On a rainy afternoon in New York, a boardroom was buzzed with excitement, as financial executives watched the clock tick down to the launch of the first Bitcoin ETF in the U.S. This wasn’t just another product hitting the market – it was a symbol of how far the cryptocurrency industry had come, and what followed shocked even the true believers, as within weeks, the Bitcoin ETFs shattered records, raising billions and making it the most successful ETF launch in history. For many, it marked the moment crypto broke through to the mainstream.
“The approval of crypto ETFs was a watershed moment, signifying regulatory acceptance and broader institutional involvement. However, understanding the unique nuances of the crypto market is critical. These are not traditional financial products, and they come with their own opportunities and limitations,” reflects Yoav More, Managing Partner at Finova Capital, an open-ended hedge fund focused on digital assets and blockchain.
Four Essential Insights for Investors
For investors looking to tap into this growing market, crypto ETFs offer a convenient entry point. Yet, these products are not without their challenges and nuances. It’s important to understand how these funds operate, what they offer, and where their limitations lie, in order to successfully navigate this new terrain.
Asset Diversity
Bitcoin and Ethereum dominate the crypto market, as they currently comprise over 70% of the total market capitalization, which currently stands at approximately $3.1 trillion. Today’s U.S.-based ETFs focus exclusively on these two assets. However, projects like Solana and others may also become eligible as regulatory frameworks evolve.
“When we look at crypto ETFs today, they are heavily weighted toward the ‘mega-cap’ assets of the space,” explains More. “It’s similar to traditional equity funds focusing only on large-cap stocks, while small-cap opportunities remain untapped.” This concentration presents both stability and missed diversification potential.
Fees and Tracking Challenges
During the initial ETF launches, management fees were kept attractively low. However, these costs are expected to rise over time. Moreover, it is essential to know which ETFs are futures-based, meaning they track prices through contracts rather than direct asset ownership. This structure introduces rolling costs, where contracts must be renewed monthly, adding up to significant tracking discrepancies.
“Investors often overlook the impact of rolling costs,” says More. “In some cases, these can erode returns by up to 10% annually, making it critical to evaluate the long-term costs of these products.”
Limited Flexibility
Crypto assets trade 24/7, offering constant liquidity and price discovery. ETFs, on the other hand, are restricted to traditional market hours, creating a disconnect between the underlying asset and the ETF. This limitation can hinder an investor’s ability to respond swiftly to market changes.
For long-term investors, this may not pose a significant issue. Still, as More points out: “For those looking to manage their exposure actively, the restricted trading windows of ETFs can be a disadvantage compared to direct asset ownership.”
Utility Gap
One of crypto’s unique appeals is its utility. Digital assets like Bitcoin and Ethereum can power entire ecosystems and be used for payments, staking, or accessing decentralized applications. ETFs, however, only provide price exposure, leaving the functional benefits of these assets untapped.
Final Thoughts
The launch of crypto ETFs and mutual funds marks a significant step in bringing digital assets into the mainstream financial system. For retail and institutional investors alike, they provide a familiar and regulated way to access the crypto market.
But as More emphasizes, “Crypto ETFs are an important bridge for adoption, yet they are just one piece of a much larger puzzle and are not a holistic solution for exposure in the cryptocurrency market. Understanding the unique dynamics of this market is key to making informed decisions.”