Crypto Funds vs ETFs and ETPs: Which is the Better Investment Option?
The world of cryptocurrency has exploded in popularity in recent years, with investors clamoring to get in on the action. However, with so many investment options available, it can be challenging to navigate the market and determine which investment vehicle is right for you. Three popular investment options in the cryptocurrency space are crypto hedge funds, crypto ETFs, and crypto ETPs. In this article, we will provide an overview of the differences between them, so you are equipped with the knowledge to maximize your profits.
Authors: Maximilian Bruckner, Jona Hauch
Table of Contents
- Definition of crypto funds, crypto ETFs, and crypto ETPs
- Differences between crypto funds, crypto ETFs, and crypto ETPs
- Factors to consider when choosing between crypto funds, crypto ETFs, and crypto ETPs
Definition of crypto funds, crypto ETFs, and crypto ETPs
Crypto funds are a type of investment fund that pools together funds from multiple investors to invest in cryptocurrencies. These funds are managed by investment professionals who make decisions about which cryptocurrencies to invest in and when to buy and sell them. Crypto funds are usually structured as hedge funds in the form of alternative investment funds (AIFs). Most of these funds are open-ended and are fairly liquid, allowing investors to subscribe or redeem regularly.
Advantages of investing in crypto funds include access to professional management and expertise in the cryptocurrency market, diversification across multiple cryptocurrencies, and actively managed strategies like arbitrage or long/shorts. The downside of investing in crypto funds is the comparatively high fees as well as high minimum investments. These kinds of funds are only open to professional investors and typically require at least $100,000 as a minimum ticket size.
Examples of popular crypto funds include the Grayscale Bitcoin Trust and the Bitwise 10 Crypto Index Fund. 21e6 Capital has created the largest and most comprehensive crypto fund database with more than 1,100 funds, click here to get more details.
Crypto ETFs, or exchange-traded funds, are very different from crypto hedge funds. These ETFs are traded on the public market and available to retail investors. They can usually be bought or sold daily. However, unlike crypto funds, which are actively managed by investment professionals, crypto ETFs are typical passive investments. Also, crypto ETFs do not offer direct exposure to crypto assets. Instead, they invest in stocks of publicly traded companies somehow involved in the blockchain and crypto asset industry. This could include Coinbase, Meta, or Nvidia.
Crypto ETFs are traded on major stock exchanges like traditional ETFs, making them more accessible to a broader range of investors. They also offer the potential for lower fees than crypto funds due to their passive investment structure. Crypto ETFs tend to be less risky but also have lower profit potential, as they offer only a very diluted exposure to the sector.
Some popular Blockchain ETFs are offered by iShares or Vanguard.
Crypto ETPs, or exchange-traded products (sometimes referred to as ETCs - exchange-traded commodities) could be understood as a middle way between ETFs and crypto hedge funds.
ETPs are also traded on the public market and are open for retail investors, but they can actually invest in crypto assets directly. They do so by backing every ETP bought 1:1 with the respective crypto asset, using licensed and regulated crypto custodians. They are liquid and traded daily, but are also not actively managed. They offer long-only exposure to a single crypto asset or to baskets of crypto assets. Some novel ETPs also incorporate staking rewards.
While they offer a simple way to invest in crypto assets for someone who does not want to do so directly (through a regulated crypto exchange or a DEX), they are also quite expensive for a simple long-only exposure. They often charge up to 250bps TER (a kind of management fee) per year.
Differences between crypto funds, crypto ETFs, and crypto ETPs
Figure 1: Differences between crypto funds, crypto ETFs, and crypto ETPs
The key differences between these three crypto investment vehicles can be summarized in a few areas:
Investment structure: Crypto funds are actively managed investment vehicles, while crypto ETFs and ETPs are passive investments that track companies or a specific crypto asset or index.
Regulatory requirements: Crypto hedge funds are typically subject to slightly lesser regulatory oversight than ETFs or ETPs, which is why they are only available to professional investors. ETFs and ETPs are more limited in how they can invest but are in turn also available to retail investors.
Trading mechanism: Crypto hedge funds can be subscribed to via your house bank regularly (though usually not daily), while crypto ETFs and ETPs can be traded throughout the day on major stock exchanges.
Fees: Crypto funds typically have higher fees than crypto ETFs and ETPs due to the active management of the investment vehicle and performance fee taken by managers. However, their outsized returns can add enough value to justify the fee structure.
Tax implications: The tax implications of investing in crypto funds and crypto ETFs or ETPs can vary depending on the regulatory environment of the investment structure and the investor.
Factors to consider when choosing between crypto funds, crypto ETFs, and crypto ETPs
When considering investing in crypto funds or crypto ETFs, there are several factors that you should take into account to make an informed decision. The following are some of the critical factors to consider when choosing between these two options:
Investment Goals: Before making any investment, it's essential to establish clear investment goals. If you're looking for active management and the potential for higher returns, a crypto fund may be the better option. On the other hand, if you're looking for a passive investment with lower fees, a crypto ETF or ETP may be more suitable. It's important to assess your investment goals and choose the investment vehicle that aligns best with your objectives.
Risk Tolerance: Crypto funds and ETFs both involve risk, but the level of risk can vary. Crypto hedge funds can, depending on their strategy, have a bigger or lower risk associated with them than more passive ETFs or ETPs. It is important to consider things like counterparty risk as well, and not only price fluctuations.
Liquidity: Liquidity refers to the ease of buying and selling an investment. Crypto ETFs and ETPs are usually more liquid than crypto hedge funds, as they are traded on an ongoing basis on a traditional stock exchange.
Crypto funds, crypto ETFs, and crypto ETPs are all investment vehicles that allow investors to gain exposure to the cryptocurrency market and blockchain sector. However, they differ in terms of investment structure, trading mechanism, fees, risks, and tax implications.
Crypto funds are actively managed investment vehicles with higher fees, making them suitable for professional investors looking for active management and higher returns. In contrast, crypto ETFs are open to everyone and have lower fees, but do not invest into crypto assets directly. Crypto ETPs have slightly higher fees than ETFs, in return for a direct exposure to crypto assets.
21e6 Capital is a Swiss investment advisor, connecting professional investors with tailor-made crypto investment products. We focus on risk management of crypto and digital asset exposure for family offices and institutional investors. Our expertise in crypto asset management stems from a team combining decades of experience in traditional financial services with native and in-depth knowledge in digital assets.
21e6 Capital has analyzed over 1,000 crypto hedge funds across the world and condensed them into a selection that can yield crypto-exposure with minimized downside risk. Our risk management solution, provided by OpenMetrics Solutions, is also trusted by the largest Swiss pension funds.
The 21e6 Capital team builds upon strong academic roots with a track record of leading crypto asset and decentralized finance (DeFi) publications and research, ensuring state-of-the-art crypto investment solutions for professional investors, family offices and asset managers.
This article is an informational document and does not constitute an investment recommendation, investment advice, legal, tax or accounting advice or an offer to sell or a solicitation to purchase any securities and therefore may not be relied upon in connection with any offer or sale of securities. The views expressed in this letter are the subjective views of 21e6 Capital personnel, based on information which is believed to be reliable. Any expression of opinion (which may be subject to change without notice) is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.
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