Exchange Traded Funds (ETFs) have provided a fully regulated, transparent gateway for institutional investors to gain arm’s-length exposure to crypto assets.
ETFs have been a staple investment vehicle of traditional finance for the last 35 years, tracking the performance of numerous underlying assets – from stocks and bonds to real estate, foreign currencies and commodities.
The first Bitcoin futures ETF launched in 2021, backed by contracts that bet on the future price of the cryptocurrency. The first batch of Bitcoin-backed spot ETFs were granted regulatory approval in the US in January 2024, followed by Ethereum-backed ETFs later that summer.
Bitcoin-backed ETFs were an instant hit with investors, attracting greater investment flows in their first 12 months than any other ETF, including those backed by gold and by a wide margin. However, Ethereum-backed ETFs have been less spectacular but have room for future growth.
ETFs perfectly bridge the worlds of decentralised and traditional finance, allowing pension funds and asset managers to allocate client assets to tracking the real-time or future price of crypto assets.
The changing regulatory landscape, particularly in the US, is providing positive impetus for the adoption of crypto assets in mainstream finance.
Crypto-backed ETF momentum might be further boosted by the current turbulent and uncertain economic climate. Many investors are seeking safe haven by hedging their investments in non-correlated alternative assets.
Crypto and ETFs: the perfect mix?
Trading in crypto assets has traditionally been dominated by retail investors. Financial service providers with a fiduciary duty of care to their clients have been held back by the fear of regulatory and reputational risks.
But a recent positive sea-change in regulatory sentiment, especially in the US, has opened the doors for institutional investors. Crypto assets are no longer viewed purely as a threat to the established financial order. There is a growing acknowledgement that decentralised finance has the potential to add efficiencies.
ETFs represent the most convenient and understandable means of entering the crypto market as they offer a range of advantages versus buying crypto assets directly.
- ETFs strip away the technical complexities of buying and securely storing cryptocurrencies. The fund buys the underlying assets and investors purchase participation in their performance.
- Stakes in ETFs are highly liquid as they can be easily traded in the financial markets.
- ETFs need regulatory approval to launch and submit to regulatory oversight throughout their lifecycle. This makes ETFs highly compliant investment vehicles. ETF managers provide up-to-date performance metrics, making the investment highly transparent
How are crypto-backed ETFs performing?
The first spot Bitcoin ETFs, led by Blackrock’s IBIT fund and Fidelity’s FBTC, met a pent-up demand for such a financial instrument, enjoying overwhelming early success. Investor demand has been decidedly volatile at times, but the total spot Bitcoin ETFs net inflows have shown to be substantially positive, surpassing USD 40bn by mid-May.
US Bitcoin ETF total net inflows vs US gold ETFs since launch (USD):
Source: The Block & World Gold Council
US spot Bitcoin ETFs are widely regarded as the most successful ETF launches of any asset class, including gold-backed versions that first appeared in 2003 (in the US November 2004). In the first 17 months, US spot Bitcoin ETFs have achieved 4.22 times greater total net inflows than US gold ETFs over the same period (inflation-adjusted). Meanwhile, they have proved more successful than futures crypto ETFs because they grant exposure to real-time prices of cryptocurrencies.
Their emergence from January 2024, led to a reallocation of investor assets away from futures crypto ETFs.
ETFs that track the spot prices of Ether have not yet gained anything like the Bitcoin traction. Total net inflows languished at around USD 2.5bn by mid-May. This may be because the Ethereum narrative of building an alternate decentralised digital system is more complicated to understand than the Bitcoin story. The price of ETH has also suffered from the growing pains of the Ethereum network in recent months, which makes ETH-backed ETFs less appetising to investors.
However, Ether’s recent rally following the successful launch of its Pectra upgrade, and BlackRock’s proposed ETF amendments to include staking are likely to reignite investor interest ahead of the SEC’s decision next month (late June).
The future for crypto-backed ETFs
Meanwhile, several ETF providers having filed for additional funds that track the price of Solana, Litecoin, XRP, Doge and BNB, among several others. More than 70 filings are currently awaiting approval from the SEC, with VanEck’s recent filing for a spot BNB ETF and Bitwise’s filing for a NEAR ETF being the most recent applications and the first to target both crypto assets.
Source: Bloomberg Intelligence
But the regulatory progress has been slowed by the uncertain definition of many crypto assets as either commodities or securities. Trading securities, even via ETFs, comes with more onerous regulatory restrictions to protect investors.
Each crypto asset carries its own regulatory quirks, maturity and risk profile, and with no clear classification framework currently in place, the SEC is likely to take the full 240-day window on most applications. Amid the ongoing leadership changes, the SEC has once again postponed several ETF decisions (including Solana, Litecoin, Hedera, Polkadot, XRP and Dogecoin), with most now delayed into June or October 2025.
Institutional demand is another limiting factor. Bitcoin and Ether have a long record of CME futures trading, whereas XRP, BNB, Litecoin, and other altcoins lack that history and still sit outside regulated derivatives markets and institutional portfolios. Solana is the only new cryptocurrency that did reach the CME back in March, but its futures volumes have been underwhelming (although stronger market conditions could change that).
This may be why BlackRock is holding off on new filings, even as its Bitcoin and Ether ETF products continue to attract the bulk of inflows. Unless meaningful demand materialises, other crypto ETF applications are unlikely to be seen by the world’s largest asset manager.
Outlook
The future of crypto-backed ETFs may also lie with basket-based crypto indexes, such as the Hashdex Nasdaq Crypto Index ETP. Issuers are banking on professional investors being more comfortable with index-based products.
But once again, the development of crypto index ETFs might be hampered by a lack of clarity over the precise definition of some crypto assets in the US. This situation might be cleared up by the new regime heading the SEC under Paul Atkins.
While it would be an exaggeration to label crypto ETFs as a game changer, they certainly represent a significant landmark in the adoption of crypto assets as a sustainable and credible alternative asset class.
At present they are the perfect vehicle for institutional investors to bet on the price of crypto assets. But many of the decentralised networks they operate on have visions of building powerful alternative financial networks or other decentralised Web3 projects.
As investors become more aware and knowledgeable about these projects and the ambitions of various decentralised platforms, crypto-backed ETF investments could reflect the market’s view on which cryptocurrency has the best chances of powering a breakthrough innovation.
Thematic ETFs, such as decentralised finance or Web3 baskets, could then represent the future of this financial instrument.
As much as we like to see the obvious signs of institutional interest, it is still unclear which crypto assets will ultimately get the green light. But with pressure building from Congress and more crypto-friendly leadership now in key regulatory posts, the odds are shifting in favour of more approvals this year.
ENDS
Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.
Sign up for Future Finance
Join our 40,000 strong global community to future proof your investments. Sign up now to be the first to receive our news, product launches, industry reports and educational series.