The biggest concerns with crypto ETFs, and what they mean for investors

Cryptocurrency exchange traded funds (ETFs) have grabbed headlines, and for good reason. They’re a simpler way to invest in the digital asset class: no need for digital wallets, private keys, or navigating crypto exchanges – just buy and sell them like you would any other ETF.

Do crypto ETFs make Bitcoin investing safer – or just simpler? How do the costs stack up against buying coins directly? And what happens when crypto markets are moving 24/7 but exchanges are closed?

Whether you're a seasoned crypto investor considering the switch to ETFs, or someone looking to dip their toes into Bitcoin for the first time, understanding the mechanisms of crypto ETFs will help you make more informed decisions. So let's dig into some of the biggest concerns about crypto ETFs, and see what they actually mean for your investment strategy.

Key takeaways

• Crypto ETFs simplify investing and offer a secure way to gain exposure to cryptocurrency, but they do not reduce the inherent volatility of the asset class. To manage risk while still tapping into the growth potential of crypto, we recommend keeping your exposure modest – no more than 5% of your overall portfolio.

• Crypto ETFs have a more predictable fee structure and can be more cost-effective than direct trading, depending on your investment style. Crypto exchanges may charge trading fees, withdrawal fees, network fees, and platform charges, which can add up over time.

• Unlike direct ownership of cryptocurrency, crypto ETFs represent shares in a fund that holds the underlying assets. While this means you don’t have direct control over your Bitcoin or Ethereum, you do benefit from added security measures and regulatory oversight.

• Crypto ETFs are ideal for investors seeking diversification and the potential for growth over a longer time period and within a regulated framework. Ultimately, the key to incorporating crypto ETFs into your broader portfolio is to start with clear investment goals and an understanding of your risk tolerance. 

The digital elephant in the room: risk

Let's address the biggest concern head-on: whether you invest in cryptocurrency through an ETF, or buy it directly, you're still exposed to the asset class's big price swings.

Owning Bitcoin or Ethereum through an ETF doesn't change this characteristic – your investment can experience substantial gains or losses in a relatively short period. Bitcoin, for example, can see price swings exceeding 10% in either direction. These swings happen quickly and are triggered by various factors: from breaking news on regulations to technological developments – even high-profile tweets!

This volatility is why we recommend keeping your total crypto exposure to no more than 5% of your overall portfolio's value. Research has shown that excess exposure to cryptocurrency may increase portfolio volatility without proportionally improving risk-adjusted returns (1).

Consider your crypto ETF allocation as a component that can add growth potential and diversification benefits to your core investments. For those just starting their crypto journey, begin with a smaller allocation and gradually increase it as you become more comfortable with the asset's behavior.

Cryptocurrency remains an emerging asset class – while ETFs make it more accessible and easier to invest in, they don't inherently make it less volatile. Understand the risks, size your position appropriately, and ensure it fits within your broader investment strategy.

If you're comparing costs between crypto ETFs and buying crypto directly, the differences might surprise you. The ETF structure is simple – there's an annual management fee (0.3% in our case) plus the fund's expense ratio (0.25% for the ETFs available on our platform). For a $10,000 investment, that's $55 per year in total fees.

Crypto exchanges, on the other hand, often advertise seemingly lower trading fees, sometimes as low as 0.1%. But direct crypto investing comes with less visible costs. There are withdrawal fees that vary by cryptocurrency (typically $10–$30 per withdrawal), network fees ("gas fees") that fluctuate based on network congestion, and sometimes additional platform charges. An investor making monthly trades and a few withdrawals per year could easily spend $200–300 on a $10,000 portfolio.

While the ETF structure eliminates those variable costs, your total expenses will ultimately depend on your investment style – how frequently you trade, whether you need to move crypto between wallets, and how long you hold your investments.

Under the hood: How crypto ETFs work

When you buy Bitcoin directly, you own the actual cryptocurrency – it's yours to use, transfer, or hold as you see fit. With an ETF, you're investing in a fund that holds the coins on your behalf.

StashAway’s Bitcoin and Ethereum ETFs are managed by Fidelity Digital Assets, a division of Fidelity Investments that specialises in cryptocurrency custody. We're talking about one of the world's largest asset managers applying their decades of experience to crypto security.

This institutional backing means your investment benefits from security measures like cold storage (meaning the majority of Bitcoin or Ethereum is held offline), insurance coverage against potential losses, and protection against exchange hacks. Plus, unlike direct crypto investing where you're largely on your own if something goes wrong, crypto ETFs operate within a regulated framework overseen by traditional market authorities.

If you're investing for exposure to crypto as an asset class, this distinction might not matter – but if you want to actively use Bitcoin or maintain direct control over your cryptocurrency, buying Bitcoin directly might be more appropriate. Think of crypto ETFs as a more convenient, alternative way to get investment exposure to the digital asset class.

Trading hours are another key difference between ETFs and direct crypto ownership. Crypto markets never sleep – they trade 24/7, 365 days a year. Crypto ETFs, however, only trade during market hours, when exchanges are open.

While this trading limitation might seem like a drawback, ETF trading hours essentially create a built-in pause during periods of high volatility – like a cooling-off period when emotions might otherwise drive trading decisions during market extremes. We believe that focusing on the long-term growth of the digital assets is more important than reacting to every short-term price fluctuation.

Kickstart your crypto journey

Crypto ETFs represent a significant evolution in the way we invest in the digital asset class. They bring institutional-grade security, more predictable costs, and a more convenient way to add crypto exposure to your portfolio. But they also come with their own set of characteristics, and understanding them will help you make more informed decisions about how they fit into your strategy.

The key is starting with clear goals. Size your positions according to the level of risk you’re comfortable with and ensure they align with your broader investment strategy. If you're ready to explore cryptocurrency through a regulated, hassle-free vehicle, ETFs offer a compelling way forward.

References

1. Liu, M., Jotaki, H., and Takahashi, H. (2021). A Study of the Impact of Crypto Assets on Portfolio Risk-Return Characteristics Before and After COVID-19 Outbreak (2014–2020).