Cryptocurrency ETFs vs. direct cryptocurrency investing
Editorial staff, J.P. Morgan Wealth Management
- There are various ways to gain exposure to cryptocurrency, and buying shares in a cryptocurrency exchange-traded fund (ETF) is one option.
- ETFs may be a more convenient option for investors to buy and hold cryptocurrency assets (as opposed to owning cryptocurrency directly) because the shares can be bought and sold in a brokerage account and held alongside traditional assets like stocks and bonds in a single portfolio.
- There are risks, such as significant price volatility, that come with buying cryptocurrency. This holds true for cryptocurrency-focused ETFs, so it’s important that investors carefully consider the risks involved.
As an investor, it can be difficult to parse out what the options are if you’re considering dipping your toes into cryptocurrency. One possibility is cryptocurrency ETFs.
In this article, we’ll dive into what cryptocurrency ETFs are, the various kinds of cryptocurrency ETFs available, and the difference between buying shares of a cryptocurrency ETF and buying cryptocurrency directly.
First things first: What is an ETF?
Generally speaking, ETFs are investment funds that are traded on stock exchanges. They are a basket of assets that can include a combination of stocks, bonds, currencies, commodities and other investments. Some are diversified across asset classes and sectors, while others are curated with a focus – for instance, an ETF focused on gold.
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The price of an ETF depends on supply and demand and can fluctuate throughout the trading day, just like stocks. ETFs can also be traded throughout the day.
ETFs are popular with investors because they typically have low fees and in some cases can provide instant diversification for investors.
What is a cryptocurrency ETF?
To understand what cryptocurrency ETFs are, it’s important to first have a basic understanding of what cryptocurrency is. Cryptocurrency is a digital form of currency that can be used for internet-based electronic payments on a distributed ledger called a blockchain. In most cases, cryptocurrency functions independently of central banks. Thousands of cryptocurrencies exist, and that number is increasing.
Some cryptocurrencies – like bitcoin – are more established than others. Bitcoin, the world’s first cryptocurrency, was invented in 2008.
A cryptocurrency ETF refers to an ETF that tracks the performance of cryptocurrencies (or a basket of them) and in some cases directly holds cryptocurrencies. These ETFs are relatively new; the U.S. Securities and Exchange Commission (SEC) first approved the launch of several bitcoin ETFs in January 2024, and in a relatively short amount of time the offerings have expanded.
Today, not only are there ETFs that hold bitcoin, but there are ETFs that hold ethereum and others that hold investments in cryptocurrency-related companies or technologies. Lastly, there are multi-strategy ETFs with direct or indirect cryptocurrency exposure that also hold other assets.
As with other kinds of ETFs, the structure of cryptocurrency ETFs can vary widely. Some may include only cryptocurrencies, while others might include cryptocurrencies as well as stocks and ETF holdings. Some cryptocurrency ETFs also use options and futures to leverage cryptocurrency.
Where can you buy cryptocurrency ETFs?
You can purchase cryptocurrency ETFs through many types of investment accounts. Some of the accounts through which you may be able to buy and own cryptocurrency ETFs include the following:
- Brokerage accounts
- 401(k)s
- Traditional and Roth individual retirement accounts (IRAs)
What’s the difference between buying shares of a cryptocurrency ETF and buying cryptocurrency directly?
There are some key differences – as well as pros and cons – to consider if you’re weighing buying shares of a cryptocurrency ETF versus buying cryptocurrency directly from an exchange. It’s important to note, however, that both options may pose similar investment risks given the volatility of cryptocurrency in general.
Let’s walk through some of these critical considerations.
Pros of buying a cryptocurrency ETF
- Ease of purchase: Cryptocurrency ETFs allow investors to gain exposure to cryptocurrency markets in a traditional brokerage account – without requiring those investors to go through certain hurdles that come with buying cryptocurrency directly, including holding a separate digital wallet to transact. This approach can help investors integrate cryptocurrency in a single investment portfolio alongside assets like stocks and bonds.
- Diversification: With some cryptocurrency ETFs, investors can get instant exposure to both cryptocurrencies and crypto-related companies with a single purchase, rather than needing to buy and hold a variety of cryptocurrencies and companies to achieve comparable diversification.
- Security: A cryptocurrency ETF is a regulated fund, so you’ll be exposed to fewer crypto-specific security risks, such as vulnerability to hacking, since you won’t hold the cryptocurrency directly.
Pros of buying cryptocurrency directly
- Direct asset-performance correlation: Due to challenges in tracking this evolving sector, a cryptocurrency ETF’s performance may deviate from the underlying assets in the fund. This won’t happen if you hold cryptocurrencies directly.
- Clarity around your investments: When you buy cryptocurrency directly, you’ll likely know exactly what you’re buying. When you buy shares of a cryptocurrency ETF, however, you may need to dig deeper to understand the investments included in the fund, along with their risks.
- Potentially lower fees: While ETF expense ratios are usually relatively low, the fees to buy cryptocurrency directly may be even lower depending on the trading platform you’re using.
- Potential for 24/7 trading: While ETFs are typically traded during regular market hours, you may be able to trade direct cryptocurrency holdings 24/7.
- Unrestricted use: Investing in cryptocurrency ETFs restricts your ability to transfer and use the underlying digital assets. If you hold cryptocurrency directly, you may be able to use it for payments.
What opportunities and risks come with investing in cryptocurrency ETFs?
In general, buying a cryptocurrency ETF may offer more consumer protection than buying cryptocurrency directly. When you buy cryptocurrency ETFs, the funds are held in a brokerage account that is insured by the Securities Investor Protection Corporation (SIPC) up to $500,000 in the event that the brokerage firm fails. It’s important to note that this does not protect investors from a decline in investment value. Direct cryptocurrency investments are not insured by the SIPC or the Federal Deposit Insurance Corporation (FDIC).
This isn’t an exhaustive list of risks, but some of the major ones include the following:
- Volatility: Cryptocurrency can be volatile compared to other assets – prices may change often and significantly.
- Regulatory uncertainty: Government regulations around cryptocurrency may change and vary according to where you live. This uncertainty not only can lead to price volatility for cryptocurrency ETF shares but also can have tax and other implications. This holds true even when investing in ETFs within regulated securities markets.
- Potential liquidity issues: Regarding cryptocurrency ETFs specifically, the underlying assets in these funds may not always be as liquid as those in traditional ETFs; this can pose risks to investors.
The bottom line
Cryptocurrency ETFs provide a way to gain exposure to cryptocurrency using a traditional brokerage account. While this approach can simplify things when it comes to purchasing and holding digital assets, it’s important to remember that cryptocurrency ETFs still have many investment risks similar to those inherent in direct cryptocurrency ownership. You’ll want to thoroughly research any cryptocurrency investment you’re considering before adding it to your broader portfolio.
Frequently asked questions about cryptocurrency ETFs
Some cryptocurrency ETFs focus solely or mostly on bitcoin instead of other cryptocurrencies. In some cases, these cryptocurrency ETFs may even hold bitcoin directly. Some cryptocurrency ETFs hold bitcoin futures, which means the fund has bought futures contracts. Other bitcoin ETFs may also include assets other while maintaining a larger focus on bitcoin.
If you’re interested in ETFs but don’t want to buy a full share, you may be able to purchase a partial or fractional share, depending on your brokerage account type.
For example, let’s say one share of a cryptocurrency ETF costs $100, but you want to invest only $50. If the option is available to you, you could buy a fractional share with $50, which would be equal to half a share (.50).
It’s important to know that some brokerages allowing for the purchase of fractional shares have a minimum purchase amount.
One of the benefits of investing in an ETF can be receiving dividends. You can either receive the dividends as cash or reinvest them in the ETF. The latter option is known as a dividend reinvestment plan (DRIP).
Some cryptocurrency ETFs pay dividends. Keep in mind, however, that how much you earn in dividends directly correlates to the number of shares you own. Be sure to read the summary prospectus for the ETF you’re interested in purchasing to learn more about its dividend payouts.
Editorial staff, J.P. Morgan Wealth Management
