Crypto ETFs

This report explores what crypto ETFs are, providing an overview of the current crypto ETF market and looking into how they work as investment vehicles. Plus, we explore their features, advantages and significance, and drawbacks.

Feb 02, 2024 Crypto ETF

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Key Takeaways

  • Similar to individual stocks, an exchange-traded fund (ETF) is a type of investment fund traded on stock exchanges designed to track the performance of a specific index, sector, commodity, or asset class. Crypto ETFs are exchange-traded investment funds that track the price performance of one or more cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) by investing in a portfolio linked to their value. They offer several benefits similar to the traditional ETFs, including better accessibility, transparency, and cost-efficiency for investors. 
  • Currently, there are different types of crypto ETFs offered in the market, namely Spot (physical) crypto ETFs, Futures-based crypto ETFs and Crypto Industry ETFs.
  • Spot crypto ETFs, also known as physical ETFs, directly invest in cryptocurrencies and securitise them. By issuing and redeeming shares, spot crypto ETFs provide increased liquidity in the cryptocurrency market and offer retail and other investors the opportunity to gain exposure to these assets. The strategy of all the current spot BTC ETFs is to long Bitcoin and short USD.
How Crypto ETFs Work
  • Futures-based crypto ETFs do not hold the actual cryptocurrency. Instead, they track the price of crypto through futures contracts, which allow traders to speculate on the future price of an asset without actually owning it. Currently, there are about 22 futures-based crypto ETFs offered in the market, accounting for an estimated total of US$2.65 billion in AUM.
Bitcoin Futures ETF Volumes
Ethereum Futures ETF Volumes
  • Crypto Industry ETFs hold shares in companies that have invested in cryptocurrency or whose business involves cryptocurrency trading, mining, or other services. These companies are considered to be involved in the development, adoption, and utilisation of blockchain technology and cryptocurrencies, and these ETFs provide investors with diversified exposure to the industry without directly investing in cryptocurrencies.
  • On 10 January 2024, the US Securities and Exchange Commission approved the first-ever US spot Bitcoin ETFs, and they commenced trading on US exchanges. This was considered a pivotal moment for the crypto industry, as it potentially signifies a shift to Bitcoin being an institutional-grade asset, tradeable as a regulated financial product in the US. The new ETFs have seen total net inflows topping over US$1 billion since their launch. Grayscale’s ETF has shown net outflows, while BlackRock’s ETF has received the most inflows.

US Spot Bitcoin ETFs

US Spot Bitcoin ETFs
Source: Funds’ Websites
*BRRNY: CME CF Bitcoin Reference Rate — New York Variant
#Classification is based on the Investment Company Act of 1940 (‘1940 Act’)
US Spot Bitcoin ETF Net Flows
  • Although ETFs offer benefits to both individual and institutional investors, there still exist drawbacks, including higher management fees, as well as potentially lower liquidity than directly holding crypto, price tracking errors, and limited trading hours, amongst others.
  • The recent approval of spot Bitcoin ETFs has been referred to as a ‘watershed’ moment for the industry, offering an estimated US$38.6 billion inflows into Bitcoin ETFs by the first three years.

Illustrative US Spot Bitcoin ETFs Market Sizing & Inflows by Year

Illustrative US Spot Bitcoin ETFs Market Sizing & Inflows by Year
Source: Galaxy Digital
  • The integration of digital assets like Bitcoin into mainstream financial products like ETFs marks a significant development in the acceptance of cryptocurrencies and accelerates massive crypto adoption.

Read the full report: Crypto ETFs

Authors Research and Insights team

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