Investing in Cryptocurrency Exchange-Traded Funds (ETFs)

Cryptocurrencies (Crypto) have become more and more popular for investors looking to diversify their portfolios. However, understanding and investing in crypto can seem like a daunting task given all the technical aspects to consider. Crypto ETFs can help, as they offer a way for investors to gain exposure to the crypto market without the complexities of buying and holding individual crypto. In this article, we explore the basics of crypto ETFs and how they work. We’ll also offer insight into how to invest in crypto ETFs and some of the risks and benefits to think about when investing.

You can buy and sell Crypto ETFs with a TD Direct Investing account, find out more here.

What are Crypto ETFs?

Crypto ETFs are investment funds that track the price of cryptos, either individually or in a group. Crypto ETFs are like regular ETFs as they are traded daily, and their price can fluctuate based on the investments and sales on any given day.

Crypto ETFs may be a great way for investors looking to benefit from the financial growth of the digital currency market, but who may be also looking to avoid some of the hassles associated with directly owning and storing crypto. With lots of crypto options to choose from, you might worry you’ll pick one that underperforms. Crypto ETFs can help take the guess work out of choosing between cryptocurrencies and offer investors the opportunity to diversify their investments across a basket of multiple cryptos. If you’re worried you don’t fully understand the crypto markets, worry not. Crypto ETFs allow new investors exposure to cryptos without having to understand them inside and out.

How do Crypto ETFs work?

You can invest in a crypto ETF with the same brokerage account that you would purchase regular ETFs through, and they are typically available in two types:

• The first type provides indirect ownership of shares of an actual crypto digital token. With this, an investment firm managing the fund purchases the crypto so when an investor purchases an ETF, they’ll indirectly own an amount of that cryptocurrency.
• In the second type, the investing firm doesn’t purchase or hold any crypto. Instead, this type of crypto ETF tracks derivatives like futures contracts and other crypto exchange traded products. This form of synthetic variant crypto ETFs mimics the prices of actual cryptos, along with the rises and falls.

What is the Crypto Regulations Status?

Regulatory framework is constantly evolving when it comes to the digital currency markets. As a relatively newer financial option on trading platforms, there are still many challenges the crypto industry is looking to address. The Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC) is actively working with - and encouraging feedback from industry experts on business models and potential options for the best way to approach this space.

Bitcoin ETF approval

In February of 2021, Canada was the first country in North America to offer crypto ETFs when the OSC approved the first Bitcoin ETF. Since then, additional options have become available as more companies have launched their own version of crypto ETFs. In January of 2024, the U.S. Securities and Exchange Commission (SEC) granted approval to several firms that planned to launch new Bitcoin Spot ETFs on major U.S. stock exchanges. Since then, interest has only risen in crypto ETFs and additional options have become available as more companies have launched their own version of crypto ETFs.

What is the Difference Between Block Chain ETFs and Crypto ETFs?

Blockchain ETFs are like regular ETFs that invest in any number of sectors or industries, except blockchain ETFs invest only in companies that have operations related to blockchain technology. Since the broader blockchain technology is a decentralized digital ledger that facilitates and records all kinds of transactions, it has many applications outside of crypto. This means that investments in blockchain ETFs can expand to many sectors beyond that of crypto ETFs.

As with any investment, there are also risks when considering blockchain ETFs. The technology is still relatively new and in early stages of development. Plus, many companies associated with the investment opportunities tend to be start-up tech companies which come with their own amount of uncertainty.

However, blockchain ETFs can still be considered a great diversification tool for people to access blockchain-related investments, without carrying the risk of owning stocks in the tech.

Crypto ETFs are offered as pooled assets available through traditional ETF brokerages. These ETFs offer some reassurance for individuals who wish to diversify their investment, or for those getting into crypto markets without fully understanding the technology. They also offer a more cost-effective way to invest in crypto markets and were actually created in an effort to provide alternative options to the market when crypto costs started escalating.

Crypto ETFs are available through most brokers who offer ETFs. They are traded daily, and their cost and value are impacted by the rise and fall of prices of the market.

What are the Benefits & Risks of Crypto ETFs?

Like any investment, crypto ETFs have their benefits, as well as their risks. Understanding both helps you ensure it not only meets your financial goals but also matches your risk profile.

Benefits include:

• Indirect investment in cryptocurrency may offer lower risk than holding directly, which means as there is no need for wallet storage, you do not need to worry about losing your private key to access your wallet and thus, your crypto holdings.
• Diversification by purchasing ETFs that span multiple cryptos.
• Less hassle and expense than owning and storing actual cryptos.
• Tax breaks as you can buy crypto ETFs in your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) through brokerages in Canada.
• No need to place your trust in a crypto exchange, which are relatively new and not as regulated as a discount brokerage or asset manager offering an ETF.

Risks include:

• Administration fees associated with ETFs.
• Potential for lack of transparency or inaccurate reflection of actual crypto prices.
• No actual ownership of crypto.

When considering your options, also recognize that there are other indirect ways of investing in the crypto market, such as:

• Investing in companies that hold crypto or offer a crypto product or service, like exchange payments
• Companies that produce hardware related to the crypto industry, such as graphics processors or computers to store or mine crypto

How to invest in Crypto ETFs?

If you’re looking to invest in crypto ETFs, you can purchase them through your discount brokerage firm. Many online brokers such as TD Direct Investing allow you to filter, research, buy and sell Crypto ETFs, just like the traditional ETFs.

Canadian investors can also hold crypto ETFs in registered accounts including Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

It’s important to note that investing in Crypto is considered highly risky and speculative, hence you must exercise caution when investing in such volatile securities.

FAQs related to Crypto ETFs

What is a bitcoin ETF?

A bitcoin ETF is an investment fund that seeks to track the price of bitcoin. These are further divided into spot bitcoin ETFs and Bitcoin futures ETFs. Spot bitcoin ETFs hold actual bitcoin which means it holds bitcoins equivalent to the market capitalization of the fund. On the other hand, the bitcoin futures ETFs operate by using derivatives, or contracts, that speculate on the future price of the underlying asset, bitcoin. Hence, a spot bitcoin ETF enables investors to gain exposure to the current price of bitcoin without having to hold the asset itself. 

What are Ethereum ETFs?

An Ethereum ETF is an exchange traded fund designed to track the price of Ether, which is a cryptocurrency based on Ethereum blockchain. This offers a convenient way for investors to gain exposure to Ether without directly holding the digital asset. Ether futures ETFs hold derivative contracts tied to the Ether's (cryptocurrency) token value and trade on regulated stock exchanges. Spot Ether ETFs, on the other hand, hold crypto directly.

Are Ethereum ETFs approved by the SEC?

Ether futures ETF that invest in Ether futures contracts are regulated and traded on traditional stock exchanges. Additionally, applications for Spot ETFs that hold Ethereum's ether (ETH) were approved by the SEC in July 2024. This means you can now trade Spot Ether ETFs through any discount brokerage firm that supports crypto ETFs such as TD Direct Investing.

Is it safe investing in Crypto ETFs?

With any investment there are risks, and crypto is no different. It can pose risks if a significant amount of your portfolio is invested in futures markets, or even if your ETF indirectly invests in crypto held by an investment firm. It’s important to thoroughly research all your potential investments, while considering your own personal risk profile along the way.

Are Crypto ETFs a good investment?

Crypto is generally seen as a high-risk, high-reward opportunity. While crypto ETF margins may not be as large as owning your own crypto tokens, the option to invest in crypto indirectly through ETFs is something that some investors may find appealing.

Is the Management fee on crypto ETFs higher than regular ETFs?

The management fee, or management expense ratio (MER), refer to the costs to cover the expenses of running the ETF and can impact overall investment returns, especially over the long term. The management fee for crypto ETFs is generally higher than the regular ETFs and can range widely. It can fall anywhere between 0.5 to 2%.

Is there a Crypto Index fund?

Investing in a crypto index fund is an option that allows you to invest in a specific index of crypto. It does offer the potential for reduced risks and diversification; however, it comes with the same risks of investing in a volatile market.

Conclusion

As investors look to diversify their portfolios and capitalize on the potential growth of the digital currency market, the introduction of crypto ETFs has gained traction. Crypto ETFs can offer investors a convenient and regulated way to invest in crypto, with the added benefit of diversification and risk management. As with any investment, it’s important to understand the risks and benefits of crypto ETFs to see if they work for you.