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Cryptocurrencies like Bitcoin, Dogecoin and Ethereum have been dominating headlines around the world for many months. A surge of new crypto ETFs have been launched to make it easier for investors to buy cryptocurrencies without the headaches, security risks and complexity of setting up and managing crypto wallets and keys.

No longer wallowing in nerdy obscurity, cryptocurrencies are now a feature of many personal and professional portfolios. But, how do the new generation of crypto ETFs compare and where can investors go to find the right one for them? We take a look below.

What Cryptocurrencies can be bought as ETFs?

Given Bitcoin is the largest, most liquid and most well-known cryptocurrency, it’s no surprise that the majority of crypto ETFs track this coin. However, as the segment expands, issuers are providing ETFs that provide exposure to the price of Ethereum, Ripple, Bitcoin Cash, Binance Coin, Tezos, Polkadot, Litecoin, Cardano, Stellar, NEO, EOS and Cosmos. More are likely to follow if demand remains high.

There are also two ETFs that provide exposure to a diverse basket of different crypto assets, meaning investors can gain exposure to the sector without betting on a specific cryptocurrency.

But what are the differences in investing in cryptocurrencies via an ETF instead of buying it directly?

What are the Advantages of Crypto ETFs?

An easier way to invest

Crypto ETFs can be bought, held and sold using a normal brokerage account.

Unlike direct investment in (for example) Bitcoin, investors do not need to go through the challenges of setting up a cryptocurrency wallet or trading on unregulated cryptocurrency exchanges. Millions of investors’ existing brokerages or banks are already set up for trading ETFs, so this means no additional steps are necessary to start trading adding cryptocurrencies to your portfolio.

Deal with the businesses you trust

Bitcoin ETFs are issued by regulated companies and trade on mainstream, regulated exchanges so you can invest with greater confidence knowing that all parties involved have been checked and that their trades are monitored, to prevent market abuse or funding illegal activities. This would not be the case if investors invest using one of the many unregulated offshore cryptocurrency exchanges, apps or platforms.

With their investment physically backed and in custody of regulated entities, Bitcoin ETFs help mitigate the risk of fraud and avoid the risk of scandal, collapses, hacks and failures that are associated with unregulated crypto exchanges.

No Wallet to Lose

There have been many horror stories of investors losing the key to their Bitcoin wallet and being unable to access thousands or even millions of dollars’ worth of Bitcoin.

An additional benefit of the ETF is that there is no risk of losing your key and suddenly being unable to access your coins. The buying, storing and selling of the coins backing the ETF is handled by the Authorised Participant and the ETF is stored in your brokerage account just like a normal share.

Disadvantages of Crypto ETFs

This doesn’t mean that investors shouldn’t exercise caution with Crypto ETFs. Bitcoin, and other crypto assets were designed as currencies, not primarily as investment assets. They can be very volatile and it can be particularly difficult to gauge the fair value. Here are some downsides to using a Crypto ETF vs buying directly on a crypto exchange.

Tracking isn’t always perfect

Some ETFs directly hold physical Bitcoins, Ethereum or other cryptocurrencies. Others will replicate the asset synthetically via derivatives. Different structures will give different results in terms of replication and moves in the price of the coin not always be exactly reflected in the price of the ETF.

Crypto ETFs come with extra costs

ETFs have their own layer of fees that investors would not incur should they elect direct investment in Bitcoin. Overall costs of ownership include transaction costs (the cost of trading shares of the ETF) as well as management fees (the cost of holding shares of the ETF). Fees for Bitcoin ETFs can be high – often upwards of 2% a year. Over the long run these expenses will hinder returns relative to owning Bitcoin directly.

You can’t buy things with a Crypto ETF

If you own Bitcoin or other cryptocurrencies directly, you can use them just like a regular currency to buy things or make payments as well as benefiting from any increase in value relative to your local currency. When you buy a Crypto ETF, you cannot use the currency to make (or receive) payments; you can only benefit from positive price changes.


Guide to Bitcoin ETFs

Starting off with the biggest and most well-known cryptocurrency, we see a competitive market with 14 funds now available worldwide. For once, the US was late to the party, meaning that European investors have a far wider range of choices than their transatlantic counterparts.

Price

Bitcoin ETFs tend to be priced on the higher end of the scale, which is fair enough considering that the issuer’s removing a lot of the complexity and security risks that come from managing your own crypto wallet and keys.

Nonetheless, there’s a significant difference in the fees charged by different issuers, which ultimately will eat into the returns the investor receives.

The cheapest Bitcoin ETF we track is the US-listed CI Galaxy Bitcoin ETF (BTCG) which charges an annual fee of 40bps (equivalent to $4 for every $1,000 invested). On the other end of the scale, the most expensive Bitcoin ETFs charge annual fees of 250bps (equivalent to $25 for every $1,000 invested).

Of the four ETFs that track the Bloomberg Bitcoin Price Index, the costs range from 98bps a year to 250bps – for exactly the same exposure to exactly the same asset. Don’t forget that the point of investing is to make you wealthier, not line the pockets of asset managers, so it is worth questioning why some are so much more expensive than others. If one issuer can give you Bitcoin exposure for 40bps, then why can’t the others?

While price is one important dimension to an ETF, investors should also pay attention to the Tracking Difference between the product and the underlying cryptocurrency as this can represent a hidden ‘cost’ to the investor. Detailed information on the replication accuracy and tracking difference of each Crypto ETF can be found on trackinsight.com.

Size

While the liquidity of an ETF is directly linked to the liquidity of the underlying asset class, the size of a fund can be an important consideration for investors. In Europe, the largest Bitcoin ETF is also the oldest and most expensive – the Coinshares Bitcoin Tracker Euro ETC. This shouldn’t be surprising as, for many years it had no competition and could charge what it wanted. However, the newer BTCEetc Bitcoin Exchange Traded Crypto ETC (BTCE) which launched in the middle of 2020 has seen assets surge with a more competitive 200bps price and the additional features of centrally-cleared trades and redemption to ‘physical’ Bitcoin or cash.

BTCE has also seen the most interest from European investors this year, leading the flow league table with $585 million of new flows so far this year.

North American investors had to wait until 2021 to get their first Bitcoin ETF, care of Purpose Investments, meaning the market has had less time to gather assets. The largest existing Bitcoin ETF in the region is the Purpose Bitcoin ETF CAD with $718 million of assets. It is also priced mid-range at 100bps.

Other Crypto ETFs

Moving away from Bitcoin, we see that issuer 21Shares is leading the charge to bring crypto assets to your brokerage account, providing eight of the nine non-Bitcoin crypto ETFs.

With no equivalent products or competition for assets, there is no benchmark for comparison for these funds (which may explain their high fees). Assets and flows are unremarkable and many of the crypto assets tracked have far lower name recognition, liquidity and market cap than Bitcoin. This means they may struggle to raise assets without a spike in the underlying cryptocurrency. However, if you strongly desire to buy Ripple, but don’t want to manage your own crypto wallet, this is the only game in town.

21Shares also provides two diversified crypto baskets that track a combination of five and 10 different crypto currencies. While this can offer diversification, investors may question why they pay the same fees (250bps a year) to own a single Ethereum ETF as they do to own a basket of 10 cryptocurrencies which includes Ethereum.

Active Crypto

We track one actively-managed crypto ETF – the FiCAS Active Crypto ETP (BTCA) that can hold any combination of the top 15 crypto assets (per their factsheet). However, as with many active strategies, you have no transparency on the holdings and weights and are faced with a hedge-fund style pricing structure of 200 bps annual fee and 2,000 bps performance fee above a high-water mark.

This is significant, as without a performance benchmark, investors will pay eye-scorching fees if the fund hit a new high – regardless of the performance of the wider crypto market. As with all active strategies, a close look at the track record will be a critical part of the decision to choose this strategy over your own allocations.

Where Next for Crypto ETFs?

The pace of change is so rapid that it’s hard to make predictions on the direction of the crypto ETF market. Having come from nothing to become a $7 billion+ industry in just a few years, the segment has become a significant growth driver for the ETF industry.

The US has just got started, with its first Bitcoin ETF listing earlier in 2021. It would be reasonable to expect that a far wider variety of crypto currencies will be available for US investors in future – though high-profile crypto assets like Dogecoin still have no ETF tracking them. As a result, this would open the door for competitively-minded issuers to create a differentiated offering.

Given the trend towards ANTs (Active Non-Transparent ETFs), there is also a huge opportunity for active managers to prove their alpha-generating abilities with this nascent asset class. This means more crypto baskets and crypto strategies may come to market.

We have yet to see any of the ‘big name’ issuers enter the crypto space, but as the market matures and crypto assets become more accepted as both transactional currencies and investment products, the siren call of lucrative fees may be hard to resist.

Whatever you think of the future, it’s clear that crypto ETFs are here to stay. Tomorrow’s landscape looks more crowded, more competitive and more complex. Investors will have more homework to do when selecting the right product. With full data on the global universe of crypto ETFs, Trackinsight will provide the tools and information to help them in their research.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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