Cryptocurrency ETFs Explained

Bitcoin and Ethereum ETFs have undoubtedly become one of the key developments extending far beyond the crypto industry, serving more to connect it with traditional finance – and it is necessary to have cryptocurrency ETFs explained.

Here, we will break down what cryptocurrency ETFs are, and how do cryptocurrency ETFs work? What’s the difference between a crypto ETF and buying coins directly? And why this deserves your attention.

What Is a Crypto ETF?

A cryptocurrency ETF is an exchange-traded investment fund that gives market exposure to a range of digital assets by trading through traditional stock exchanges. At its core, it is the same classic ETF, where the investor buys a share of the fund instead of buying and managing assets directly. With cryptocurrency ETFs, we have a similar story, but as you might have guessed, the assets here are Bitcoin, Ethereum, or potentially other digital tokens that are actively being considered now for future approval.

If you don’t quite understand why anyone would buy such a thing, that may only seem so at first glance. A crypto ETF provides access to crypto assets but eliminates the need for direct interaction with blockchain infrastructure, the need to manage private keys, ensure wallet security, or understand the specifics of on-chain transactions. Instead, you have a classic brokerage account, regulated by financial authorities, with access to crypto assets within a familiar institutional environment.

And that is extremely important because while for crypto enthusiasts there is no issue with directly interacting with the crypto industry, it often acts as a barrier for more traditional markets and institutions. Thus, a crypto ETF is a response to the growing value of crypto assets and the need to integrate a high-risk and technologically complex market into the more mature and familiar infrastructure of traditional capital. This opens the door for institutional investors, such as pension funds, trusts, insurance companies, and others, to comply with compliance and reporting requirements without stepping outside existing regulatory frameworks.

ETF vs Direct Crypto Investment

Yet it is worth considering the fundamental difference between ETF vs direct crypto investment in digital assets, which lies in the degree of control and ownership. When using an ETF, the crypto investor gains access to the price movement of the cryptocurrency through a regulated fund without owning the crypto assets directly, having limits in the possibility of direct participation in on-chain activities such as staking, providing liquidity, or voting in governance.

When you buy and own crypto assets directly, cryptocurrencies directly through a CEX, DEX, or self-custody, you gain full control over the asset and the ability to use it within the DeFi infrastructure. Of course, this is accompanied by additional responsibility regarding its management, requires some technical competence, and carries risks of loss of access, key theft, or incorrect storage.

So, what’s the difference between a crypto ETF and buying coins directly? An ETF minimizes the complexities and risks of direct asset ownership but limits various possibilities of its use within the DeFi ecosystem. Thus, a crypto ETF is well suited for those seeking exposure with minimal operational involvement, whereas direct ownership is essential for those aiming for functional use of crypto assets and interested in DeFi opportunities such as staking, providing liquidity, or voting in governance.

How Do Cryptocurrency ETFs work?

Wondering how do cryptocurrency ETFs work? Technically, they operate like a standard exchange-traded investment fund but with consideration for the specifics of digital assets and the requirements for custodial storage. The basic mechanism is built around the regular calculation of net asset value (NAV), the creation and redemption of fund shares (creation/redemption units), and the participation of authorized market makers who maintain market liquidity.

Funds that use a physical model, such as a spot ETF, imply that they directly own the corresponding amount of cryptocurrency. At the same time, it is stored with qualified custodians such as Coinbase Custody, Fidelity Digital Assets, or BitGo, who provide secure cold storage and comply with regulatory requirements. All fund operations are carried out within a strict and transparent reporting framework, with regular proof of reserves and independent financial and technical audits.

At the same time, the fund uses standard brokerage infrastructure such as a ticker, trading volume, ISIN, and listing on the NYSE, Nasdaq, etc. Fund shares are traded in real-time, and their market price may slightly deviate from the NAV – especially during periods of high demand or reduced liquidity. These deviations are corrected through arbitrage mechanisms involving Authorized Participants, who issue and redeem ETF share blocks depending on the price imbalance.

For example, Grayscale Bitcoin Trust (before conversion into an ETF) does not have such an arbitrage mechanism, leading to significant premiums and discounts to NAV. However, in the case of a full-fledged ETF, the structure mainly aligns the market price through the activity of APs and market makers, making the instrument more transparent and predictable for the investor.

Spot Bitcoin ETF vs Futures ETF

Another fundamental and structural difference between the main types of cryptocurrency ETFs is spot ETF vs futures ETF, which lies in the nature of exposure to the underlying asset. As you already understand, a spot Bitcoin ETF is backed by actual ownership of Bitcoin, albeit through authorized custodians, which ensures the most direct link between the fund’s share price and the current asset market price.

A Futures Bitcoin ETF, by contrast, builds its exposure based on futures contracts, typically traded on the CME, and does not hold the asset directly but purchases and periodically rolls futures positions. This structure is simpler from an infrastructure perspective but it entails additional costs and potential deviation from the spot market price. In particular, there is a specific term for this – contango, a situation in which the futures price exceeds the spot price of the asset. Prolonged holding may lead to reduced investment efficiency, while rolling mechanisms may increase transaction costs and create additional volatility within the fund’s structure.

Therefore, when you explain spot vs futures ETF for crypto, it comes down to the fact that a spot ETF directly owns the assets and provides a high correlation with the real price of Bitcoin and other cryptocurrencies, making it the preferred instrument for long-term investors. Futures ETFs do not hold the asset directly but purchase and periodically roll futures positions and maybe most advantageous in short-term strategies or under conditions where regulatory approval for a physical model is lacking.

Bitcoin ETF vs Ethereum ETF

At first glance, it may seem that a Bitcoin ETF and an Ethereum ETF are not fundamentally different, and at this industry stage, you would be right. However, potentially, this goes beyond the differences in underlying assets and touches on deep aspects of architecture, yield generation, and regulatory compatibility.

Bitcoin ETFs represent a more straightforward form of price exposure since Bitcoin natively does not involve native staking and is not connected to mechanisms of internal yield. Accordingly, even a spot-oriented Bitcoin ETF only requires the presence of held assets with a custodian and closely tracks the spot price of the asset, which reduces structural and operational risks and makes such funds transparent and easily scalable in terms of NAV calculation and market correlation.

Ethereum ETFs, by contrast, due to the specifics of the network based on proof-of-stake, may potentially include staking activity in their structure. Some of the applications submitted to the SEC envision the fund participating in the Ethereum network as a validator, with corresponding staking rewards and other DeFi activities. However, this is naturally associated with increased requirements for custodial infrastructure, liquidity lockup, and income disclosure, which increases both operational complexity and regulatory risks.

Crypto ETFs for Beginners

For a traditional investor without technical exercise in blockchain or working with cryptocurrency, a crypto ETF represents one of the most understandable and manageable ways to gain exposure to digital crypto assets. Of course, this is not an alternative to direct cryptocurrency ownership but rather a structured instrument integrated into the existing brokerage ecosystem.

Are crypto ETFs safe for beginners? It can be said that from the standpoint of operational risks, ETFs are indeed safer: assets are held by custodians that meet SEC requirements, and the funds themselves undergo regular audits and do not require self-management of private keys. However, do not forget that safety can never be absolute – funds can also experience volatility or encounter regulatory hurdles, and the convenience of use comes at the cost of limited functionality: through an ETF, one cannot participate in staking, vote in a DAO, or receive on-chain yield.

So, can I buy a crypto ETF with a brokerage account? Yes, and that’s the whole point since practically all spot Bitcoin ETFs approved by the SEC (including IBIT from BlackRock and FBTC from Fidelity and others) are available on major platforms such as Charles Schwab, Fidelity, E*TRADE, TD Ameritrade, and more. Moreover, an investor can add BTC exposure to their IRA, retirement account, or standard brokerage portfolio, just like stocks or bonds.

How to Invest in Cryptocurrency ETFs

Approaching the more practical side of the question, how do I invest in crypto ETFs? It requires consideration of the key features of the ETF you are interested in, such as the brokerage platform, account type (taxable or retirement), and the list of available funds, as well as specific characteristics of the particular instrument: spot or futures, with physical custody or through derivatives, fee levels, liquidity, and compatibility with your investment strategies.

Also, when choosing between different cryptocurrency ETFs, it is crucial to take into account сrypto ETF tax implications. For spot funds such as IBIT and FBTC, standard capital gains taxation applies based on the holding period (short-term vs long-term capital gains). Futures ETFs registered in the U.S. are generally subject to Section 1256, which means a blended tax rate (60% long-term / 40% short-term) regardless of the holding period.

In addition, special attention should be paid to cases where an ETF may be classified as a Passive Foreign Investment Company (PFIC), which creates additional reporting requirements for non-U.S. residents. For IRA and 401(k) retirement accounts, many funds are available, but the specific list of eligible assets must be confirmed with the account administrator, as not all ETFs may meet qualification criteria.

Thus, your crypto ETF investment guide is as follows:

• fund model (spot/futures),
• tracking method (physical replication or synthetic),
• level of assets under management and trading volumes,
• eligibility for IRA and other qualified plans,
• infrastructure details – custodian, market makers, arbitrage mechanism, reporting frequency.

However, looking at the full range of what you need to analyze, you may justifiably ask: is a Bitcoin ETF a good investment? Generally speaking, if the goal is to include BTC in a structured portfolio with reporting, compatibility with tax and retirement mechanisms, and without managing private keys – then yes. It is not a substitute for on-chain participation but a balanced solution for a traditional investor seeking managed exposure to digital assets without abandoning procedural discipline.

Best Сrypto ETFs in 2025

The year 2024 was historic for the crypto ETF market because we got a dozen SEC-approved cryptocurrency ETFs. So, which crypto ETFs are approved in 2025? The most prominent examples are clearly BlackRock, as well as Fidelity, Grayscale, Ark/21Shares, Bitwise, VanEck, Invesco, Franklin Templeton, and WisdomTree. But how are crypto ETFs regulated? In order to receive SEC approval, they were required to undergo a fairly strict process generally consisting of the following stages:

• Submission of registration form S-1 describing the fund structure, index methodology, share creation terms, and the roles of the custodian and market makers;
• SEC review for compliance with investor protection standards, liquidity, disclosure, and structural transparency;
• Public comment period or responses to Commission feedback;
• Final registration and listing on NYSE Arca, CBOE, or another approved exchange.

Moreover, their daily operations are also subject to certain obligations, many of which have already been discussed above:

• Disclosure of daily NAV and market price;
• Provision of creation/redemption mechanism through Authorized Participants;
• Custody of assets with a qualified custodian (e.g., Coinbase Custody or Fidelity DAS);
• Publication of audited reports on reserves and total fund value.

Top-Performing Crypto ETFs 2025

What’s the best ETF for crypto exposure? Most noteworthy are the most successful players with consistent operations. The first contender is BlackRock, while Fidelity and Grayscale are also worth considering.

IBIT (iShares Bitcoin Trust ETF)

The obvious leader here is BlackRock. Its spot Bitcoin ETF IBIT tracks the CME CF Bitcoin Reference Rate – New York Variant. AUM stands at $70.98B as of May 2025, and NAV is $61.89, with an impressive YTD return of +18.92%. At the same time, the management fee is relatively competitive – 0.25%. The primary custodian is Coinbase Custody, which is something of an industry standard. Over the past 30 days, average daily trading volume exceeded 40.6 million shares.

It is important to note that the fund does not use derivatives, lending, or staking, and the portfolio consists of 100% Bitcoin, with no additional assets. NAV calculation takes into account market depth and pricing from regulated venues. Available for all major brokers and for inclusion in retirement accounts (IRA, 401(k)).

ETHA (iShares Ethereum Trust ETF)

Another of BlackRock’s offerings is spot Ethereum ETF. ETHA tracks the CME CF Ethereum Reference Rate (NY Close), with an AUM of $3.38B as of May 2025. NAV is $19.43, calculated daily, and admittedly, due to the ongoing challenges faced by Ethereum, the fund shows a negative YTD return of -20.92%. The fee is 0.25%, identical to IBIT. The portfolio is 100% ETH, with no derivatives or USD components. The average daily trading volume is around 12 million shares.

FBTC (Fidelity Wise Origin Bitcoin Fund)

While not as high-profile, Fidelity’s FBTC is also key, tracking the Fidelity Bitcoin Reference Rate (FBPRR), which is calculated using the VWMP methodology – a volume-weighted median price over a 60-minute rolling window, updated every 15 seconds. NAV is calculated daily based on VWMP and published simultaneously to all participants. IIV is updated in real-time and available via CTA, CQS, and Bloomberg/Reuters terminals. Its custodian is Fidelity Digital Asset Services, LLC (FDAS), and all bitcoin is held in cold storage. The fee is also 0.25% annually and includes administration, custody, audit, listing, etc. 

The fund is likewise spot-based, not using derivatives, lending, staking, or leverage. The ETF is available through all major brokerage platforms, including IRA and 401(k). Jane Street serves as an Authorized Participant, providing liquidity and arbitrage.

FETH (Fidelity Ethereum Fund)

Accordingly, Fidelity also offers an Ethereum product FETH, based on a physical model. NAV is calculated using the Fidelity Ethereum Reference Rate (FERR), which is also VWMP-based. It is listed on the Cboe BZX, with the custodian again being Fidelity Digital Asset Services, LLC, with cold storage. The annual fee is also 0.25%, covering operational costs, including index provider, administration, custody, and listing.

The fund does not engage in staking or generate on-chain yield, and it excludes forks and airdrops – all such assets are disregarded by default. There are no derivatives, leverage, or additional instruments in the structure. Share creation and redemption are carried out exclusively in cash, without ETH transfers. IIV is published every 15 seconds via CTA, CQS, Bloomberg, Reuters, and NAV is fixed at 4:00 PM EST.

GBTC (Grayscale Bitcoin Trust ETF)

Not last, but a key player is Grayscale, and its spot Bitcoin ETF converted from a closed-end trust on January 11, 2024. It tracks the TradeBlock XBX Index Price, which is calculated based on spot prices from regulated venues. Before its ETF conversion, the fund was widely known to trade at a persistent discount to NAV, at times nearing -40%. AUM as of May 2025 is $20.4B, and the custodian is traditionally Coinbase Custody. Regarding terms, they are no longer as easy to enter, and the management fee is 1.50% annually. The fund’s shares are traded on NYSE Arca, with an average daily volume of 2.77 million.

The Grayscale fund is also built on a physical model, meaning spot, without using derivatives or lending. Before the conversion, the fund traded at a constant discount to NAV (up to -40%), but after the transition to ETF architecture and the implementation of the creation/redemption procedure, the premium/discount stabilized within ±0.5%. The fund is available via major brokerage platforms.

BTC (Grayscale Bitcoin Mini Trust ETF)

An interesting solution from Grayscale is that they offer several funds at once, including a simplified Bitcoin ETF with a reduced fee of 0.15% annually. AUM is $4.7B, NAV is $48.16, the market price is $48.18, the premium is 0.04%. The fund tracks the same index as GBTC, namely TradeBlock XBX, with a total amount of BTC under management of 43,643.3075 and the same custodian – Coinbase Custody. The number of shares is 97.89 million, with an average daily volume of 1.08 million shares.

Everything is the same here, this is a spot fund without the use of lending or derivatives, supported by brokers and compatible with retirement infrastructure.

ETHE (Grayscale Ethereum Trust ETF)

Similarly, Grayscale offers several Ethereum-based options, and the main one is the spot ETHE ETF. NAV is $21.25, market price is $21.27, premium is 0.09%. AUM is $8.29B, the amount of ETH in the fund is 1,138,342.5185. The fee is a noticeable 2.50% annually. It tracks the ETX index from CoinDesk Indices, listed on NYSE Arca, with 371,086,500 shares outstanding and the same custodian – Coinbase Custody.

Naturally, the ETHE is built on a physical model, does not allow staking or validator activity, and does not participate in forks and airdrops. NAV is updated daily, and IIV is calculated in real-time. Daily trading volume is over 3.2 million shares.

ETH (Grayscale Ethereum Mini Trust ETF)

The simplified Ethereum ETF follows a similar scheme, with a fee of 0.15% annually. NAV is $24.11, market price is $24.15, premium is 0.17%. AUM is $1.27B, ETH in the trust is 497,102.3735, and custody is Coinbase, ETH per share is 0.00941834. It tracks the same ETX index (CoinDesk) and is listed on NYSE Arca. Daily trading volume is over 1.6 million shares.

NAV and GAAP NAV are published daily. Supported by leading brokers and suitable for long-term passive allocation.

Pros and Cons of Crypto ETFs

You’ve likely gained a fairly comprehensive understanding of what crypto ETFs are, how they work, what features they offer, and in what scenarios they may be useful. Let’s briefly summarize the cryptocurrency ETF risks and benefits so you can decide whether they align with your trading strategy.

Pros of Cryptocurrency ETFs

• They provide access to cryptocurrencies through traditional regulated brokerage accounts without the need to interact with blockchain infrastructure, private keys, or wallets.
• Supported by retirement accounts and institutional infrastructure such as IRA, 401(k), as well as brokers and custodians.
• Offer a certain degree of volatility risk balancing, regular reporting, transparent pricing, and compliance with SEC requirements.
• Minimize operational risks related to storage, management, and transfer of digital assets.

Cons of Cryptocurrency ETFs

• They do not allow participation in on-chain activity such as staking, voting in a DAO, or providing liquidity.
• In the case of futures ETFs, there may be costs related to contract rollovers and price divergence (e.g., contango).
• Some ETFs have high fees, and the fund’s return does not always fully match the spot price of the underlying asset.
• There may be restrictions with certain brokers and for non-U.S. residents.

Summary

Crypto ETFs have undoubtedly become a breakthrough investment instrument in 2024 and are rightfully gaining momentum in 2025, helping to bridge the gap between traditional and innovative digital assets. Moreover, it is likely that we are only seeing the beginning of this development, and other investment instruments may emerge whose structure includes more DeFi activities familiar to crypto enthusiasts.

The market demands it, regulators are forced to take it into account, and just as spot crypto ETFs seemed impossible a few years ago, more types of crypto ETFs may over time become a norm in the financial industry.

FAQ

Do cryptocurrency ETFs actually hold crypto assets or just track prices?

It depends on the fund structure – spot ETFs hold the underlying cryptocurrency directly via a qualified custodian, while futures ETFs use derivative contracts that replicate exposure without owning the asset.

Can crypto ETFs generate passive income like staking rewards?

Most current ETFs do not include staking or yield-generating mechanisms due to actual SEC regulatory constraints. Any such integration would require explicit approval and infrastructure capable of managing validator responsibilities transparently.

Why might a crypto ETF trade at a premium or discount to NAV?

ETF market prices can diverge from NAV due to demand-supply imbalances, low liquidity, or the absence of real-time arbitrage (especially in non-redemption-structured trusts). Spot ETFs with active creation/redemption mechanisms typically show smaller deviations.

Are crypto ETFs a viable hedge against fiat inflation?

While ETFs provide exposure to assets like Bitcoin, which some view as an inflation hedge, the ETF itself is still USD-denominated and managed under traditional finance infrastructure. The inflation-hedging effect may be indirect and depends on macro conditions.

How do crypto ETFs impact long-term portfolio allocation strategies?

Crypto ETFs allow allocation to digital assets within a risk-managed, reportable structure, enabling integration into retirement accounts, model portfolios, or institutional mandates that require SEC-compliant vehicles.

Can ETF-based exposure replace participation in decentralized finance (DeFi)?

No. While ETFs simplify access to crypto price action, they do not allow interaction with DeFi protocols (e.g., lending, governance, or liquidity pools). Direct ownership remains essential for utilizing decentralized ecosystems.