Investing in Cryptocurrency ETFs

Cryptocurrency has captured the attention of all sorts of investors -- from individual retail investors looking for a home run trade to big institutions launching their own cryptocurrency funds. Venture capital investors poured almost $33 billion into crypto and blockchain start-ups in 2021, according to a report from digital asset manager Galaxy Digital (TSX:GLXY).

Some investors have made massive returns from investing early on in crypto, but this industry is still very young. There's big potential for gains, but there's potential for big investment losses, too. The wild volatility that returned in late 2021 and early 2022 is proof. Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH) were both down by double-digit percentages through the first few months of 2022.  

That's why investing in a cryptocurrency ETF (exchange-traded fund) might make sense. Rather than trying to pick a winning crypto yourself, an ETF can yield investment exposure to a basket of cryptos and the underlying blockchain technology they're built on. 

Source: Company websites. Data as of April 13, 2022.

Investing in cryptocurrency ETFs

U.S.-based investors are still waiting on the Securities and Exchange Commission (SEC) to approve a Bitcoin ETF that invests directly in the original cryptocurrency. The same goes for other cryptocurrencies. Consequently, ETF options that invest directly in crypto are fairly limited at this point. Alternatives that invest in Bitcoin futures contracts such as the Grayscale Bitcoin Trust (OTC:GBTC) are available, but there are special risks to consider with those types of investment vehicles. 

Not to worry, though. More cryptocurrency ETFs have emerged in recent years to meet the growing demand for crypto and more general blockchain technology investing. 

What is a cryptocurrency ETF?

An ETF is a type of investment fund that can be bought just like a stock. It's a quick and easy way to diversify since most ETFs invest in a group of stocks, bonds, and/or other assets -- in this case, cryptocurrencies and related companies involved in their development.

Here's a list of seven cryptocurrency ETFs to consider for 2022:

1. Amplify Transformational Data Sharing ETF

With $955 million in assets under management as of spring 2022, the Amplify Transformational Data Sharing ETF is one of the largest funds focused on the cryptocurrency and digital asset economy. It's a good choice to begin a search for the best crypto industry ETFs, although it doesn't directly invest in cryptocurrencies. The fund has a 0.71% annual expense ratio, meaning $7.10 in fees are deducted from the fund's performance each year for a $1,000 investment.  

The Amplify Transformational Data Sharing ETF contains 47 company stocks. It was launched in January 2018, making it one of the longest-tenured ETFs on this list -- although, in the grand scheme of things, this is still a very fresh investment product launch. Top holdings in the fund include crypto trading marketplace Coinbase Global (NASDAQ:COIN) and semiconductor company Nvidia (NASDAQ:NVDA), which designs GPUs, the hardware necessary for crypto mining.

Also prominent in this ETF are crypto mining company stocks such as Hut 8 Mining (NASDAQ:HUT), HIVE Blockchain Technologies (NASDAQ:HIVE), and top Bitcoin owner MicroStrategy (NASDAQ:MSTR). Since these companies hold Bitcoin, having them in the ETF's portfolio gives investors indirect access to potential price increases in the top cryptocurrencies.

2. Bitwise 10 Crypto Index Fund

The Bitwise 10 Crypto Index Fund is a unique offering on this list. It was originally a private placement fund, but shares can now be bought and sold over the counter. The fund is actively managed, so it has a hefty expense ratio of 2.5% (or $25 in annualized deducted fees from fund performance per $1,000 invested).  

The Bitwise 10 Crypto Index Fund invests in the top 10 cryptocurrencies (as measured by market cap) and is rebalanced monthly to account for changes in crypto prices. Bitcoin and Ethereum are far and away the largest cryptocurrencies by size, so they make up a respective 61% and 29% of the underlying portfolio. The next eight cryptos by size -- including Solana (CRYPTO:SOL), Cardano (CRYPTO:ADA), and Avalanche (CRYPTO:AVAX) -- make up the balance. 

Because this fund trades over the counter, it can trade at a severe discount or premium to the underlying crypto prices it owns at times, depending on the demand for shares. Investors should tread cautiously. However, if investing in the largest cryptocurrencies is what you're after, this fund is worth a look.

3. Siren Nasdaq NexGen Economy ETF

The Siren Nasdaq NexGen Economy ETF is another fund that focuses on companies developing and utilizing blockchain technology. Its assets under management are far smaller than Amplify's similar ETF product, but it does provide a slightly different take on this space. 

For one thing, the ETF is composed of 64 stocks. Its focus is broadened to encompass more general technology businesses that might have a crypto or blockchain segment such as IBM (NYSE:IBM), which is a top holding. It also includes shares of traditional lenders and digital payments networks such as American Express (NYSE:AXP) and Visa (NYSE:V) that have started dabbling in the world of crypto. It's a far more diversified way to bet on the growth of the crypto industry. It has an expense ratio of 0.68%.

4. First Trust Indxx Innovative Transaction & Process ETF

The First Trust Indxx Innovative Transaction & Process ETF is another broad bet on crypto. The fund contains 103 stocks, making it the most diversified crypto ETF listed here. First Trust is also a large and well-established company that has created all sorts of investment products, which might check the box for some investors worried about track record and fund manager reputation. The First Trust Indxx Innovative Transaction & Process ETF has an annual expense ratio of 0.65%, making it one of the more affordable options on the market.

However, diversification isn't a silver bullet for investing in crypto. Since its inception in 2018, this ETF was up just 30% (at the time of this writing), which means it's underperforming most of its crypto fund peers. Nevertheless, it provides sweeping exposure to the crypto space, including many international tech companies that might be harder to come by for U.S.-based investors (Chinese companies comprise 12% of the portfolio).

5. Bitwise Crypto Industry Innovators ETF

The Bitwise Crypto Industry Innovators ETF was launched in May 2021, making it a relative newcomer to the crypto fund party. It contains just 30 stocks, with holdings focused on innovators and crypto pioneers. As a result, it's likely this ETF will exhibit some of the wild swings in value inherent in crypto prices. It also has a relatively high annual expense ratio of 0.85%.  

Many of the underlying stocks in this fund are Bitcoin miners and owners. Top holdings include Coinbase, MicroStrategy, and bank and institutional crypto trading platform operator Silvergate Capital (NYSE:SI), which recently acquired the stablecoin assets from Diem Association, a project headed up by Facebook parent Meta Platforms (NASDAQ:FB). At less than a year old at the time of this writing, it's too soon to tell how this crypto-focused ETF strategy will fare over the long term.

6. Global X Blockchain ETF

The Global X Blockchain ETF believes blockchain technology has uses far beyond just cryptocurrencies. It invests accordingly into 25 tech and Bitcoin mining stocks that are leading the charge in the world of crypto and underlying blockchain technology.

This is another fresh ETF product launch, though, having just started in July 2021. The fund has an affordable annual expense ratio of only 0.5%. If you're interested in focused investment exposure to crypto miners and tech companies instrumental to the development of blockchain such as Coinbase, this new fund is worth a close look.

7. Global X Blockchain & Bitcoin Strategy ETF

The Global X Blockchain & Bitcoin Strategy ETF, launched in November 2021, is closely affiliated with the Global X Blockchain fund, comprising almost half of the underlying holdings (46% as of spring 2022). But what makes the new ETF investment different is that the other half of the portfolio is invested in Bitcoin futures.

Bitcoin futures are a way to mimic the daily moves in value of an asset, in this case Bitcoin. However, because the futures contracts will need to be rolled over monthly, it will likely underperform Bitcoin's price moves over the long term. This is a problem other funds that invest in Bitcoin futures have experienced in recent years. However, if you want some extra indirect Bitcoin investment in the mix, Global X's recent ETF launch might be what you're looking for. The annual expense ratio for this ETF is 0.65%.  

Cryptocurrency ETFs will be a volatile investment

Cryptocurrencies are still a very new asset class, and ETFs focused on them are even younger. As with any emerging asset class, expect lots of volatility -- both in cryptos themselves, as well as the companies focused on their development.

If you decide to invest, bear two important points in mind. Keep any bet small, and stay focused on the long-term potential for cryptocurrency and blockchain technology overall.