Cryptocurrency ETFs: An Institutional Investor‘s Guide to the Crypto Market in 2024
Dear reader,
Are you an institutional investor looking to gain exposure to the burgeoning cryptocurrency market in 2024, but unsure of where to begin? Cryptocurrency exchange-traded funds (ETFs) offer a regulated and straightforward way to access this new asset class, while mitigating many of the risks of direct crypto investment.
In this guide, I‘ll walk you through everything you need to know as an institutional investor about putting crypto ETFs to work in your portfolio. Let‘s explore what crypto ETF products exist today, where the market is heading in 2024, and how to position your firm to capitalize on crypto and blockchain‘s growth.
What Are Cryptocurrency ETFs and How Do They Compare to Direct Crypto Ownership?
Cryptocurrency ETFs function similarly to traditional ETFs that offer exposure to equities or commodities. The ETF manager purchases and custodies the underlying crypto assets, then issues shares of the ETF to investors. This allows exposure to crypto prices without having to directly hold coins in a digital wallet and manage private keys.
Here is a quick comparison between direct crypto investment and crypto ETFs:
| Direct Crypto Investment | Crypto ETF Investment |
|---|---|
| Hold coins in personal wallet with keys | ETF custodies assets |
| Transact directly on crypto exchanges | Trade ETF shares on stock exchanges |
| Volatile, complex, and risky | Regulated and transparent |
| No diversification | Basket of cryptocurrencies |
| Tax headaches | Potential tax advantages |
While direct ownership provides more control, ETFs offer simplicity, security, diversification, and potential tax benefits when held in retirement accounts.
Snapshot of Existing Cryptocurrency ETF Products
The crypto ETF space is expanding rapidly, but here is a look at some of the key products available today:
| ETF Name | Ticker | Asset Class | AUM | Return (1Y) |
|---|---|---|---|---|
| Grayscale Bitcoin Trust | GBTC | Bitcoin | $12.5B | -64% |
| Purpose Bitcoin ETF | BTCC | Bitcoin | $445M | -56% |
| Bitwise 10 Crypto Index Fund | BITW | Crypto Index | $120M | -59% |
Grayscale‘s GBTC is the largest crypto asset manager, but trades at a premium to its bitcoin holdings. Purpose Investments‘ BTCC was the first physically-backed crypto ETF in North America. Bitwise‘s index fund provides diversified exposure.
The Outlook for a US Spot Bitcoin ETF in 2024
The holy grail for institutional crypto exposure is a spot bitcoin exchange-traded fund (ETF) that holds bitcoin directly, something Canada already has but the US does not. Firms like Grayscale and Bitwise have applications for spot bitcoin ETFs pending with the SEC.
Approval would be a watershed moment, according to Baillie Gifford‘s James Anderson, "[A spot bitcoin ETF] would allow the professionalization and institutionalization of the product. That would make me think the outlook is very positive."
Bloomberg Intelligence estimates that a spot bitcoin ETF could see up to $50B in inflows in the first year. With major asset managers like BlackRock showing interest in partnering with crypto providers on an ETF product, the infrastructure is falling into place.
3 Key Approaches for Institutions Looking to Invest in Crypto
As you evaluate the right crypto allocation for your firm for 2024, here are 3 main approaches to consider:
1. Direct ownership of coins – For maximal flexibility and control, invest directly in cryptocurrencies through an institutional-grade custody solution like Anchorage Digital. This allows trading, staking, governance rights, DeFi yield opportunities, and micropayments. The downside is its operational complexity.
2. Crypto funds – Closed-end funds like Grayscale‘s products allow ownership of the underlying crypto assets in a fund structure. The shares can trade at significant premiums/discounts though. Index crypto funds like Bitwise provide diversified exposure.
3. Blockchain equity ETFs – ETFs like BLOK and LEGR invest in public companies engaging in blockchain and crypto businesses. This provides indirect exposure to crypto and blockchain growth.
Evaluate your firm‘s priorities – do you want direct control, simplicity, diversification, or equity exposure? Mixing approaches can allow you to balance these different benefits.
Tax Considerations Are Key for Crypto ETFs
One major appeal of crypto ETFs is the ability to hold them in tax-advantaged retirement accounts like IRAs that do not allow direct crypto ownership.
While direct cryptocurrency transactions are subject to capital gains taxes and complexity around staking rewards and airdrops, crypto ETFs held in a retirement account can grow tax-free. ETF shares are easier to value for tax purposes than direct coin holdings.
Consult a qualified crypto CPA to be sure you take advantage of available tax benefits and properly account for crypto‘s complex tax treatment.
In Closing
While risks undoubtedly exist in the volatile crypto sector, a small strategic allocation to cryptocurrency ETFs as part of a diversified institutional portfolio can unlock significant upside potential.
As both crypto assets and products mature in 2024, institutions that educate themselves and move early could find themselves ahead of the curve. I hope this guide has provided a balanced perspective on accessing crypto markets through ETF vehicles. Please reach out with any other questions!
Sincerely,
[Your Name]
