What Is a Crypto ETF and How can You Invest?

Cryptocurrencies have gone mainstream, and it’s near impossible to go a day without talk of them, from news channels, your neighbour, uncle, or right here on Canstar. But for many, investing in Bitcoin and other cryptocurrencies remains a confusing and daunting task.

That’s why the hype surrounding crypto ETFs is growing. Exchange-traded funds (ETFs) are a well-known and well-established investment tool, offering exposure to a wide range of securities without the need to invest directly.

It’s the reason I can lose money when the price of gold drops, despite not owning a speck of the precious metal.

So can a crypto ETF do the same and provide investors with exposure to crypto assets without the need for digital wallets and cryptoexchanges? Canstar takes a deep dive into crypto ETFs and what you need to know.

In this article:

What is an ETF?
What is a crypto ETF?
Why use a crypto ETF instead of investing directly?
How does a crypto ETF work?
Should you invest in a crypto ETF
Crypto ETFs in New Zealand

What is an exchange-traded fund (ETF)?

Before we get to crypto ETFs, let’s start with ETFs in general.

An exchange-traded fund is a basket of securities that are bundled together. Typically, ETFs track an index, commodity or industry. For example, NZX50 companies, tech companies, real estate, bonds, gold or more.

Shares in ETFs are bought and sold on the stock market the same way you buy shares in a company.

Most ETFs track these indexes or commodities by holding assets linked to that index or commodity. For example, a gold ETF may track the value of gold by holding physical stores of gold. Or an NZX50 ETF may use its investments to invest in all 50 companies in the NZX50.

This means that the performance of these securities directly correlates to the performance of the ETF, giving you exposure to these assets without having to directly invest or store the assets.

→ Related article: Sharesies: NZ’s Best Online Share Trading Platform

What is a crypto ETF?

A crypto ETF aims to track a certain cryptoasset or assets. For example, a Bitcoin ETF  tracks the price of Bitcoin. So instead of buying Bitcoin, you can get exposure to it without having to actually purchase it yourself.

As mentioned above, this is typically done by the fund holding the asset.

So, in theory, a Bitcoin ETF uses your investment (and the investments of others) to buy Bitcoin. Giving you exposure to Bitcoin without the hassle and security concerns of buying and storing Bitcoin yourself.

Why not just buy Bitcoin?

If a Bitcoin ETF is more or less just a middle man, and it aims to replicate the performance of Bitcoin, why not just buy Bitcoin yourself?

Well, there may be a few reasons for this:

• Hassle – share trading is fairly straightforward, and many investors may not want the hassle of dealing with the more complex nature of cryptotrading and cryptoassets.
• Security – crypto attacks are common, and if your cryptocurrencies are not securely stored, they could be stolen. On the flip side, if you secure your crypto using a watertight password, if you lose that password you lose access to your investment. But if you invest in a crypto ETF, you don’t own the actual crypto yourself, so you don’t have to worry about such issues.
• Tax – the laws covering tax and cryptocurrency can be complex and confusing. Investing via an ETF has more straightforward tax implications
• Cost – the fees charged on an ETF may be cheaper than directly investing in a cryptocurrency

→ Learn more: How are Crypto Assets Taxed in NZ?

How does a crypto ETF work?

As mentioned above, typically an ETF uses your money to buy the securities the ETF tracks (although there are exceptions). But, with crypto ETFs, this isn’t necessarily the case.

Because cryptocurrencies are still new and remain largely unregulated, the financial sector is more hesitant about approving stocks that invest in them. As a result, almost all crypto ETFs don’t actually purchase any crypto.

So how does an ETF track the price of an asset if it doesn’t invest in those assets? In this case, through futures.

Compare online share trading apps

What does this mean?

For the purpose of this article, we don’t need to go too in-depth about futures contracts. But what is important to know is that investing in Bitcoin futures contracts is not the same as investing in Bitcoin.

Futures contracts have become an integral part of the financial sector. Traders speculate and trade on a wide range of securities and what they believe the price of those securities will do. For example, the price of oil will increase in a month’s time, or the value of gold will fall, etc. Basically, it’s gambling on what you think is going to happen in the future.

Crypto ETFs trade futures contracts that speculate on fluctuations in the price of crypto assets. For example, betting on what the price of Bitcoin will do, instead of actually investing and trading Bitcoin.

Other types of crypto ETFs

Another form of crypto ETF is a stock-based ETF. This is a little different from other crypto ETFs in that it doesn’t track Bitcoin, Ethereum, or other cryptocurrencies. Instead, it tracks the performance of the wider crypto market.

Instead of investing in crypto, it invests in companies involved in the industry. Bitcoin miners, crypto exchanges, hedge funds, or even companies that are known to hold large reserves of cryptocurrency, such as Tesla.

In this sense, these ETFs are similar to other ETFs that track the performance of other industries, like tech or blue chip companies.

Should I invest in a crypto ETF?

A crypto ETF could be a good investment, but it depends on what you’re looking for. As it’s tracking notoriously volatile assets, it’s likely to be more volatile than many other ETFs. So it may not be ideal for long-term, passive investing.

And if you want to invest specifically in cryptocurrency, just without the hassle of it then, once again, a crypto ETF probably isn’t for you. Unless the ETF directly holds the assets, and is not simply investing in futures contracts, then it’s difficult for the ETF to accurately track the index. While a crypto ETF gets you indirect exposure to the cryptomarket, it’s not the same as actually investing in cryptocurrency itself.

For example, if you buy shares in a Bitcoin ETF right before a huge price surge, you may not see the same benefits as you would if you actually bought Bitcoin.

Furthermore, crypto ETFs don’t offer the very thing that’s the backbone of the cryptomarket – decentralisation. A crypto ETF is purely an investment approach to cryptocurrency. So if you believe in what cryptocurrencies are trying to achieve, in a more philosophical sense, then a crypto ETF isn’t for you.

What crypto ETFs are available in New Zealand?

There are a number of Bitcoin ETFs available overseas, but most of these aren’t easily available for your average trader here in New Zealand. And to access most of them, you may need to go through a broker or fund manager.

For those that use online share trading platforms like Sharesies and Hatch, you do have access to the Proshares Bitcoin Strategy ETF. But keep in mind this invests in futures, not actual Bitcoin.

There is one New Zealand based option, however, the Vault International Bitcoin Fund. This isn’t an ETF, but it does invest in Bitcoin ETFs. Though, again, the Bitcoin ETFs it’s investing in do not hold Bitcoin themselves. So your investment may not accurately track Bitcoin’s price.

Compare online share trading apps

Where to buy Crypto in NZ