A Beginner's Guide in Crypto ETFs

Are you interested in exploring the world of cryptocurrencies but feel overwhelmed by the complexities of crypto exchanges and wallets? If so, we have good news for you! You can now invest in crypto exchange-traded funds (ETFs) which provide a way to access the potential of digital assets without having to worry about the technical details. With ETFs, you can invest in a diversified portfolio of cryptocurrencies, making it an exciting opportunity that you shouldn’t miss out on! 

Whether you have prior experience in investing or are new to cryptocurrency, this guide aims to equip you with the essential knowledge and confidence required to invest in crypto ETFs. We will avoid using complicated terminology and technical jargons. Instead, we will simplify the process step-by-step to help you become a well-informed investor in cryptocurrency in no time. 

The ProShares Bitcoin Strategy ETF is the first crypto ETF on U.S. markets. An analysis of this fund shows how crypto futures ETFs work. As of January 2024, the fund invests around 44% of its portfolio in CME bitcoin futures that expire at the end of the current month. Additionally, it invests approximately 54% in CME bitcoin futures expiring the following month.  

When the contracts in the portfolio are about to expire, the fund sells them and buys new ones for the following month. This is called rolling over the contracts, and it comes with certain costs. These costs may be responsible for some of the differences in performance between the ETFs and their underlying cryptocurrencies. 

After ProShares entered the cryptocurrency ETF market, VanEck launched the VanEck Bitcoin Strategy ETF in November 2021. This ETF invests in CME Bitcoin futures contracts and holds US Treasuries as collateral. 

Investment funds can trade cryptocurrencies directly by creating spot crypto ETFs. In these funds, cryptocurrencies are purchased and securitised. Retail investors and others can trade shares in spot crypto ETFs, similar to regular ETFs, providing more liquidity and exposure to these assets. The fund can also issue and redeem shares to make it easier for investors to buy and sell shares in the crypto market. 

Since 2014, many asset managers have applied for approval from the SEC to launch spot Bitcoin ETFs. Between October 2022 and October 2023, the SEC received over 3,500 fund applications related to cryptocurrency. Finally, in January 2024, the SEC approved the first 11 Bitcoin spot ETFs, potentially leading to the approval of more cryptocurrency spot ETFs in the future. 

There are two ways to invest in crypto ETFs: speculating on their prices using CFDs or buying the fund units hoping to increase their value. 

 A CFD is a type of contract where you speculate on the price of a cryptocurrency. You don’t own the actual coins or stocks. Instead, you agree to exchange the difference in price from when you first opened your position to when you close it. If you buy when the market is going up and the price increases, you make a profit. However, if the price falls, you’ll make a loss. The same applies if you sell when the market is going down. 

Before starting, you should create and open a CFD trading account.  

Alternatively, you may purchase a cryptocurrency ETF, which involves owning a portion of the fund (units) and holding it with a broker to profit if it increases in value.  

It is important for every investor to conduct proper research on the various investment options available for investing in crypto ETFs. It is crucial to evaluate one’s financial situation and invest only what they can afford to lose. While it is true that crypto ETFs may be less volatile than cryptocurrencies, it is still important to exercise caution when investing in such assets. 

Here is how to buy crypto ETFs as well as crypto stocks through an online broker:    

• Decide which strategy you want to use. Trading lets you bet on price changes in both directions. Dealing allows you to buy fund units, but you have to pay the full amount upfront. In contrast, trading only requires a margin deposit (collateral). 
• Create an account. Regardless of the strategy you choose, you must register and complete the KYC process for identity verification. 
• Fund your account with fiat money. Before investing in crypto ETFs, you must deposit fiat currency in your exchange account, such as U.S. dollars or Euros. 
• Select your crypto ETFs. You should conduct thorough research to identify public ETFs that hold cryptocurrencies. 
• Place a buy order for your chosen crypto ETF. Follow the trading platform’s steps to submit and complete a buy order for one or more crypto ETFs. 

Investors knew that the competition for launching spot Bitcoin ETFs would be intense, with nearly a dozen issuers seeking to do so simultaneously. However, the actual race for a Bitcoin ETF has exceeded expectations, with even greater competition than anticipated. 

The lowest fee mentioned in a fund prospectus is offered by Bitwise Asset Management, which plans to charge an annual expense ratio of 0.2% for its fund. ARK Invest and 21Shares are sponsoring a fund with a 0.21% fee, while VanEck, BlackRock BLK and Fidelity charge 0.25%. 

Furthermore, Bitwise, ARK/21Shares, and Invesco plan to waive fees entirely for six months for assets under management between $1 billion and $5 billion.  

The Grayscale Bitcoin Trust is currently the most expensive fund available, though it plans to become an ETF later. The fund has an expense ratio of 2% and trades like a closed-end trust, meaning its price doesn’t always match its assets. Grayscale has stated that when the fund converts into an ETF, it will charge a 1.5% annual fee.  

For traders who frequently buy and sell Bitcoin, the Grayscale fund may still be a good option due to its high asset level, making it more liquid and having tighter bid-ask spreads. 

Before rushing off to invest in a crypto ETF, we at CAIZ always recommend that you conduct research to understand the unique risks and common pitfalls found with bitcoin ETFs. In this next section we’ll explore these risks with some common mistakes that new investors should avoid:  

Avoid The Hype/FOMO and Conduct Research 

Headlines proclaiming “Bitcoin ETFs Will Make You Rich” can create excitement, leading to impulsive investments driven by the fear of missing out (FOMO). However, it’s important to remember that headlines rarely give the whole picture. Instead of giving in to emotional hype, conducting thorough research is essential.  

This includes understanding Bitcoin’s underlying technology, the ETF’s specific investment strategy, and the associated fees. It’s also important to comprehend the risks of investing in a highly volatile asset class before committing your hard-earned money.  

Understanding Portfolio Diversification  

While Bitcoin ETFs can add diversification and growth to your portfolio, it’s important to avoid concentrating investments in any single asset, including Bitcoin. This will help mitigate risk and protect your overall financial health.  

Knowing The Difference Between Safety & Accessibility  

 ETFs can provide an easy way to invest in Bitcoin, but it is essential to understand that this doesn’t mean there is no risk involved. The cryptocurrency’s well-known volatility is still present even within an ETF. Additionally, this is a relatively new market, so it is essential to do your research before investing. Take the time to examine the issuer, the holdings, and the fees associated with the ETF before making any investment decisions.  

Neglecting Security Measures  

 Exchange Traded Funds (ETFs) can serve as a means to invest in Bitcoin, but it’s important to keep in mind that the responsibility of safe storage of your cryptocurrency rests entirely on you. You are now the bank, the vault, and the security guard. It’s crucial to treat your private keys with the utmost care, just like classified documents. Always use two-factor authentication as an added layer of security, and avoid discussing your cryptocurrency holdings online. It’s recommended to use a hardware wallet as an offline backup, and to choose platforms with strong cybersecurity measures. Remember, in the world of cryptocurrency, your vigilance is your most valuable asset. 

It’s essential to regularly monitor your cryptocurrency ETF positions and stay updated on news and developments that could impact the underlying assets.  

It’s essential for investors to know that certain crypto exchange-traded funds (ETFs), particularly those that utilise futures contracts, may not accurately follow the current market value of the digital asset they are based on. This is because these ETFs must frequently adjust their holdings as futures contracts come to an end, which can lead to inconsistencies.  

We’d suggest using a crypto portfolio tracker app to keep track of and monitor the cryptocurrencies tied to your ETFs. There are several to choose from including; CoinTracker, CoinStats, The Crypto App, Delta Investment Tracker, and CoinGecko, just to name a few.  

You’re not alone. We at CAIZ know how overwhelming investing in a new financial vehicle can be, and crypto ETFs are no different for new investors. Don’t go at it alone, we suggest utilising the following resources:  

• Investment websites and blogs: Platforms like CAIZ Medium, Investopedia or Motley Fool offer crypto ETF insights and market analyses. 
• Financial news channels: Stay tuned to news channels for updates on the crypto market and relevant economic events. 
• Online communities: Connect with other crypto enthusiasts and investors in online forums or social media groups to learn and share experiences. 

Investing in cryptocurrency ETFs is a long-term commitment, not a quick win. To get started, it’s recommended to start small, conduct thorough research, and invest responsibly. With the appropriate knowledge and tools, you can explore the fascinating world of crypto ETFs and leverage their potential to diversify and grow your portfolio.