The rapid rise and fall and rise of cryptocurrency prices over the past three years have undoubtedly hurt the industry's growth – and sparked volatility across many bitcoin and crypto ETFs.
The good news is that cryptocurrencies have generally fared well in 2023. The two largest cryptocurrencies by assets – Bitcoin (BTC/USD) and Ethereum (ETH/USD) – are up significantly year-to-date, with much less volatility to show for their gains. That's excellent news if you're a longtime investor.
Bitcoin and crypto ETFs could get an AI boost
Helping the entire digital assets arena in 2023 is the global push into artificial intelligence (AI) by companies of all sizes. AI is the secular trend that could be the crypto and blockchain industry's savior.
As one example, Vancouver-based crypto miner Hive Blockchain Technologies (HIVE) announced that it was changing its name to Hive Digital Technologies to better reflect the use of its high-performance data centers to fuel the processing power needed for generative AI tools.
Moves like these are part of the Web3 maturing process that's taking place. That's a positive for future cryptocurrency investments, including the best Bitcoin and crypto ETFs that provide investors exposure to the space.
Also stoking optimism in the crypto space is a recent decision by a federal judge to overturn the Securities and Exchange Commission's (SEC) attempt to block Grayscale Investments' application for a spot bitcoin exchange-traded fund. Judge Neomi Rao said the SEC's decision to approve two bitcoin future ETFs but reject the application for the spot market fund was "arbitrary and capricious."
The order "does not convert the Grayscale Bitcoin Trust (GBTC) product into an ETF immediately, but gives a fair basis for Grayscale to be treated in line with other Bitcoin ETF applicants," says Gautam Chhugani, senior analyst of Global Digital Assets at Bernstein. Crypto could get an additional boost on any favorable headlines surrounding the potential approval of bitcoin futures funds.
It should go without saying that Bitcoin and other digital assets remain highly speculative and should be approached with extreme caution.
However, those interested in more risk-averse options might consider these best bitcoin and crypto ETFs. Their asset levels might be lower than at the height of the crypto surge in late 2021, but they're returning due to promising new technologies such as AI.
Data is as of September 11, unless otherwise indicated.
Amplify Transformational Data Sharing ETF
- Assets under management: $461.0 million
- Expenses: 0.75%
The Amplify Transformational Data Sharing ETF (BLOK, $21.03) is similar to many U.S. cryptocurrency ETFs in that it is an actively managed fund that aims to invest at least 80% of its assets in companies that are involved in developing blockchain technologies and using them for their own business.
The ETF has 48 holdings at present, the top 10 of which account for about 40% of its assets.
MicroStrategy (MSTR), the data analytics software company, is a top holding in BLOK, with a weighting of roughly 5%. The company is technically a data analytics software firm, however, it is more widely known for its Bitcoin investments. In May and June, for instance Microstrategy bought 12,000 bitcoin for $347 million. It now holds 152,333 bitcoin worth around $4 billion at current prices.
Other top 10 holdings include Bitcoin miner Marathon Digital Holdings (MARA) and Coinbase Global (COIN), one of the world's leading cryptocurrency exchanges. Also on the list is Overstock.com (OSTK), the internet retailer that's rebranding under the Bed Bath & Beyond brand after buying the bankrupt company's intellectual property for $21.5 million.
However, a few interesting holdings are found outside of the top 10.
Specifically, the crypto ETF invests in Block (SQ), the parent of Square and Cash App; blue chip tech giant International Business Machines (IBM); Nu Holdings (NU), the Latin American digital financial services platform; and semiconductor stock Advanced Micro Devices (AMD).
Breaking down the blockchain industry allocation in one of Wall Street's best ETFs for cryptocurrency exposure, BLOK's top three are transactional firms (25%), crypto miners (23%) and venture capital (13%).
BLOK is also diversified across size: 30% of assets are large caps or ETFs, 22% are mid-cap stocks, and 48% are small-cap or unclassified. Its average market cap is $5.7 billion.
Bitwise 10 Crypto Index Fund
- Assets under management: $420.2 million
- Expenses: 2.50%
The Bitwise 10 Crypto Index Fund (BITW, $7.03), launched in November 2017, tracks the performance of the Bitwise 10 Large Cap Crypto Index, representing the 10 largest investable cryptocurrencies. These 10 cryptocurrencies account for approximately 70% of the total crypto market.
Because BITW is weighted by market capitalization, Bitcoin accounts for roughly 66% of the portfolio. That's more than double Ethereum, at 26.0%. XRP is a distant third at 3.5%. The other seven cryptocurrencies by weight are Cardano (1.1%), Solana (1.0%), Polkadot (0.7%), Polygon (0.8%), Litecoin (0.6%), Avalanche (0.4%) and Uniswap (0.4%).
BITW only became available over the counter in December 2020. It began trading with $120 million in assets. Twenty-seven months later, despite the downturn in cryptocurrencies, it has managed to grow its assets under management.
Bitwise Asset Management, the fund's sponsor and advisor, explained how BITW works relative to an open-ended mutual fund or ETF.
"The Bitwise 10 Crypto Index Fund is an open-ended, publicly traded statutory trust, not an exchange-traded fund or closed-end fund," Bitwise Asset Management stated in December 2020. "Accredited investors may create shares of the Fund at net asset value (NAV) through private placement. Those restricted shares may then become eligible for public sale after a 12-month holding period."
It's important to note that this crypto ETF is closed to new subscriptions. However, the accredited investor and minimum holding period requirements no longer apply because it is traded over the counter.
The 2.5% expense ratio is high. However, Bitwise's website states it "includes the management fee, custody charges for holding the fund's assets charged by the custodian, and customary fees and expenses of the fund administrator and auditor."
The Bitwise 10 Crypto Index Fund is rebalanced monthly. BITW currently trades at a steep 55% discount to net asset value.
First Trust Indxx Innovative Transaction & Process ETF
- Assets under management: $107.9 million
- Expenses: 0.65%
The First Trust Indxx Innovative Transaction & Process ETF (LEGR, $38.46) is another one of the cryptocurrency ETFs that is equity-based. Launched by First Trust in January 2018 – the fifth-largest ETF provider in the U.S. by revenue and sixth-largest by assets under management – it tracks the performance of the Indxx Blockchain Index. This index follows companies that have some connection to blockchain technologies.
The selection process for the index starts with a global universe of equities in both developed and emerging markets. It eliminates stocks with market caps of less than $250 million and three-month average daily trading of less than $1 million.
Other reasons for removal include stocks that haven't traded on 90% of the eligible trading days, a free float of less than 20% of the shares outstanding, and companies with share prices greater than $10,000.
Lastly, all companies with zero exposure to blockchain technology are removed before starting the ranking process.
It then applies a score of 1 for companies actively developing blockchain technology, 2 for companies actively using blockchain technology, and 3 for companies actively exploring blockchain technology.
The index then only includes companies scoring 1 or 2, giving 50% of the weighting to firms scoring 1 and 50% to those scoring 2. Companies scoring 3 are excluded altogether. The portfolio is capped at 100 stocks, and the index is rebalanced and reconstituted twice a year.
The ETF's top three sectors currently are financials (36%), technology (33%) and consumer discretionary (9%). The top three countries are the U.S. (40%), China (11%) and Germany (8%). LEGR is also a large-cap-heavy fund, with Nvidia (NVDA) and Oracle (ORCL) among its top holdings.
VanEck Digital Transformation ETF
- Assets under management: $43.4 million
- Expenses: 0.50%
The VanEck Digital Transformation ETF (DAPP, $5.75) is a passively managed fund that tracks the performance of the MVIS Global Digital Assets Equity Index, a collection of companies that participate in the digital assets economy.
DAPP is one of the newer crypto ETFs, launched in April 2021. As a result of the unfortunate timing – the second crypto winter started at the end of 2021 and went well into 2022 – a $10,000 investment in DAPP at its inception is today worth around $1,800 today. The good news: the fund has more than doubled so far in 2023.
To be eligible for the index, a company must generate at least 50% of its revenue from digital asset projects or have the potential to generate 50% from these digital assets.
The weighted average market cap of the ETF's 22 holdings is $4.9 billion, with price-to-earnings and price-to-book ratios of 2.9 times and 2.1 times, respectively. Small-cap stocks account for 61% of the fund's net assets, followed by large caps (23%) and mid caps (16%).
Domestic stocks make up the vast majority of the portfolio (62%), followed by firms in Canada (14%) and Singapore (10%). DAPP has a high turnover rate of 74%, which means it turns the entire portfolio every 16 months.
The VanEck Digital Transformation ETF's top three holdings are a who's who of the crypto space: Coinbase Global, MicroStrategy and mining stock Bitdeer Technologies (BTDR). They currently account for more than a quarter of the entire portfolio.
While digital assets such as cryptocurrencies can be scary investments for some investors, investing in digital asset-related businesses like those offered in several of the bitcoin ETFs featured here can be an excellent way to play the growing adoption and usage of digital assets.
Fidelity Crypto Industry and Digital Payments ETF
- Assets under management: $41.0 million
- Expenses: 0.39%
The Fidelity Crypto Industry and Digital Payments ETF (FDIG, $17.21) is another one of the newer crypto ETFs, having just launched in April 2022.
The fund seeks to track the performance of the Fidelity Crypto Industry and Digital Payments Index, a collection of businesses engaged in cryptocurrency, blockchain technology and digital payments processing.
The selection methodology starts with the global equity universe, eliminating certain companies based on insufficient average daily trading volume and market cap. The remaining companies are divided into two themes: Crypto and Blockchain stocks and Digital Payments stocks.
Stocks that generate 50% of their revenue from the crypto and blockchain industries remain in the index. Also included are the top 20 digital payments stocks generating 50% of their revenue from digital payments processing activities.
Approximately 60% of the index will comprise crypto and blockchain companies. The maximum weighting for each stock is 22.5%, or the maximum weight that supports $20 million in average daily volume. The index is rebalanced quarterly.
FDIG currently has around 40 holdings. The top 10 stocks account for more than 60% of its net assets. The three top stocks by weighting are Coinbase Global, Marathon Digital Holdings, and Bitcoin miner Riot Platforms (RIOT).
Schwab Crypto Thematic ETF
- Assets under management: $11.5 million
- Expenses: 0.30%
The Schwab Crypto Thematic ETF (STCE, $20.98) is another one of the passively managed crypto ETFs that tracks the performance of the Schwab Crypto Thematic Index.
"The Schwab Crypto Thematic Index (the "Index") is designed to deliver global exposure to companies that may benefit from one or more of the following business activities: either directly or facilitating others in validating consensus mechanisms for (such as mining or staking), investing in, or trading cryptocurrency or other digital assets; enabling the use of cryptocurrency or other digital assets to buy or sell goods and services; and developing, distributing, or implementing applications of blockchain or other distributed ledger technology including in new cryptocurrencies or digital assets," states the index's methodology overview.
So, like many bitcoin ETFs, it's tracking the stocks of companies in crypto and blockchain-related endeavors, referred to as themes. To make the cut, the index puts companies through a four-part process.
First, firms are rated for their relevance to these themes based on available data and patent and regulatory filing information. Then the companies are mapped to a specific security. If there is no security available, it is excluded from the index.
The third part of the process is stock screening to eliminate additional companies. For example, if the average daily trading volume over the past three months is less than $2.5 million, it's out. If a company's free float is less than 10% of the outstanding shares, it, too, is excluded. Like most indexes, the minimum market cap to be included is $300 million. Lastly, if a stock doesn't have 30 days of trading history over the past 50 trading days, it's also excluded.
At this point, the companies still standing all have a Thematic Beta. The individual thematic betas of each company are divided into the total of all the companies to establish the weighting. Each position should account for at most 20% of the index.
The top three countries by weight are the U.S. (78%), Japan (11%), and Canada (7%). The ETF's top 10 holdings, which include Coinbase Global, payments processor PayPal Holdings (PYPL) and bitcoin mining stock CleanSpark (CLSK), account for roughly 60% of STCE.
Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.
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