can vary from fund to fund.
Why Investors Use Crypto ETFs
Crypto ETFs’ biggest draw is convenience. The fund is in your brokerage account, so you don’t have to set up a separate crypto exchange account or manage a digital wallet.
You also don’t have to worry about guarding private keys. They’re the secret passwords that control your coins, and they can’t be recovered if you lose them.
Selling a crypto ETF works like selling any stock, and profits are generally taxed as capital gains, with lower long-term rates from the IRS if you hold the fund for more than a year.
You can also add crypto ETFs to tax-advantaged accounts, like an IRA, which can be difficult or expensive to do with coins you bought directly.
A drawback for some investors is that you own fund shares, not coins. You can’t withdraw the crypto to a digital wallet, send it to someone, or spend it. You also pay the ETF’s expense ratio, while a coin you store yourself may cost nothing to keep after you buy it.
If you want to actually use crypto, buying it directly may make more sense. If you only want price exposure, an ETF may be a better investment.
The Main Types of Crypto ETFs
You can invest in cryptocurrency ETFs through a number of categories:
Spot Bitcoin ETFs
These funds hold real bitcoin and are the largest category of crypto ETFs. They can be the most direct and cheapest way to track bitcoin's price through a brokerage account.
Spot Ether ETFs
These funds hold ether, the second-largest crypto that powers the Ethereum network. Some ether ETFs have started staking, meaning they lock up coins to help run the network in exchange for small rewards, which can add a bit of extra return.
Altcoin ETFs
An altcoin is any cryptocurrency other than bitcoin. Altcoin ETFs let you track other cryptos such as Solana or XRP. Altcoins are smaller and often swing even more sharply in price, so the risk may rise for their funds.
Crypto Futures ETFs
These funds hold futures contracts, which are agreements to buy a coin at a set price on a future date, rather than the coin itself. Rolling contracts forward each month can cost money, so futures funds can lag the coin's actual price over time.
Crypto Company Stock ETFs
These funds are an indirect way to invest in cryptocurrency because they hold shares of businesses tied to crypto. They can include exchanges, finance companies that support crypto transactions, and companies that hold bitcoin.
Is a Crypto ETF Safer Than Owning Crypto?
A crypto ETF removes some practical risks, like losing your password, sending coins to the wrong address, or having an unregulated exchange collapse with your money inside.
It does nothing to reduce price risk, however, because the fund rises and falls as much as the coin does.
That risk may be considerable Over the past year, IBIT shares have traded as high as $71 and as low as $33 for a drop of more than 50% from peak to trough.
Because of crypto ETFs’ potential for volatility, it pays to be extra careful and start small. Depending on your risk tolerance, many financial advisors recommend putting between 1% and 5% of your investable assets into crypto-related products.
How to Buy a Crypto ETF
First you need a brokerage account. You can typically open one online in 10 to 15 minutes and fund it with a transfer from your checking account. From there, you search for the ETF’s name, enter the dollar amount or number of shares you want to invest, and place the order.
It’s important to note that bitcoin trades around the clock, but crypto ETFs trade only while the stock market is open, from 9:30 a.m. to 4 p.m. Eastern Time on weekdays.
That means big weekend move in a cryptocurrency can show up all at once in your fund's price when trading reopens Monday morning.
