As the cryptocurrency market matures, many investors want exposure to the upside without owning digital coins directly.
For some, digital assets like bitcoin and Ethereum feel unfamiliar and too volatile. Others are uneasy about storing crypto themselves, working with unfamiliar third-party custodians or navigating a market many financial advisers still avoid.
Whatever the reason, there are a number of ways to invest in cryptocurrency without direct ownership.
Plain-vanilla crypto ETFs
Most investors who want exposure to digital assets without owning the assets outright could be well-served with single-crypto ETFs, known as spot ETFs, that focus on one cryptocurrency, says Matt Gentzkow, investment strategist at Waddell & Associates in Nashville, Tenn.
Bitcoin and Ethereum represent most of the digital-asset market capitalization, so advisers suggest starting with a spot ETF in at least one of these cryptocurrencies. Those who want exposure to more than one digital asset can buy different ETFs, Gentzkow adds.
The Securities and Exchange Commission approved the first batch of spot bitcoin ETFs in January 2024 and investors have several options to choose from. BlackRock’s iShares Bitcoin Trust ETF (ticker: IBIT) is the largest by total assets, followed by Fidelity Wise Origin Bitcoin Fund (FBTC) and Grayscale Bitcoin Trust (GBTC), according to VettaFi’s ETF database. Spot Ethereum ETFs begin trading in July 2024, and there are also several options. The largest by total assets is iShares Ethereum Trust ETF (ETHA).
These ETFs are relatively inexpensive, typically with an expense ratio of 0.15% to 1.5%, are easy to buy through major online brokerages and trading platforms, and are regulated by the SEC. What’s more, they are easier from a tax-reporting perspective than direct crypto ownership, because brokerages typically provide standardized tax reporting.
There are some downsides, however. Investors should remember that they don’t own the actual coins with an ETF, so they can’t use bitcoin or Ethereum for transactions, says David M. McInnis, managing partner at Aristîa Wealth Management in Atlanta.
Investors also can’t be crypto stakers in many spot ETFs. Crypto staking is a process that involves locking up your cryptocurrency for a period to help keep a blockchain network running in exchange for rewards generally paid out in the same cryptocurrency.
Other types of crypto ETFs
Some investors seeking broader exposure to digital assets may prefer a crypto index fund over owning separate spot bitcoin and Ethereum ETFs. While these index funds typically carry higher fees than spot ETFs, expense ratios are still relatively modest, often ranging from 0.58% to 0.75%.
Crypto index ETFs generally track a basket of the largest digital currencies, though the number of holdings varies. Bitwise 10 Crypto Index ETF (BITW), for example, tracks the 10 largest crypto assets, while Grayscale CoinDesk Crypto 5 ETF (GDLC) seeks to cover about 90% of the crypto market’s capitalization in a single fund.
For most individual investors, these options will be sufficient for exposure purposes, financial advisers say, but there are other types of crypto ETFs for more sophisticated investors. Innovator Uncapped Bitcoin 20 Floor ETF (QBF), for example, aims to capture bitcoin’s upside while limiting losses to 20%, before fees and expenses, over successive three-month periods.
There are also more crypto income ETFs, actively managed funds that seek to generate current income while providing exposure to cryptocurrency markets, primarily through options strategies.
Crypto infrastructure funds and firms
Another way to gain exposure to cryptocurrency is through funds that invest in publicly traded companies with ties to cryptocurrency. The allure of these funds for some investors is the ability to achieve steady growth while mitigating volatility.
One such fund is Bitwise Crypto Industry Innovators ETF (BITQ), which tracks an index of companies that generate most of their revenue from crypto activities. It has an expense ratio of 0.85% and its top holdings include IREN, an AI cloud provider; Strategy, an AI-powered enterprise analytics software provider; and Coinbase.
Another option, Grayscale Bitcoin Adopters ETF (BCOR), offers exposure to a global basket of public companies that have adopted bitcoin as part of their corporate treasury. It has an expense ratio of 0.59%.
Beyond funds that invest in crypto-related companies, many investors already have exposure to crypto through their existing investments even if they didn’t set out to invest in it directly, says Timothy Chubb, chief investment officer at Girard in King of Prussia, Pa. Such companies include BlackRock, which creates crypto ETFs; Intercontinental Exchange, which benefits from increased crypto trading activity; CME Group, a provider of crypto options; and Charles Schwab, which offers crypto trading.
Sophisticated investment funds
Eligible sophisticated investors might want to consider venture capital, private equity or hedge funds that invest in crypto infrastructure companies. These opportunities are open to accredited investors, generally people who have a net worth over $1 million, excluding their primary residence, or high-income households.
Pantera Funds, for example, provides investors with exposure to the crypto sector that includes illiquid venture-capital assets such as private tokens and multistage venture capital equity, where firms deploy capital to companies in stages, as well as more-liquid assets like bitcoin and other cryptocurrencies.
These types of funds often have high-income minimums. They can also be risky because of their exposure to illiquid or early-stage companies.
Crypto separately managed accounts
These accounts allow investors to maintain direct ownership of their digital assets, but have them run by a professional portfolio manager according to a customized strategy. Eaglebrook Advisors is a large provider of these, and it has relationships with asset managers including Bitwise and Franklin Templeton.
SMAs allow for customization and tax efficiency, but they have higher management fees because of the customization involved, says Ric Edelman, founder of the Digital Assets Council of Financial Professionals in Fairfax, Va., which educates financial professionals about blockchain technology and digital assets. For example, investors can customize a portfolio by deciding to focus on a certain type of asset or avoid certain risks, and can take opportunities to reduce or defer capital-gains tax liability.
Some crypto purists might not like this option because you don’t manage your own crypto wallet. “That sentiment is applicable only to do-it-yourself investors who are intimately knowledgeable about how crypto functions,” Edelman says. “For the vast majority of the investing public, it’s a complication that’s far beyond their ability and desire.”