Investing in crypto ETFs

What are crypto ETFs?

They are a type of exchange-traded fund (ETF) that invests in cryptocurrencies or companies operating in the crypto sector. Funds that invest directly in cryptocurrencies may invest exclusively in just one token (like Bitcoin or Ethereum) or buy a basket of digital tokens instead. 

Crypto ETFs can provide investors a low-cost way to gain exposure to cryptos and the crypto industry. And outsourcing investment decision-making to a fund manager massively reduces the time investors need to devote to researching cryptos. 

This gives ETFs a clear advantage over direct crypto investment, especially considering how opaque and volatile the crypto space can be.  

But this doesn't mean crypto ETFs don't also come with some significant risks that you need to be aware of. So, before getting on with our discussion of ASX crypto ETFs, let's cover off some basics.

So, what exactly are cryptocurrencies?

Cryptocurrencies are a type of digital asset. Unlike fiat currencies (such as the Australian or United States dollars), central banks do not issue cryptos. Instead, they are created via blockchain technology through a process called mining. You can check out our article on cryptocurrencies if you want to get into the weeds of blockchain technology. 

Once created, we can trade cryptos just like other assets. Bitcoin was the first cryptocurrency created, and it remains the most valuable. As people have found more applications for blockchain technology, the number of different cryptos has rapidly increased. However, after peaking at more than 10,000 listed cryptocurrencies in February 2022, that number had fallen to around 8600 by February 2023.¹

And how about ETFs?

ETFs are a type of investment vehicle similar to a mutual fund. However, unlike a mutual fund, an ETF trades on the stock market just like ordinary shares.

ETF managers pool together money from many investors and then use that money to make investments according to a particular fund mandate or strategy. Many ETFs are passively managed funds. They might replicate the returns of an index, such as the S&P/ASX 200 (ASX: XJO), a market sector (like tech or healthcare), or even a commodity (gold or oil).

How to invest in ETFs in Australia

Plenty of ETFs trade on the Australian Securities Exchange, pursuing different investment strategies. They provide a low-cost way to diversify your investments across multiple shares and asset classes. 

You can invest in a portfolio of international technology shares, high-dividend ASX stocks, or even a basket of different commodities in a single trade.

The best thing about ETFs is you can buy and sell units in the fund just as you would ordinary shares. Simply lodge a trade with your preferred broker.

Investing in international funds

There are two ways to gain international exposure through ETF investing. One is to buy units in an ETF trading on the ASX that already invests in international shares. For example, the iShares Global 100 ETF AUD (ASX: IOO) offers exposure to the world's top 100 companies, ranked by market capitalisation. 

The second way is to invest directly in ETFs that trade on overseas stock exchanges. More and more brokers (particularly new digital broker start-ups like Stake) allow you to invest in overseas stock markets at relatively low costs. This offers up a whole new universe of ETFs to invest in – many of which pursue different investment strategies to those listed on the ASX. 

Extra choice is particularly attractive for investors seeking crypto exposure, given the limited range of Australian crypto ETFs.

The easiest overseas share markets for Australians to invest in are usually those located in the United States. Thousands of ETFs are trading on US equities markets like the NASDAQ and New York Stock Exchange, many of which provide crypto exposure. 

For example, the Valkyrie Bitcoin Strategy ETF (NASDAQ: BTF) aims to track the price of Bitcoin by investing in Bitcoin futures contracts.

Why invest in crypto ETFs?

Many cryptocurrencies have a finite supply written into their digital code. Some, like Bitcoin, become increasingly difficult to mine over time until, eventually, their supply will run out. 

Crypto enthusiasts argue that this inbuilt scarcity gives crypto an inherent value, much like precious metals. In fact, Bitcoin's greatest supporters believe the token could one day become a new 'digital gold' – a safe haven asset that investors can turn to as a store of value in troubled economic times.

Some investors are also just naturally drawn to the libertarian ideals of crypto. Unlike fiat currencies, central banks can't control the supply of cryptocurrencies. They exist beyond the reach of government regulations and traditional monetary policy. This can make crypto pretty alluring to those with a rebellious spirit.

Crypto's anti-establishment streak comes from the underlying blockchain technology. Blockchain's decentralised structure has the potential to utterly transform many industries – particularly banking and financial services – by removing the need for trusted intermediaries. Investing in crypto is the best way to gain exposure to this potentially revolutionary tech. 

As we've already mentioned, a cryptocurrency ETF can be a low-hassle, low-cost way to gain exposure to the crypto industry. Many crypto ETFs provide broad exposure to cryptocurrencies and companies involved in the crypto space. Accessing this sort of diversification cheaply also reduces some risks in investing in crypto.

Top options

The only option currently available to Australian investors who want to invest in crypto ETFs on the ASX is the BetaShares Crypto Innovators ETF (ASX: CRYP), which invests in companies operating in the crypto space rather than cryptocurrencies themselves.

You will have to look overseas if you want an ETF that tracks the prices of actual cryptocurrencies. There are a few funds trading on stock exchanges in the US that offer more direct exposure to cryptos themselves. 

BetaShares Crypto Innovators

The BetaShares Crypto Innovators fund invests in the companies that build crypto mining equipment, like high-powered computer hardware, as well as other companies that support the crypto industry. The fund is well diversified, with holdings in up to 50 crypto companies.

The fund is currently the best and only option for ASX investors seeking crypto exposure. Its largest holdings include Marathon Digital Holdings Inc (NASDAQ: MARA) and Riot Platforms Inc (NASDAQ: RIOT), crypto mining companies, and Coinbase Global Inc (NASDAQ: COIN), the operator of one of the most popular crypto trading platforms.

ProShares Bitcoin Strategy

With well over US$500 million in net assets, ProShares Bitcoin Strategy claims to be the world's largest and most actively traded Bitcoin ETF. However, it doesn't invest directly in cryptocurrency. Instead, the fund uses futures contracts to try and replicate the price performance of Bitcoin.

It is still a good option for investors seeking Bitcoin exposure. The fund has actually managed to track the price of Bitcoin quite closely since its inception back in October 2021. Unfortunately, the price of Bitcoin has declined by more than 60% in that timeframe.

Bitwise 10 Crypto Index Units

The Bitwise fund tracks an index of the 10 largest cryptocurrencies, as measured by their market capitalisations. Units in the fund can be bought and sold over the counter in the US.

As the values of cryptocurrencies can fluctuate rapidly, the fund is rebalanced monthly. This active management comes at a substantial cost, with annual fees totalling 2.5%, or $25 for every $1,000 invested. This can quickly eat into your potential returns.

Even so, Bitwise is probably the best crypto ETF for investors seeking exposure to the crypto market. Roughly 60% of the fund's holdings are in Bitcoin, 30% are in Ethereum, and the remaining 10% are split between other altcoins.   

Pros and cons of investing in crypto ETFs

We have already discussed some of the benefits of investing in crypto.  

Crypto acolytes claim that the scarcity of some digital tokens gives them an inherent value. If this proves true, it could make some cryptocurrencies – particularly Bitcoin – viable alternatives to traditional safe-haven assets. It may even make crypto an inflation hedge.

The blockchain technology that makes crypto possible also has the potential to revolutionise many industries. Companies continue to experiment with blockchains and are continually coming up with new and exciting applications for the technology. Of course, not all of these ventures will succeed, but those that do could become genuine game changers. 

Investors should always approach crypto investments cautiously. The crypto markets are volatile and incredibly risky. Just last year, FTX – at the time the world's largest crypto exchange – collapsed amid allegations of fraud. And that's just one of many frauds and thefts that have plagued the crypto industry in its short history. 

This is enough to turn some investors off crypto for good. In fact, crypto's greatest detractors will tell you it's all a giant Ponzi scheme. That sooner or later, the world will realise that the emperor has no clothes and these digital tokens are worthless. 

Given the risks, do plenty of research before investing in crypto, even through a large, diversified ETF. And never invest any money you can't afford to lose. 

How have global events impacted crypto markets?

The collapse of the FTX exchange rattled crypto markets, with billions wiped off the market caps of some of the leading cryptocurrencies. However, markets had already been in decline before the FTX debacle. 

Runaway inflation, rising interest rates, and fears of a recession caused investors to dump riskier assets. Bitcoin has yet to live up to its promise as a digital alternative to gold and other safe-haven assets.

Markets have stabilised more recently, but the damage to the crypto industry from the collapse of FTX could be long-lasting. It reminded investors of the risks of putting money into an unregulated industry. 

Are crypto ETFs right for you?

Crypto ETFs can be an easy, low-cost way for everyday investors to gain exposure to cryptocurrencies and the crypto industry. This may particularly suit a growth investor with a fondness for tech shares, as it can provide exposure to companies building new blockchain applications.

Although the potential payoff could be enormous, investing in crypto is still incredibly risky, as the FTX collapse shows. This means investing in crypto won't suit all investors.

So, before adding crypto ETFs to your portfolio, consider your financial situation carefully. It's vital to ensure crypto investing aligns with your personal investment goals and risk appetite.