Exploring Cryptocurrency Investment Options
Many investors are eager to gain exposure to prominent cryptocurrencies like Bitcoin and Ether without the complexities and risks associated with directly holding these digital assets. To accommodate this desire, there are several investment vehicles available: crypto trusts, strategy exchange-traded funds (ETFs), and spot ETFs. Crypto trusts acquire and hold the actual digital currencies, allowing shares of the trust to be traded on public markets similar to closed-end funds. Meanwhile, strategy ETFs, which emerged prior to the regulatory approval of spot ETFs, utilize futures contracts and occasionally options to gain exposure to the price movements of the cryptocurrencies. In contrast, spot ETFs, which were introduced in 2024, directly purchase the cryptocurrencies at the current market price. The question arises: which of these options most closely mirrors the performance of the cryptocurrencies themselves?
Evaluating Performance of Different Investment Vehicles
In our investigation into these various cryptocurrency investment options, my research team, comprising Lilia Benrabia and Seongjun Lee, identified that spot ETFs emerged as the top performers for both Bitcoin and Ether. Conversely, strategy ETFs for Bitcoin and Ether significantly lagged behind the performance of the actual cryptocurrencies. To conduct this analysis, we examined all dollar-denominated Bitcoin and Ether products accessible to U.S. investors since the beginning of 2024, categorizing them into three distinct groups: trusts, strategy ETFs, and spot ETFs. We then compared the average returns of each product against the spot returns of the underlying coins, also calculating the average tracking error by assessing the monthly discrepancies between the returns of the cryptocurrencies and their respective investment products.
Bitcoin Performance Insights
When analyzing Bitcoin, we discovered that spot ETFs provided the highest overall returns and effectively minimized tracking error. For example, since early 2024, the average monthly return for spot ETFs has been 6.85%, while Bitcoin itself has yielded an average monthly return of 6.77%. This translates to a slight outperformance of 0.08 percentage points per month by the spot ETFs. Although it may seem unusual for spot ETFs to outperform the underlying cryptocurrency, this could be attributed to strategic timing methods employed by the ETFs to reduce tracking errors or the timing of investors’ transactions. Additionally, Bitcoin spot ETFs reported an average tracking error of 0.88 percentage points per month, indicating that if Bitcoin achieves a 10% return in a given month, the average spot ETF might return between 9.12% and 10.88%. On the other hand, Bitcoin strategy ETFs were the poorest performers, averaging a monthly return of just 6.28%, which is a shortfall of 0.49 percentage points compared to the actual cryptocurrency. Their tracking error was also the highest, reaching 1.24 percentage points monthly.
Ether Performance Analysis
Similarly, for Ether, which saw the launch of its spot ETF products in August 2024, we observed a comparable trend. Ether spot ETFs delivered an average monthly return of 4.17% over the past year, closely matching the average monthly return of 4.16% for the Ether coin itself. This results in a minimal outperformance of 0.01 percentage points per month. Conversely, Ether strategy ETFs exhibited the weakest performance, with an average monthly return of 3.55%, translating to a 0.61 percentage point underperformance relative to actual spot Ether returns. In both cases, crypto trusts demonstrated performance levels similar to those of spot ETFs, outperforming strategy products in tracking the underlying returns but not quite matching the efficacy of spot ETFs.
Conclusion on Crypto Investment Vehicles
The findings indicate that investing in spot ETFs for Bitcoin or Ether offers a nearly equivalent experience to directly purchasing the cryptocurrencies themselves. This highlights the growing importance and effectiveness of spot ETFs as a viable investment option in the cryptocurrency landscape.
