Here's Why ETFs Are a Safer Way to Buy Crypto

Bitcoin's seen more drama in its short life than you'd get in several seasons of The Bold and The Beautiful. Given that most of us prefer to keep turmoil on the TV and tranquility in our investment portfolios, crypto ETFs are worth a closer look. If you're considering buying Bitcoin or Ethereum, ETFs can be a safer way to do it.

Pew Research shows that 9 in 10 Americans have heard of cryptocurrency. Of those, about three-quarters say they're worried about safety. This isn't so surprising when you think about the dramatic hacks, global crime cartels, high-profile fraud, and platform collapses that have grabbed the headlines over the years. Safety is a big concern for many potential investors.

What are crypto ETFs?

Exchange-traded funds (ETFs) are baskets of securities that follow a particular theme. That might be an index, industry, sector, or asset (such as crypto). You can buy them from your brokerage account, just as you would individual stocks. They are a great way to build a diversified portfolio.

As the name suggests, cryptocurrency ETFs give exposure to crypto. This year, the SEC approved spot Bitcoin and Ethereum ETFs which track each cryptocurrency's price. Unlike futures ETFs, which don't own the underlying assets, the managers of spot ETFs hold BTC or ETH in a digital vault.

Some brokerages make it easy to add crypto to your portfolio, both as ETFs or individual cryptocurrencies.

Crypto ETFs mean someone else will take care of storage

Storing crypto can be a big headache for investors. Many leave their assets on the platform where they bought them. The crypto exchange or brokerage stores those funds in what's called a custodial wallet. If that platform gets hacked or fails -- as has happened in recent years -- your assets are at risk.

Experienced crypto investors handle this by moving funds to their own crypto wallets. This gives them more control, but it comes with more responsibility. If you lose your security credentials, you may never be able to access your crypto again. There's tens of billions of dollars worth of Bitcoin stuck in wallets that people can't get to anymore.

If you buy a Bitcoin ETF, you don't have to think about how to store your crypto. Pick a fund that has strong security protocols and let the fund managers do the worrying.

ETFs give slightly more investor protection

The crypto industry is still relatively young and there isn't a lot in the way of regulation or investor protection. ETFs give you slightly more security in and of themselves. They come under the SEC's remit and have to share detailed information about themselves.

Not only that, but it gives you coverage against platform failure. Cryptocurrency isn't covered by FDIC insurance (which covers banks) or SIPC insurance (which covers brokerages). So if your crypto exchange or brokerage collapses, you could lose your investments.

In contrast, SIPC insurance does apply to ETFs. For clarity, this gives you protection against brokerage failure. It does not cover any investment losses. If crypto prices drop or the ETF itself fails, you would still lose your money.

If you want to add a small amount of Bitcoin or Ethereum to your portfolio, but are worried about platform collapse, SIPC coverage makes a big difference. Check out our favorite ETF brokers here.

Understand the pros and cons of crypto ETFs

Crypto ETFs are an exciting development for investors, but they aren't perfect. Before you buy a crypto ETF, look into the pros and cons. We've talked about the lower risks, but ETFs may also come with higher fees as well as tax consequences. Plus, some investors will prefer the extra features offered by cryptocurrency exchanges.

It's also important to research and understand how Bitcoin, Ethereum, or any other crypto will fit into your portfolio. If you're a buy-and-hold investor, look at how they might perform and what their utility might be in the long term. Make sure any crypto investments only make up a small proportion of your total investments.

Cryptocurrency still carries risks, whatever way you buy it

Don't take the SEC's green-lighting of a Bitcoin ETF as an endorsement of the crypto industry. SEC Chair Gary Gensler didn't mince his words when he labeled Bitcoin as, "A speculative, volatile asset that's also used for illicit activity."

ETFs are a safer way to buy crypto, but they don't magically turn it into a risk-free investment. Cryptocurrency prices can swing wildly, and there is a lot of uncertainty about how the industry will evolve.