The cryptocurrency market is currently in the midst of a regulatory deadlock with the U.S. Securities & Exchange Commission regarding the approval of a spot-based Bitcoin exchange-traded fund, or ETF.
Normally, most cryptocurrency investors buy Bitcoin via centralized exchanges like Coinbase Global Inc. (ticker: COIN) and choose to either hold it online in “hot storage” or offline in “cold storage.” However, this approach requires technical knowledge for self-custody, which may deter some investors.
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To meet this need, numerous fund managers have launched cryptocurrency ETFs that currently offer exposure to Bitcoin via futures contracts, a type of derivative.
“Crypto ETFs are essentially funds that track the price of a select individual cryptocurrency or even a group of 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 sought-after holy grail of crypto ETFs remains the spot-based Bitcoin ETF, which would actually hold underlying Bitcoin with a trusted custodian. However, these ETFs have yet to debut on the market.
At the heart of this impasse is an ongoing lawsuit by Grayscale Investment against the SEC after the regulator rejected Grayscale’s proposal to convert the closed-end Grayscale Bitcoin Trust (GBTC) into an open-ended ETF.
“Grayscale’s lawsuit asserts that the spot and futures Bitcoin ETFs have similar risks and are priced based on the same underlying spot markets and should be treated equally,” says Ron Geffner, partner at Sadis & Goldberg.
However, despite Grayscale’s arguments, the regulator so far remains steadfast with its reluctance to approve a spot Bitcoin ETF, citing numerous risks.
“The SEC disagrees and counters that while spot and Bitcoin futures ETFs are correlated, spot Bitcoin ETFs are more vulnerable to manipulation and fraud because the underlying spot market remains unregulated, while Bitcoin futures ETFs trade on the Chicago Mercantile Exchange, or CME, which has sufficient safeguards against fraud and manipulation,” Geffner says.
In the interim, notable asset management firms like ARK Investment Management, BlackRock, WisdomTree and Invesco have also submitted their own prospectuses for a spot Bitcoin ETF, with ETF analysts Eric Balchunas and James Seyffart from Bloomberg Intelligence estimating the odds of approval at 65% recently.
Until the legal situation is resolved, investors can still use the following seven ETFs for cryptocurrency exposure:
| ETF | Expense ratio |
| ARK Next Generation Internet ETF (ARKW) | 0.88% |
| ProShares Bitcoin Strategy ETF (BITO) | 0.95% |
| VanEck Bitcoin Strategy ETF (XBTF) | 0.66% |
| The Valkyrie Bitcoin Strategy ETF (BTF) | 0.95% |
| The Valkyrie Bitcoin Miners ETF (WGMI) | 0.75% |
| Bitwise Crypto Industry Innovators ETF (BITQ) | 0.85% |
| Blockchain & Bitcoin Strategy ETF (BITS) | 0.65% |
ARK Next Generation Internet ETF (ARKW)
Although not a pure-play cryptocurrency ETF, the actively managed ARKW ETF still has some palpable exposure. For example, as of Aug. 17, 9% of the ETF was held in Coinbase. ARKW also features a 7.6% allocation to GBTC, a closed-end trust that holds spot Bitcoin. This is to help the ETF meet its goal of providing exposure to Blockchain and peer-to-peer, or P2P, technology.
Still, the ETF is mainly focused on the next generation of the internet. Investors buying ARKW for its cryptocurrency exposure must also be fine with exposure to cloud computing, cybersecurity, e-commerce, big data, artificial intelligence, the “Internet of Things” and social networking stocks. The ETF also charges a fairly high 0.88% expense ratio.
ProShares Bitcoin Strategy ETF (BITO)
BITO made its debut in October 2021 as the first Bitcoin-lined ETF in the U.S. market. This provides 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 actually hold underlying Bitcoin.
As of Aug. 16, BITO’s assets were split fairly evenly between CME Bitcoin futures dated for August and September, respectively. As time goes on, the ETF will “roll” its futures contracts, selling the expiring ones and buying later-dated ones to maintain exposure to Bitcoin. Due to its use of derivatives and frequent turnover, this ETF is fairly pricey, with a 0.95% expense ratio.
VanEck Bitcoin Strategy ETF (XBTF)
To compete with ProShares, VanEck launched its own Bitcoin futures ETF in November 2021. The actively managed XBTF holds a number of U.S. Treasury bills as collateral for CME Bitcoin futures contracts, rolling as necessary to maintain exposure. Structured as a C-corporation, XBTF offers potential tax efficiencies.
Despite its low assets under management, or AUM, of around $47 million, investors may like XBTF over BITO due to its lower expense ratio. By undercutting BITO with a 0.66% expense ratio, XBTF may appeal to cost-conscious investors. Still, 0.66% is fairly expensive when considering that index-based equity ETFs like the Vanguard S&P 500 ETF (VOO) can be had for 0.03%.
The Valkyrie Bitcoin Strategy ETF (BTF)
With just shy of $30 million in AUM, BTF has struggled to accrue significant investor attention and inflows compared to BITO, despite its similar strategy. Like the previous ETFs, BTF holds a portfolio of Treasury bills used as collateral for monthly CME Bitcoin futures. Currently, it charges a fairly hefty 0.95% expense ratio, the same as BITO and higher than XBTF.
BTF also had the misfortune of launching at an inopportune time. Debuting in October 2021, the ETF ran almost immediately into the cryptocurrency bear market of 2022. From its inception date to July 30, 2023, the ETF is down -55.7%, even after a 2023 rally of 68.1% through July 30. Investors interested in ETFs like BTF must therefore be comfortable with the ups and downs of Bitcoin.
[Read: The History of Bitcoin, the First Cryptocurrency]
The Valkyrie Bitcoin Miners ETF (WGMI)
WGMI’s ticker symbol is an Easter egg referring to a popular cryptocurrency catchphrase, “WAGMI,” which stands for “we’re all going to make it.” This catchphrase is frequently used online as a reference to the dream of achieving wealth and financial independence through cryptocurrency investing. However, unlike its cousin BTF, WGMI doesn’t hold Bitcoin futures.
Instead, the ETF takes a different approach by investing in Bitcoin miners, defined as a company that derives at least 50% of revenues or profits from Bitcoin mining, providing 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, but it still has a high correlation to Bitcoin. The ETF charges 0.75%.
Bitwise Crypto Industry Innovators ETF (BITQ)
For a broader focus on the overall cryptocurrency ecosystem instead of just Bitcoin, investors can consider BITQ. This ETF currently has around $89.6 million in assets, which is invested in a portfolio of stocks designed to represent the broad cryptocurrency industry. Many of these companies hold sizable reserves of Bitcoin or have Bitcoin and other cryptocurrencies traded on their platform.
As of Aug. 16, the ETF’s top holdings include Coinbase, Riot Platforms Inc. (RIOT), MicroStrategy Inc. (MSTR), Marathon Digital Holdings Inc. (MARA) and Bitfarms Ltd. (BITF). Unlike WGMI, investors also get cryptocurrency exchanges in addition to the usual Bitcoin miners. The ETF currently has 27 holdings and charges a fairly high 0.85% expense ratio.
Blockchain & Bitcoin Strategy ETF (BITS)
Global X ETFs, a well-known provider of thematic ETFs, also has some cryptocurrency-related offerings in its lineup. An example is BITS, which offers Bitcoin investors a hybrid strategy. As of Aug. 16, 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 via the Solactive Blockchain Index.
The remainder of BITS follows a strategy similar to BITO and other Bitcoin “strategy” ETFs like XBTF and BTF by employing CME Bitcoin futures and Treasury bills as collateral. As such, investors in BITS benefit from exposure to cryptocurrency stocks and Bitcoin futures, which adds an extra dimension of diversification. The ETF also charges a slightly lower 0.65% expense ratio.
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7 Best Cryptocurrency ETFs to Buy originally appeared on usnews.com
Update 08/17/23: This story was previously published at an earlier date and has been updated with new information.
