Crypto ETFs 101: What they are and what they mean

While ETFs are somewhat of a recent development in crypto, they are actually an old idea from the world of traditional finance (TradFi). Similarly to a mutual fund, ETFs generally track the price of an asset or a group of similar assets. ETFs are easily accessible, as they can be purchased just like a stock or bond on most online brokerage platforms.

The excitement around crypto ETFs largely stems from their anticipated impact on market liquidity and interest and a sense of regulatory and institutional acceptance. Indeed, since the approval of high-profile spot Bitcoin and Ether ETFs this year, there has been both a larger crypto market rebound, and increased interest in crypto from both financial and political institutions across the world. 

That all being said, ETFs aren’t necessarily a pure benefit for crypto. Most importantly, the way ETFs work doesn’t allow for self-custody, which calls into question just how directly ETFs can offer investors crypto exposure.

But how exactly do crypto ETFs work? What kinds of ETFs are there, and should you invest in an ETF or buy and manage your crypto yourself? 

Let’s dive into crypto ETFs.

What Is a Crypto ETF?

An exchange-traded fund (ETF) is a kind of financial instrument that allows investors to gain exposure to a group of assets. You can think of an ETF as an investment pool that tracks the performance of a group of assets such as stocks or bonds. These can be appealing because they give investors exposure to certain groups of assets without having to trade individual assets. 

As an example, take the Vanguard Total Stock Market Index Fund (VTI), which basically tracks how the overall US stock market is doing. If an investor believed that the stock market as a whole was going to rise, they could buy shares of VTI, saving money on fees while maintaining a diverse investment portfolio.

Similarly, cryptocurrency ETFs allow investors to bet on the price of a cryptocurrency without having to directly buy it. 

Types of Crypto ETFs and How They Work

The two main categories of crypto ETFs are spot ETFs and futures ETFs.

Crypto Futures ETFs

A crypto futures ETF tracks the price of futures contracts. To explain, a futures contract is an agreement to buy or sell cryptocurrency at a predefined price, at a later date. Notably, the value of the futures contract is determined by whether futures contract holders are betting on the price of the cryptocurrency to rise or fall. That is to say that the price of a futures contract is highly influenced by the sentiments of futures contract holders, and can be higher or lower than the actual price of the cryptocurrency.

Crypto Spot ETFs

In contrast to Futures ETFs, spot ETFs track the real-time value of a cryptocurrency, aka its “spot” price. In short, spot ETFs hold a certain amount of crypto in their funds, and issue shares based on that amount (as well as market demand). Thus, spot ETFs can offer investors more direct exposure to crypto than other ETFs might offer.

Which Crypto ETFs Are There?

Bitcoin ETFs

Naturally, ETFs tracking the price of the world’s largest cryptocurrency are some of the most popular on the market. While the first Bitcoin futures ETF was approved for trade in the US in 2021,  spot ETFs did not receive regulatory approval until January 2024.

While US regulators had long taken an adversarial role against crypto ETFs (and crypto as a whole), this began to change in June 2023, after Blackrock applied with the SEC to launch a Bitcoin Spot ETF. After months of speculation and anticipation, the SEC approved 11 Bitcoin spot ETFs in January 2024.

Some of the largest Bitcoin ETFs include the Grayscale Bitcoin Trust (GBTC), BlackRock’s iShares Bitcoin Trust ETF (IBIT), and the ProShares Bitcoin Strategy ETF (BITO).

ETH ETFs

Expectations for a spot ETH ETF approval raised significantly following the success of the Bitcoin ETF applications. Even so, with SEC representatives continuing to assert that Ether might be a security, the ETF approval seemed unlikely for months. Nevertheless, and in a surprising and abrupt about-face, the SEC finally approved the first spot Ether ETFs in May 2024.

The nine US spot Ether ETFs began trading on July 23rd, 2024, netting a combined trading volume of more than $1B. Notably, this marked a much slower start for spot ETH ETFs as compared to Bitcoin spot ETFs, which saw $4.66B in trading volume on their first day.  Some of the most notable ETH ETFs include the Grayscale Ethereum Mini Trust (ETH), the Franklin Ethereum Trust (EZET), the VanEck Ethereum Trust (ETHV), and the Grayscale Ethereum Trust (ETHE).

What Are the Risks of Crypto ETFs?

The biggest challenge with crypto ETFs is that they do not represent real ownership of crypto. While this is not completely negative as it can still bring people into the ecosystem, it’s ultimately at odds with the founding philosophy of crypto. 

As Ledger CTO Charles Guillemet laid out in his BTC Prague 2024 Keynote, ‘Don’t Buy Into an ETF’, “The purpose of Bitcoin is permissionless money: you don’t have to ask anyone permission to own your value and to use it.” ETFs inherently negate this aspect of crypto for those buying into them.

Where Can I Buy Crypto ETFs?

As the name suggests, ETFs are available on traditional regulated exchanges like the New York Stock Exchange and Nasdaq. That means you can buy and sell shares of crypto ETFs on many of the same online brokerage platforms that offer traditional assets like stocks and bonds.

Before you buy into a crypto ETF however, it’s important to consider some of their drawbacks as mentioned above. Ultimately, buying shares in an ETF does not give you access to the most impactful things that crypto enables. By practicing secure self-custody, you can hold your crypto yourself, giving you full control over your assets and eliminating third-party risk. 

Final Thought on Crypto ETFs

All things considered, even though ETFs bring people into crypto same time, buying into an ETF opens you up to the very third-party risks that crypto was built to overcome.

The revolutionary power of crypto comes from its permissionless nature, and the only way to take advantage of that is through self-custody. Fortunately, Ledger’s lineup of secure devices makes it easy to secure and manage your digital assets. Plus, with Ledger Live you can buy your crypto directly through our buy providers, all while enjoying the battle-tested security of your Ledger device.

When you understand the true benefits of crypto and why it exists, nothing beats the sovereignty and individual agency that comes with self-custody. When you’re ready to leap, Ledger devices are here to help ensure that only you can access your crypto.

If you’re considering exploring what crypto has to offer, there’s no need to wait. Explore the Ledger ecosystem today to start your journey to secure self-custody.