What Is a Crypto ETF? How It Works & Why You Should Invest In It

Crypto ETFs have become an integral part of many investors’ portfolios since January 2024, sparking interest and curiosity. For seasoned investors, it’s an additional investment vehicle, but newcomers are asking, “What is a crypto ETF?”

Our comprehensive guide answers this fundamental question, examining its benefits, mechanism, and challenges in the dynamic cryptocurrency space.

What Is an ETF in Crypto?

Crypto ETFs, short for cryptocurrency exchange-traded funds, are an innovative way of blending cryptocurrency and traditional ETFs. The investment method enables traders to gain exposure to a cryptocurrency’s price without owning the digital asset directly. As a result, investors don’t have to deal with crypto exchanges, digital wallets, or private keys.

Unlike traditional ETFs that track commodities, indices, or baskets of assets, crypto ETFs focus specifically on cryptocurrencies, such as Bitcoin. By introducing a simplified and regulated way to invest in cryptocurrencies, ETFs have attracted both institutional and retail investors. First approved in January 2024, ETFs are unlocking fresh capital inflows and enhancing the acceptability of cryptocurrencies within traditional finance.

How Does a Cryptocurrency ETF Work?

A crypto ETF functions by tracking the price of BTC, much like a Bitcoin ETF, which reflects the price movement of BTC. Similar to conventional stocks, cryptocurrency ETFs are traded on traditional stock exchanges. Trading ETFs on familiar platforms has made them familiar to traditional investors who are comfortable with stock exchanges. These investors can enter the crypto space and avoid the complexities of dealing with direct cryptocurrency transactions.    

Bitcoin ETFs track the price of BTC by buying the actual Bitcoin or Bitcoin derivatives. The fund then sells shares representing the digital asset’s value to investors. The shares will operate like any other stock or exchange-traded fund. ETFs are a convenient way for investors to get exposure to BTC in their portfolio without buying or storing BTC. 

Types of Cryptocurrency ETFs

There are two basic types of crypto-specific ETFs, namely spot Bitcoin ETFs and Bitcoin futures ETFs:

Crypto Spot ETFs: These cryptocurrency exchange-traded funds track the price of the underlying asset by holding the actual coin.

• They provide investors with direct exposure to the price of a cryptocurrency, such as BTC or ETH.
• They are ideal for anyone seeking an easy way to access the crypto space without owning the asset.   
• The ETF issuer buys the underlying crypto asset on behalf of investors and keeps it in its reserve.

Crypto Futures ETFs: In the futures ETF, the issuer doesn’t directly hold the digital asset within the fund:

• The futures ETF tracks the price of the underlying asset through a futures contract and speculates on the future price of the asset.   
• The contract represents an agreement between the parties to trade the cryptocurrency at a specified price on a predetermined date.
• Traders are allowed to bet on the price trajectory of a cryptocurrency without owning the asset directly.

Spot Crypto ETFs

The US Securities and Exchange Commission (SEC) approved the first spot Bitcoin ETFs on January 10, 2024. This represented a critical moment in the history of exchange-traded funds. The following are among the most popular spot Bitcoin ETFs:

1. iShares Bitcoin Trust ETF (IBIT)

The IShares Bitcoin Trust ETF (IBIT) enables investors to trade Bitcoin indirectly through the ETF product. This eliminates the complexities involved in taxation, operations, and custody of holding BTC directly. Since its launch, IBIT remains the world’s most traded Bitcoin ETF. The fund is managed by the world’s largest asset manager and leverages technology developed by Coinbase Prime. 

2. Grayscale Bitcoin Mini Trust ETF (BTC)    

The Grayscale Bitcoin Mini Trust ETF invests explicitly in Bitcoin, aiming to reflect the price of the asset held by the Trust.  BTC has been ranked as the most affordable Bitcoin ETF product, facilitating low-cost ownership for investors. The ETF that Grayscale sponsors is available as an investment fund directly from brokerage accounts. 

3. Fidelity Wise Origin Bitcoin Fund (FBTC)

FBTC holds Bitcoin and tracks the cryptocurrency’s daily price via the Fidelity Bitcoin Reference Rate. The instrument is derived from price feeds emanating from different eligible Bitcoin spot markets. The fund could sell some BTC to cover the expenses associated with running it and is treated as an ROI for shareholders.

4. iShares Ethereum Trust ETF (ETHA)

ETHA provides a straightforward entry point for investors interested in Ethereum into the cryptocurrency space. Investors avoid crypto wallets and exchanges as they can access the digital asset within the familiar ETF framework. The product, backed by asset manager BlackRock, has the potential for enhanced institutional adoption of cryptocurrencies.

Futures Crypto ETFs

Futures crypto ETFs, such as the Bitcoin futures ETF, have been in operation since 2021. In this category of ETF, the fund owns futures contracts rather than the underlying asset itself. The seller agrees to sell the asset on a specific day at a predetermined price. The ETF issuer performs all the work on behalf of investors, and profits are reflected in the fund’s net asset value (NAV). Some examples of futures crypto ETFs include:   

1. ProShares Short Bitcoin ETF (BITI)

The ProShares Short Bitcoin ETF (BITI) is a financial instrument managed by ProShares Advisors LLC. The fund seeks to benefit from the daily decrease in BTC futures contracts. BITI invests in currency markets, taking short positions using derivatives such as futures contracts to invest in BTC. The fund, established in 2022, tracks one times the daily performance of the Bloomberg Bitcoin Index.

2. ProShares Bitcoin ETF (BITO)

The launch of the ProShares Bitcoin ETF (BITO) holds a significant place in history as the first US-based Bitcoin ETF. The product that is traded like stocks in leading exchanges provided a new level of accessibility and legitimacy to BTC investment. BITO is now included in numerous retirement accounts and is subject to the rules of financial institutions. The fund offers a more conventional investment approach that is less complicated than owning Bitcoin.  

3. ProShares Ether ETF (EETH)  

ProShares Ether ETF (EETH) actively seeks exposure to the price of Ether (ETH). The fund is invested using front-month ether futures contracts, which are USD-cash, settled. EETH doesn’t invest directly in Ether or any other cryptocurrencies and is managed mainly via Ether futures contracts. Stakeholders manage the operation and ownership of ETH through an online peer-to-peer network called the Ethereum Network.

Bitcoin ETF vs Futures ETF: Key Differences

Feature	Spot Bitcoin ETF	Futures ETF
Asset	Real Bitcoin	Futures contracts
Risk profile	Directly relates to real-time volatility	Highly speculative
Exposure	Direct exposure to crypto market	Indirect exposure to market conditions
Accessibility	Fewer countries	More widely accessible
Duration	Ideal for long-term investors	Best for short-term traders
Volatility	Low	High because of leverage

Advantages of Investing in Crypto ETFs

Crypto ETFs offer several advantages to investors, including diversification, tax efficiency, and cost efficiency, among others. Among the most tangible benefits are the following: 

Exposure without Ownership 

Investing in the best cryptocurrency ETFs provides a streamlined solution for navigating the complex world of cryptocurrency investment. Opting for ETFs enables you to bypass those daunting and often intricate aspects of direct crypto dealings. You no longer have to set up or manage a digital wallet, address security concerns, or even understand the mechanics of blockchain technology. ETFs present the dynamic nature of crypto within the regulated framework of traditional stock trading. 

Lower Learning Curve       

Crypto ETF investment simplifies the process of learning and entering the crypto market. Investors can leverage the growth potential of crypto investments to diversify their portfolios. This makes it easier for anyone unfamiliar with digital assets to invest in BTC and other cryptocurrencies.

More Security for Investors

Cryptocurrency ETF issuers are licensed and regulated companies that are traded on regulated platforms. This means you can invest confidently, knowing that the participants have been thoroughly checked and are closely monitored by regulatory bodies.  As a result, there’s very little chance that they could get involved in illegal activities or market abuse. Furthermore, ETF issuers’ investments are mostly backed physically and held in custody or on regulated platforms, which mitigate the risks of fraud or failure.   

Lower Costs for Investors

Compared to retail cryptocurrency investments, crypto ETFs buy, sell, and trade large quantities of digital assets daily. The result is that investors benefit from the economies of scale and competitive rates when purchasing crypto from their partners. In contrast, individual investment typically involves transactions subject to higher fees, ranging from 1.5% to 3% on retail crypto exchanges. This translates to lower costs for investors buying shares in Bitcoin ETFs.

Disadvantages of Investing in Crypto ETFs

Even with all the benefits mentioned above, investors should approach investing in crypto ETFs with caution. Considering the nature of crypto assets, gauging their fair value can become tricky. The following are some disadvantages of investing in a Bitcoin ETF:

Volatility

The best cryptocurrency ETFs may offer deeper liquidity compared to direct crypto investment, but they are still subject to volatility. Market sentiments change rapidly within the crypto space – this can influence the prices of the underlying cryptocurrency of ETFs. Since cryptocurrencies are known for price volatility, the value of ETFs can fluctuate significantly.

Higher ETF Fees

Like all other mutual funds or ETFs, cryptocurrency ETFs are subject to fees. Please note that a portion of your potential earnings will be allocated to managing the fund, in addition to purchasing Bitcoin.

Lack of Direct Ownership

Unlike traditional cryptocurrency trading, where you own the coin, ETF investors don’t have direct ownership or access. While this isn’t a primary concern, some investors criticize the lack of flexibility and view it in a negative light.                                  

Risk of Tracking Error

Despite offering a regulated way of investing in cryptocurrencies, Bitcoin or Ether ETFs carry tracking error risks. This refers to the discrepancy between an ETF’s actual performance and the performance of the underlying cryptocurrency market. This may lead to a potential disparity between the expected and the exact return on investment.

How to Invest in Cryptocurrency ETFs?

The process of investing in ETFs is straightforward, taking only a few simple steps:

• Step 1: Select a Brokerage Platform: Start by choosing a brokerage platform that offers crypto ETFs. Conduct thorough research to locate a brokerage that aligns with your investment goals.
• Step 2: Open a Brokerage Account: You can easily open a brokerage account from your phone or computer. You can choose between a brick-and-mortar brokerage firm and an online one to open your account.
• Step 3: Fund your Account: Next, you need to transfer money into your new account to buy crypto ETFs. Various payment methods are available, including wire transfers, bank transfers, and debit/credit card payments.
• Step 4: Find and Buy Crypto ETF shares: Navigate the brokerage platform to locate the specific crypto ETF you’re interested in. Place your order once you have decided on the number of shares you wish to purchase.
• Step 5: Monitor your Investment: The final step is to sit still and monitor the performance of your ETF. Set alerts on what happens following significant price changes.

Taxes and Legal Regulations on Crypto ETFs

Crypto ETFs are subject to taxation, and the rates and implications may vary based on applicable laws and holding durations. Investors are liable to pay taxes on profits made with different rates for long-term and short-term capital gains. Moreover, investing in cryptocurrency ETFs may offer tax advantages compared to investing directly in digital assets. The applicable rates may vary from one jurisdiction to another; therefore, investors should consult with expert tax advisors. This will help you understand the correct tax implications associated with Bitcoin ETF investment based on your particular circumstances.

Different countries have their own rules regarding the issuance, trading, and storage of cryptocurrencies and related products. The rules may vary significantly from one country to another, and they continue to evolve in response to emerging risks. While some impose partial rules, others have comprehensive regulatory frameworks covering a wide range of crypto activities, including crypto ETFs.

Investing in crypto ETFs is subject to rules and regulations designed to protect investors from scams and market manipulation. The rules promote accurate disclosures and transparency, including clarifying how the products are taxed. In addition, the regulations are also designed to eliminate systemic risk by subjecting ETF issuers to oversight.

Alternatives to Cryptocurrency ETFs 

Following the approval of spot bitcoin ETFs, several companies have created alternative products to meet the growing demand. They include the following: 

1. Crypto Trusts  

Crypto trusts are designed to hold cryptocurrencies, enabling investors to add digital assets to their portfolios. The investor buys a basket containing Bitcoin and other cryptocurrencies through a brokerage or retirement account. The crypto trust operates differently from the regular crypto ETF as the fund can periodically sell shares to accredited investors. The accredited investors, who must meet strict income criteria, may sell their shares through public markets. The prices may differ from the underlying cryptocurrency, which is referred to as trading at a premium or discount. 

2. Crypto ETPs

Crypto ETPs, or cryptocurrency exchange-traded products, are an alternative financial tool that bridges traditional and blockchain-based finance. There are three main types of ETPs, which come in different structures, holding crypto or tracking its value through debt or contracts. Three products include Exchange-traded funds (ETFs), exchange-traded commodities (ETCs), and exchange-traded notes (ETNs).

3. Companies That Hold Crypto 

Another investment option surrounds Bitcoin treasury companies that buy and hold crypto. These firms have fully committed to Bitcoin and are currently among the largest holders of BTC. Their business model involves raising money from investors and buying Bitcoin. Leading the pack is Strategy, which owns 607,770 bitcoins as of July 2025, representing 3% of all BTC in circulation. Others include Japan’s Metaplanet, Galaxy Digital, and Twenty One Capital, among others. 

4. Crypto-Related ETFs  

There are different crypto-related ETFs that investors can choose from, with the best examples being the following:

• Bitcoin ETFs: Designed to track the price of Bitcoin by directly holding the asset or through Bitcoin futures contracts.
• Ethereum ETFs: Just like the BTC ETF, the ETH ETF tracks Ethereum’s price for spot ETH ETFs or Futures ETFs.
• Mixed Cryptocurrency ETFs: Other ETFs offer a mix of crypto assets, primarily through futures contracts. 

Are Crypto ETFs a Good Investment in 2025?

Crypto ETFs provide a new and promising avenue for investors seeking to navigate the dynamic cryptocurrency market. The ETF market is poised to experience considerable innovation and expansion in 2025 following the positive changes in crypto regulation. While regulatory frameworks could tighten, the positive aspect would be increased technological advancement and institutional adoption. Investors should take a balanced and informed approach as they learn key trends and developments within the sector. Staying informed enables investors to navigate the intricacies of crypto ETFs effectively.

FAQs                                       

What is the difference between ETFs, ETPs, and ETNs?

Exchange-traded products (ETPs) encompass a broad category of investment vehicles that include Exchange-traded Funds (ETFs) and Exchange-traded Notes (ETNs). They may also include other investment types, such as exchange-traded commodities (ETCs). ETFs hold actual assets, such as bonds, stocks, and crypto, but ETNs represent unsecured debt securities associated with a performance index. ETCs are a type of ETP linked to currencies and commodities.

What would an XRP ETF mean?

The approval of an XRP ETF would enable investors to gain exposure to the price movement of XRP without owning the cryptocurrency directly. The regulated investment vehicle would enhance the institutional adoption of XRP.

What is a crypto ETF in the S&P 500?     

Crypto ETFs track the price of cryptocurrencies like BTC in the S&P 500. And as their name suggests, investors can buy or sell ETFs like stocks using traditional brokerage accounts.                                       

Is a Bitcoin Spot ETF approved in the US?

The US SEC approved the first 11 Bitcoin spot ETFs on January 10, 2024.                         

Can I short crypto ETFs?    

Currently, no stock enables shorting Bitcoin. However, ETFs facilitate this via inverse funds, such as the ProShares Short Bitcoin Strategy ETF (BITI).                               

Which crypto ETF is the best?                                                

The iShares Bitcoin Trust ETF (IBIT) is currently one of the best crypto ETFs in history. The fund tracks the New York Variant Index of the CME CF Bitcoin Reference Rate, which enhances its appeal.