Crypto-curious? What You Need to Know About Crypto ETFs

Cryptocurrencies have come a long way since a Florida man famously spent 10,000 bitcoins on two pizzas in 2010. While that US$41 transaction may have seemed like a good deal at the time, if he had held on to his coins, they would be worth about US$1 billion today. While bitcoin was the first cryptocurrency, there are now many different ones out there.

Over the course of 2024, bitcoin surged 121%. Although the value of bitcoin can fluctuate, the price of one bitcoin crossed the US$100,000 mark in December 2024 amid regulatory changes, increased economic volatility, and U.S. President Donald Trump embracing the digital asset class.

“There has been a shift in this new U.S. administration from a degree of skepticism to staunch support,” says Robbie Mitchnick, Head of Digital Assets at BlackRock. “We’ll see what tangible impact that has, but as a tone-setting instance, it’s pretty consequential.”

Investor interest in bitcoin also continues to increase. Maybe this is, at least in part, because investors can now get exposure to bitcoin through exchange-traded funds (ETFs), which can make it easier for the average investor to buy in.

ETFs are a way to get exposure to bitcoin

ETFs are similar to mutual funds, but trade on a stock exchange, allowing investors to buy and sell funds with the same simplicity as stocks.

While traditional ETFs track the performance of a benchmark – holding all of the same companies that are in the S&P 500, for instance – there are now a plethora of ETFs that track commodities, such as gold and silver. You can get exposure to these commodities by buying the precious metal directly, but also through other investment products like ETFs and mutual funds.

Crypto ETFs, the first of which launched in Canada in 2021, operate similarly to precious metal funds. For instance, a bitcoin ETF, which holds actual bitcoin, rises and falls with the cryptocurrency’s price.

Characteristics of bitcoin ETFs

Despite the rising price of bitcoin and the seemingly increased interest in crypto, some Canadians are still trying to wrap their heads around these digital assets. A 2023 Ontario Securities Commission survey found that only 10 per cent of Canadians own any crypto, and investors answering a series of questions about these assets got only half the questions correct.

While lack of knowledge about digital assets is certainly a big barrier to ownership, many also find cryptocurrencies too complicated. Investing in an ETF that includes bitcoin is “a way to gain convenient exposure to bitcoin for investors who are looking for an alternative to going through the challenges of buying and holding bitcoin directly,” says Mitchnick.

ETFs are easy to trade within existing brokerage accounts and can come with low fees and strong liquidity. They’re subject to regulatory oversight and remove the need maintain a digital wallet or keep track of digital keys. Also, unlike cryptocurrencies themselves, these ETFs can be held in tax-sheltered accounts like Tax-free Savings Accounts or Registered Retirement Savings Plans. On the other hand, ETFs can only be traded during market hours, whereas bitcoin bought directly can be traded 24/7.

Since 2021, the types of crypto ETFs have continued to evolve, giving Canadians more flexibility. For example, bitcoin ETFs are available in both Canadian and U.S. dollars, and track the same underlying investment. “It really just comes down to the preference of a given investor and what currency they want to use to fund the trade” says Mitchnick.

Diversifying with bitcoin

Bitcoin may be seen as a potential hedge against economic, monetary, and geopolitical risks, and while it comes with risks, it can be another way to diversify a portfolio. That’s because some see these assets as being a global monetary alternative to government-issued fiat currencies.

However, while bitcoin has become popular, it’s important to remember that it’s a highly volatile asset, and there are inherent risks involved with investing in crypto, including bitcoin ETFs. If you’re considering adding bitcoin to your portfolio, do your research, and consider your needs and risk tolerance before investing.