Key takeaways
- Bitcoin ETFs provide exposure to Bitcoin’s price performance without the need to directly own BTC cryptocurrency.
- Ethereum ETFs work similarly but focus on Ethereum’s price movements and market dynamics.
- Differences between Bitcoin and Ethereum ETFs include their underlying blockchain, use cases and market maturity.
- Investors must consider benefits, risks and tax implications when choosing between these options.
Exchange-traded funds (ETFs) are investment vehicles that provide exposure to a basket of investments such as equities or bonds. They contain a combination of assets, which helps to distribute risk across many investment categories.
ETFs tied to cryptocurrencies have opened new doors for investors seeking exposure to the digital asset market without directly holding cryptocurrencies.
Among these, Bitcoin (BTC) and Ethereum ETFs are the most popular options. But how do they differ, and which one is right for you? Let’s break it down, and before that, dive into what are Bitcoin and Ethereum ETFs.
Bitcoin ETF overview
Bitcoin ETFs are designed to track the performance of Bitcoin, the world’s first and most valuable cryptocurrency. These ETFs first gained significant attention in 2021 when the ProShares Bitcoin Strategy ETF (BITO) debuted in the United States, becoming the first Bitcoin futures ETF to receive approval from the Securities and Exchange Commission (SEC).
In the official news release, Michael Sapir, CEO of ProShares, said, “1993 is remembered for the first equity ETF, 2002 for the first bond ETF, and 2004 for the first gold ETF. 2021 will be remembered for the first cryptocurrency-linked ETF.”
He emphasized how the ProShares fund would provide “crypto exposure to investors who have a brokerage account but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider … or are concerned that these providers may be unregulated and subject to security risks.”
This milestone marked a major step toward mainstream adoption, providing traditional investors a regulated way to gain exposure to Bitcoin.
However, the actual breakthrough came in January 2024, when the United States capital markets regulator, the Securities and Exchange Commission, approved 11 spot Bitcoin ETFs of large financial institutions — BlackRock, Vanguard, Franklin Templeton, Valkyre, Fidelity Investments, Invesco Galaxy, ARK Invest, Bitwise, Grayscale, Hashdex and VanEck.
As of Dec. 17, 2024, Bitcoin ETFs have experienced significant growth, with total assets under management (AUM) surpassing $129 billion, exceeding that of US gold ETFs.
These funds are managed by some of the biggest names in finance, ensuring liquidity and professional oversight while further solidifying Bitcoin ETFs as a key player in the digital asset space.
How Bitcoin ETFs work
- ETFs hold Bitcoin directly or use derivatives like futures contracts to replicate its price performance.
- These funds trade on traditional stock exchanges, offering regulated and accessible investment vehicles.
Examples of Bitcoin ETFs
- ProShares Bitcoin Strategy ETF (BITO): Focuses on Bitcoin futures contracts.
- ARK 21Shares Bitcoin ETF (ARKB): Launched in 2024, this ETF provides direct exposure to spot Bitcoin and has gained popularity for its performance in a regulated framework.
- VanEck Bitcoin Trust (HODL): Designed to track Bitcoin’s price with operational expenses deducted. Launched in early 2024, it trades on CBOE and offers a low expense ratio, appealing to cost-conscious investors.
- iShares Bitcoin Trust ETF (IBIT): Offered by BlackRock, this spot Bitcoin ETF allows easy access to Bitcoin investments via traditional brokerage accounts. It features a low expense ratio and significant trading volume, indicating strong investor interest. IBIT has emerged as a dominant player, accumulating about $60.6 billion in AUM as of Dec. 18, 2024.
- Franklin Bitcoin ETF (EZBC): Managed by Franklin Templeton, this ETF also focuses on spot Bitcoin, offering another regulated pathway to invest in Bitcoin directly
- Bitwise Bitcoin ETF Trust (BITB): This fund provides professional Bitcoin exposure, reflecting the performance of Bitcoin as per the CME CF Bitcoin Reference Rate. Its sponsor offers fee waivers for early investors.
Did you know? The ProShares Bitcoin Strategy ETF (BITO), the first Bitcoin futures ETF in the US, broke records upon its launch on Oct. 19, 2021, by amassing over $1 billion in AUM in just two days. This made it the fastest ETF to reach this milestone in history at that time, demonstrating unprecedented investor demand for crypto-based financial products in traditional markets.
Ethereum ETFs overview
Ethereum ETFs follow a similar approach but center on Ethereum, the second-largest cryptocurrency by market capitalization. Spot Ether (ETH) ETFs were not approved for trading in the US until July 2024, when the SEC officially approved nine spot Ether ETFs for trading on US exchanges.
In May 2024, the US SEC permitted Nasdaq and the NYSE to list ETFs holding Ether (ETH). Nine spot Ether ETFs began trading on US exchanges in July 2024.
This marked a historic moment as Ethereum became the second cryptocurrency, after Bitcoin, to achieve ETF representation in traditional financial markets. The launch day’s success highlighted growing institutional and retail interest in Ethereum as a tradeable asset.
In December 2024, Ethereum spot ETFs recorded net inflows of $855 million, indicating strong institutional confidence in Ethereum’s prospects. As of Dec. 16, 2024, Ethereum ETFs assets under management (AUMs) reached about $14 billion, representing nearly 5% of Ethereum’s market capitalization.
How Ethereum ETFs work
- These ETFs invest in Ethereum directly or use derivatives to track their price movements.
- Ethereum’s unique utility as the foundation for decentralized applications (DApps) adds another layer of appeal.
Examples of Ethereum ETFs
- Fidelity Ethereum Fund (FETH) – A traditional fund offering indirect exposure to Ethereum with a focus on long-term capital appreciation.
- Bitwise Ethereum ETF (ETHW) – This ETF provides direct exposure to Ethereum with a strong emphasis on security and minimizing risk.
- VanEck Ethereum ETF (ETHV) – Aimed at capturing the upside potential of the Ethereum network through a well-regulated ETF.
- ProShares Ether Strategy ETF (EETH) – A futures-based ETF that provides exposure to Ethereum’s price via Ethereum futures contracts.
- 21Shares Core Ethereum ETF (CETH) – Focuses on providing direct exposure to Ethereum, structured to be accessible and efficient for investors.
- Franklin Templeton Ethereum ETF (EZET) – This ETF is designed to provide liquidity and market access with a focus on Ethereum.
Bitcoin vs. Ethereum ETFs
While both types of ETFs provide exposure to cryptocurrency markets, their key differences stem from the nature of the underlying assets. If you are wondering which ETF is right for you, here’s the breakdown:
Did you know? In 2024, US spot-listed Bitcoin ETFs have seen net inflows exceeding $24.2 billion, demonstrating the growing demand for these financial instruments. Notably, BlackRock's iShares Bitcoin Trust recently recorded its highest single-day trading volume of $4.1 billion on Nov. 6, 2024, surpassing major stocks like Netflix and Visa on that day. This highlights the increasing adoption of Bitcoin ETFs as a mainstream investment option.
Benefits of Bitcoin ETFs
Bitcoin ETFs offer several advantages, particularly for those who want exposure to the cryptocurrency in a regulated environment.
- Regulation: Investment within a legally compliant framework.
- Accessibility: Easy to trade on traditional stock exchanges.
- Stability: Bitcoin’s established position reduces some risks.
- Portfolio diversification: Adds a new asset class to traditional portfolios.
Benefits of Ethereum ETFs
Ethereum ETFs cater to those who believe in the long-term potential of Ethereum’s DApp ecosystem. Benefits include:
- Growth potential: Exposure to DeFi, NFTs and smart contracts.
- Innovation: Participation in Ethereum’s rapidly evolving applications.
- Regulated access: Ethereum investments without direct crypto management.
- Diversification: Inclusion of an innovative blockchain asset.
Did you know? US pension funds are beginning to allocate resources to cryptocurrency ETFs, reflecting a growing interest in digital assets among institutional investors. Notably, the State of Wisconsin Investment Board (SWIB), which manages $156 billion in assets, recently invested $160 million in Bitcoin ETFs. This includes $64 million in Grayscale’s Bitcoin Trust ETF and $99.2 million in BlackRock's iShares Bitcoin Trust ETF, marking one of the first public pension fund investments in spot Bitcoin ETFs.
Tax implications of ETFs
Both Bitcoin and Ethereum ETFs have specific tax implications that investors should consider.
- Capital gains taxes: Profits from selling ETF shares are subject to capital gains taxes.
- Location matters: Tax rates vary by country and region.
- IRA and 401(k) Benefits: In some US jurisdictions, ETFs can be held in tax-advantaged accounts (accounts that offer tax benefits, such as deferred or exempt tax on contributions, earnings or withdrawals).
Bitcoin and Ethereum ETF risks
Let’s talk about risks because, as with any investment, there are a few things to remember. First, crypto can be volatile — prices can change fast and not always in your desired direction. Then there is the regulatory side; laws around crypto are still evolving, which could affect how your ETF performs.
Plus, if you are in a futures-based ETF, there’s the possibility of tracking errors, meaning the ETF might not always match the exact price of Bitcoin or Ethereum.
Here are some other concerns:
Bitcoin-specific risks
- Greater competition from other cryptocurrencies and altcoins.
- Limited supply and mining requirements for Bitcoin, resulting in asset scarcity.
Ethereum-specific risks
- Dependence on the continued growth of the DeFi and NFT sectors.
- Technical risks from network upgrades or vulnerabilities.
Bitcoin and Ethereum ETFs represent an accessible and regulated way to gain exposure to the cryptocurrency market. While Bitcoin ETFs cater to those seeking stability and a store of value, Ethereum ETFs appeal to investors focused on innovation and growth potential.
As the cryptocurrency market evolves, these ETFs will likely play an increasingly significant role in portfolios. Whether you lean toward Bitcoin’s security or Ethereum’s adaptability, understanding the key differences will help you make an informed decision.
Written by Shailey Singh