Navigating the Crypto ETF Landscape: A Comprehensive Guide
The current regulatory landscape for cryptocurrency is akin to a high-stakes chess match, with the U.S. Securities & Exchange Commission (SEC) and cryptocurrency market players locked in a strategic deadlock. At the heart of this standoff is the much-anticipated approval of a spot-based Bitcoin exchange-traded fund (ETF).
Most cryptocurrency investors opt for purchasing Bitcoin via centralized exchanges such as Coinbase Global Inc. (ticker: COIN). These investors then decide to store their Bitcoins either online in “hot storage” or offline in “cold storage”. However, this method necessitates a fair amount of technical knowledge for self-custody and can be daunting for some investors.
In response to this need, several fund managers have launched cryptocurrency ETFs that offer exposure to Bitcoin via futures contracts, a type of derivative.
“Crypto ETFs are essentially funds that track the price of select cryptocurrencies,” says Brandon Zemp, CEO of BlockHash. “They are generally low-cost, more diversified and require no real need to understand how crypto self-custody works, making them a simpler way of gaining exposure to the crypto market.”
However, the most sought after type of crypto ETFs is the spot-based Bitcoin ETF, which would hold underlying Bitcoin with a trusted custodian. These ETFs have yet to make their market debut.
The Regulatory Impasse
The current impasse is centered around a lawsuit by Grayscale Investment against the SEC. This followed the regulator’s rejection of Grayscale’s proposal to convert the closed-end Grayscale Bitcoin Trust (GBTC) into an open-ended ETF.
Grayscale argues that spot and futures Bitcoin ETFs have similar risks, as they are priced based on the same underlying spot markets, and should therefore be treated equally. However, the SEC counters that spot Bitcoin ETFs are more susceptible to manipulation and fraud because the underlying spot market remains unregulated.
In the interim, asset management firms like ARK Investment Management, BlackRock, WisdomTree, and Invesco have submitted their own prospectuses for a spot Bitcoin ETF. ETF analysts Eric Balchunas and James Seyffart from Bloomberg Intelligence estimated the odds of approval at 65% recently.
Exploring Available Crypto ETFs
Until the legal situation is resolved, investors can use the following seven ETFs for cryptocurrency exposure:
- ARK Next Generation Internet ETF (ARKW)
- ProShares Bitcoin Strategy ETF (BITO)
- VanEck Bitcoin Strategy ETF (XBTF)
- The Valkyrie Bitcoin Strategy ETF (BTF)
- The Valkyrie Bitcoin Miners ETF (WGMI)
- Bitwise Crypto Industry Innovators ETF (BITQ)
- Blockchain & Bitcoin Strategy ETF (BITS)
Let’s delve into each one of these ETFs to understand their strategies and potential for investors.
ARK Next Generation Internet ETF (ARKW)
While not entirely a cryptocurrency ETF, the ARKW ETF offers some exposure to cryptocurrencies. As of Aug. 17, 9% of the ETF was held in Coinbase, and a 7.6% allocation was made to GBTC, a closed-end trust that holds spot Bitcoin.
However, the primary focus of the ETF is on the next generation of the internet. Therefore, investors keen on cryptocurrency exposure must also be comfortable with exposure to cloud computing, cybersecurity, e-commerce, big data, artificial intelligence, the “Internet of Things”, and social networking stocks. The ETF charges a relatively high 0.88% expense ratio.
ProShares Bitcoin Strategy ETF (BITO)
Launched in October 2021, BITO was the first Bitcoin-linked ETF in the U.S. market. It offers exposure to Bitcoin via futures contracts, which are derivatives that represent agreements to buy or sell Bitcoin at a future date. While BITO has historically tracked the spot price of Bitcoin closely, it does not hold any underlying Bitcoin. The ETF charges a 0.95% expense ratio.
VanEck Bitcoin Strategy ETF (XBTF)
In competition with ProShares, VanEck launched its own Bitcoin futures ETF in November 2021. XBTF holds U.S. Treasury bills as collateral for CME Bitcoin futures contracts, which are rolled as necessary to maintain exposure to Bitcoin. With a lower expense ratio of 0.66%, XBTF may appeal to cost-conscious investors.
The Valkyrie Bitcoin Strategy ETF (BTF)
Despite its similar strategy to BITO, BTF has struggled to gain significant investor attention. The ETF, which charges a 0.95% expense ratio, launched in October 2021, just as the cryptocurrency bear market of 2022 began.
The Valkyrie Bitcoin Miners ETF (WGMI)
WGMI invests in Bitcoin miners, defined as companies that derive at least 50% of revenues or profits from Bitcoin mining, or provide chips, hardware, software or other services to miners. This makes WGMI more akin to a niche thematic technology sector ETF as opposed to a Bitcoin ETF. The ETF charges 0.75%.
Bitwise Crypto Industry Innovators ETF (BITQ)
For a broader focus on the overall cryptocurrency ecosystem, investors can consider BITQ. This ETF invests in a portfolio of stocks that represent the broad cryptocurrency industry. Many of these companies hold sizable reserves of Bitcoin or have Bitcoin and other cryptocurrencies traded on their platform. The ETF charges a 0.85% expense ratio.
Blockchain & Bitcoin Strategy ETF (BITS)
BITS offers Bitcoin investors a hybrid strategy. Around 46% of the ETF is held in the Global X Blockchain ETF (BKCH), which tracks 25 crypto miners, exchanges, hardware manufacturers and software developers. The rest of BITS follows a strategy similar to BITO and other Bitcoin “strategy” ETFs by employing CME Bitcoin futures and Treasury bills as collateral. The ETF charges a 0.65% expense ratio.
Conclusion
While the current regulatory landscape presents a challenge for crypto ETFs, investors have several options to gain exposure to Bitcoin and other cryptocurrencies. Despite the waiting game for the approval of a spot-based Bitcoin ETF, the existing ETFs offer a diverse range of strategies for investors to consider. As with any investment, investors should thoroughly research each ETF to understand their risk and reward potential.
