Is there a cryptocurrency ETF? It might surprise you to learn that the answer is no.
Although there are ETFs (exchange traded funds) for almost anything you can think of — tech companies, shopping malls, gold, cows, whatever — there still isn’t anything that’s technically a crypto ETF.
That’s because regulators are still trying to decide what to do about crypto. Several companies have applied to the US Securities and Exchange Commission to approve their crypto ETFs, only to get rejected.
Why would anyone buy crypto ETFs?
First up, let’s talk about why crypto ETFs might even be a thing. After all, it’s easy enough to open a crypto exchange account and start buying Bitcoin with some spare change. So why would you bother to look for a crypto ETF?
There are two main reasons the ETF model may appeal to crypto investors:
- Diversification: Some people believe in Bitcoin as our lord and saviour, but strong contenders like Ethereum and Cardano who have their own following too. A diversified ETF tracking a basket of multiple cryptocurrencies helps reduce the risk of going all-in with one particular coin.
- Reduce platform risks: Crypto exchanges are largely unregulated, leaving you open to nasties like hacking, phishing, platform crashes and so on. Investment brokerages, on the other hand, are well-regulated and answer to MAS. So a crypto ETF on a regulated stock exchange would be avoid the platform risks inherent to crypto exchanges.
But there are also major downsides:
- Indirect ownership: If you were planning a US trip, would you rather buy real USD or an index-tracking USD fund? Probably the latter, right? The big downside of owning an ETF rather than the underlying cryptocurrency is that you can’t use it to transact or use the blockchain network. Some people would prefer to hold “real” cryptocurrency.
- High barrier to entry: You can buy crypto on an exchange for quite cheap and with just a small amount of money. As we’ll see later, crypto ETF-like products tend to incur higher fees and therefore have a higher barrier to entry.
5 best alternatives to crypto ETFs in Singapore
While waiting for crypto ETFs to become a reality, investors may want to check out the following alternatives:
- DIY crypto portfolio
- 21 Shares Crypto Basket Index ETP (HODL)
- Amplify Transformational Data Sharing ETF (BLOK)
- ARK Next Generation Internet ETF (ARKW)
- GrayScale Bitcoin Trust (GBTC)
Note that none of them is a perfect substitute for a diversified crypto ETF yet, so each one has strengths and drawbacks. We’ll walk through the 5 crypto ETF alternatives in more detail below.
1. DIY portfolio on a crypto exchange
Not sure if you’re a Bitcoin maximalist orEthereum maximalist? If you really don’t want to pick a team and would rather track the crypto market in general, you might want to build your own diversified portfolio by holding the top X (say 5) cryptos by market cap.
Here are the current top five according to CoinMarketCap:
As an example, you can execute this by putting $1,200 in a crypto exchange and buying:
- $728 of BTC
- $313 of ETH
- $61 of USDT
- $55 of BNB
- $44 of ADA
Then rebalance your portfolio periodically (or just leave it alone).
With this method, you own the crypto directly and can invest with very little money. But you’ll be exposed to the security risks inherent to crypto exchanges.
2. 21 Shares Crypto Basket Index ETP (HODL)
That’s not a typo — HODL is an ETP, not an ETF.
ETP, or exchange traded product, is just an umbrella term for any kind of investment product that tracks underlying asset(s), and is available to trade on exchanges. ETFs are a subset of ETPs.
Now, as we established in the beginning, there are no crypto ETFs available. However, there are crypto ETPs, which are actually ETNs (exchange traded notes).
ETNs are complex financial instruments built by companies like 21Shares and XBT Provider. Unlike an ETF, which is made up of stake in the underlying assets, an ETN comprises debt notes — sort of like a collection of IOUs.
If you’re comfortable with the concept, the most accessible diversified ETN in Singapore is 21 Shares Crypto Basket Index ETP which also goes by HODL. How cute.
HODL is available on Saxo Markets, but the commission is steep at 0.1per cent (min. 18 Swiss francs, or S$26.82). On top of that, this ETP has a built-in management fee of 2.5per cent, which is very high compared to the index-tracking ETFs we know and love.
On the other hand, you do benefit from the relative safety of an MAS-regulated brokerage — although that’s no guarantee that your investment will perform.
3. Amplify Transformational Data Sharing ETF (BLOK)
Bullish on crypto, but want to stick to traditional, regulated investments like shares? There are some publicly-traded companies whose business is based on cryptocurrency (like Coinbase) or who own cryptocurrencies (like MicroStrategy, Tesla and Square).
Investing in these companies on the stock market would then expose you to crypto, albeit in an indirect way. You can do it easily and quite cheaply on any good online brokerage.
But if you don’t want to go around hunting for companies or rebalancing every time Elon Musk tweets, you could look for an ETF with outsize exposure to these companies.
A good example is Amplify’s US-listed blockchain ETF, also known as BLOK. Its top holdings include MicroStrategy, Square, PayPal, Coinbase and Nvidia.
Compared to HODL, its 0.71per cent expense ratio is cheap as chips. But it’s a completely different concept, so you shouldn’t compare them side by side.
4. ARK Next Generation Internet ETF (ARKW)
Another popular actively managed ETF for crypto-lovers is ARK Next Generation Internet ETF (ARKW). Managed by Cathie Wood’s ARK Invest, ARKW is a US-listed ETF tracking the “next generation internet”.
Some of the big business names in crypto are among its top 10 holdings. These include Tesla, Square, Coinbase, as well as Grayscale Bitcoin Trust (more on that in the next section).
Compared to BLOK above, ARKW is not as crypto-centric. The new technologies represented in ARKW include but are not limited to blockchain and peer-to-peer payments — there’s also other stuff like cloud computing, AI, big data, and cybersecurity. This makes ARKW more diversified than BLOK.
Its 0.79per cent expense ratio is affordable and it’s also easy to purchase on any online brokerage that lets you trade on US markets.
5. Coming soon? Grayscale Bitcoin Trust (GBTC)
A number of fund houses invest in cryptocurrency, but these funds are typically available to institutional/accredited investors only. That means you and I can’t buy them on stock exchanges.
However, one of the biggest Bitcoin funds, the Grayscale Bitcoin Trust (GBTC), is in the process of getting converted into an ETF right now.
If this conversion is successful, the Grayscale Bitcoin ETF will be a true crypto ETF. Structurally, it will be different from the ETNs mentioned above.
Instead of being based on IOUs, it will supposedly backed with “real” Bitcoin. We don’t know the exact mechanics yet, but it’s apparently to be modelled after gold ETFs, which are also backed with real gold.
Assuming this ETF gets listed on a common stock exchange like the NYSE, it should become accessible to just about anyone with a brokerage account.
… or you could just not bother
The 6th alternative is to not bother looking for a crypto ETF substitute, because it might still be too early for crypto to be part of your portfolio.
Currently, cryptocurrency is extremely volatile and therefore high-risk. This is largely due to how new it is to the world — we’re still figuring out how we should assess its value and how to regulate it.
As the crypto market matures and we collectively decide on how to treat it, there will most likely be more and better options for low-cost passive investors.
If you still want to try out crypto for fun though, make sure you:
- Thoroughly understand the asset
- Have a solid investment strategy
- Invest an amount you can afford to lose
- Do what you can to minimise the risks
This article was first published in MoneySmart.