Investing in Cryptocurrency through ETFs

Investing in crypto has become more mainstream and, as more investors look for a slice of the action, ETFs are coming on board. Here’s a look at what’s on offer.

Bitcoin might be the best-known cryptocurrency but it’s not the only one capturing the attention of investors. Most of us have now heard of others – including Ethereum, Cardano and Dogecoin –  as cryptocurrencies are becoming mainstream.

In Australia, almost one in five of us own some form of cryptocurrency, according to the Independent Reserve Cryptocurrency Index (IRCI) 2020.

The 2021 BTC Markets Investor Study provides a breakdown of who’s tipping money into digital currencies. While the majority (69%) are aged 25 to 44, one in four (23%) of today’s crypto investors are aged 45-plus. This level of interest is driving growth in indirect ways to invest in Bitcoin and other digital currencies.

In 2020, micro-investing platform Raiz introduced a ‘Sapphire’ portfolio, giving investors a 5% allocation to Bitcoin.

In November 2021, the Commonwealth Bank announced a pilot program that will trial trading for 10 digital currencies through the CommBank app. If the pilot proves successful, the feature will be available more broadly in 2022.

For all that crypto is making its way into personal portfolios, investors admit to serious challenges. The BTC study found market volatility was the chief concern for 48% of respondents, followed by information overload and not knowing who to trust.

One in 10 respondents pointed to a lack of more accessible products, such as exchange-traded funds (ETFs) offering access to cryptocurrencies. But it looks as though this problem is starting to be solved.

After repeated warnings to consumers about investing in crypto through unlicensed entities, investment watchdog ASIC has paved the way for exchange-traded products to offer crypto-based investments. Funds need to meet strict guidelines to stay within the letter of the law, but already options are coming onto the market, and it’s expected that plenty more will follow. While the choice is thin at present, let’s take a look at some of the ETFs that focus on crypto.

BetaShares started the ball rolling with its recent launch of the Crypto Innovators ETF (ASX: CRYP), which tracks the Bitwise Crypto Innovators Index. It’s the first and (at the time of writing) only such ETF in Australia. The annual management fee is 0.67%.

The fund smashed previous ETF records on launch day, attracting $39.7 million in net inflows on the first day of trading. The previous record of $8 million was broken within the first 15 minutes of the start of the ASX trading day, showing just how many Australians are interested in digital currencies.

It’s important to take a good look under the hood of the BetaShares Crypto Innovators ETF. It doesn’t invest directly in digital currencies. Rather, it gives investors exposure to companies engaged in the crypto economy – those building crypto mining equipment, crypto trading venues and other key crypto services.

Drilling down further, some of the fund’s key investments include cryptocurrency miner Marathon Digital Holdings; Galaxy Digital – a merchant bank that invests in everything blockchain and crypto-related; and cryptocurrency exchange platform Coinbase.

BetaShares points out that an investment in CRYP is not the same as investing directly into cryptocurrency assets, and the ETF shouldn’t be expected to track the price movements of any digital currencies.

Nonetheless, the trading results and share price of many of the underlying companies are influenced by the performance of digital currencies. Galaxy Digital, for instance, recorded a $US176 million loss in the second quarter of 2021 – a result it puts down to a 41% drop in the price of Bitcoin. In early November, Coinbase shares dipped by more than 13% following the company’s announcement of a 29% decline in quarterly crypto trading volumes.

While more crypto-based ETFs are likely to be launched on the Australian sharemarket, investors can access a wider choice across global markets. By way of example, the Bitwise Crypto Industry Innovators ETF (BITQ) listed on the New York Stock Exchange, works in a similar way to the BetaShares ETF, providing indirect exposure to the crypto economy without the complexity of investing in digital currencies directly. In fact, many of the fund’s underlying companies mirror the BetaShares ETF. The annual fee is 0.85%.

For something a little different, the ProShares Bitcoin Strategy ETF (BITO), also listed in the US, gives exposure to Bitcoin futures contracts. Futures contracts aren’t directly backed by Bitcoin, so the market price of fund units won’t always move in sync with the price of Bitcoin. In effect, you’re taking a punt on how Bitcoin will move in the future. The ETF’s annual management fee is 0.95%.

If your trading platform offers access to the London Stock Exchange, the Invesco Elwood Global Blockchain UCITS ETF (BCHN) invests in companies with exposure to blockchain – the technology behind cryptocurrencies. The annual management fee is 0.65%.

For ETFs that purchase physical Bitcoin, you’ll have to look further afield – like the Purpose Bitcoin ETF listed on the Toronto Stock Exchange. It comes with a comparatively high management fee of 1.0% per year.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, said ETFs with a crypto focus offer “a low cost, easy way to invest in cryptocurrencies without having to go to the trouble of buying cryptos like Bitcoin or opening an account at crypto exchanges”.

In addition, ASIC’s strict regulations give investors reassurance that their money will be responsibly invested by the fund manager. That’s a plus because ASIC has said there was a 20% rise in reports from consumers losing money in cryptocurrency scams during COVID-19.

On the downside, no matter how an investment in digital currencies is packaged, there is no getting around the fact that crypto assets are very high risk – something BetaShares makes clear on its website.

Moreover, as many of the crypto-focused ETFs are newcomers to the market, it’s difficult for investors to gauge what sort of returns the fund has notched up over time.

There are other potential drawbacks to be aware of. “There is likely to be a huge future for digital or cryptocurrencies – but it’s really hard to tell which of the hundreds that now exist will succeed. It may ultimately be none of them as governments and central banks could provide their own,” Dr Oliver explained.

“Cryptocurrencies are highly volatile. Some like Bitcoin can be very expensive to transact in, and their production via mining uses a lot of energy. For all these reasons, digital currencies are at risk of more government regulation as we have been seeing in China.”

The real clincher, according to Dr Oliver, is that “cryptocurrencies are highly speculative – and depend on more and more investors buying into them in order to keep pushing prices higher.” He noted that this leaves investors vulnerable if at some point digital currencies fall out of favour and the flow of new money into them dries up.

“Trying to time if – and when – that will happen is next to impossible,” said Dr Oliver. “Digital currencies could go up a lot towards the moon or they could come down with a bang!”

The key for investors thinking about investing in crypto through ETFs is to go in with your eyes open. “Recognise that investing in them is highly speculative and a bit of a punt,” cautioned Dr Oliver. “And beware the old adage that past performance is not a reliable indicator of future performance.”

The table below displays some of the International Broad Based ETFs available on Canstar’s database with the highest three-year returns (sorted highest to lowest by three-year returns and then alphabetically by provider name). Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s ETFs comparison selector to view a wider range of products. Canstar may earn a fee for referrals.

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