From Dogecoin to Bitcoin to Ethereum, investors are embracing a growing number of cryptocurrencies. These digital assets are attracting widespread attention as investors share stories of making millions by investing in crypto and more mainstream companies begin accepting virtual currency as a form of payment.
But if you're interested in becoming one of the many investors adding crypto to your portfolio, you may find it's easier said than done. Few traditional brokers offer the opportunity to buy cryptocurrencies directly, mining for them requires a lot of technical knowledge, and figuring out which particular tokens to invest in can be really complicated — especially since some are a lot riskier than others.
The good news is, for investors who don't want to become an expert in all things crypto, there's a simpler, safer way to buy into the growing interest in virtual currencies.
ETFs could make crypto investing simpler and easier
For investors looking for the safest way to gain exposure to cryptocurrencies, Exchange Traded Funds (ETFs) provide a simple, lower-risk solution. ETFs allow you to buy a basket of assets that share a common theme. There are ETFs that track broad market indexes, such as S&P 500 ETFs, and there are also niche ETFs — including those related to virtual currencies.
Currently, in the United States, there are no ETFs that purchase cryptocurrencies directly, because of regulations set by the Securities and Exchange Commission (SEC). That may change in the future, as the SEC is currently reviewing a number of proposed crypto funds. But the SEC's reluctance doesn't mean you don't already have options for using exchange-traded funds to diversify into the crypto industry now.
Several foreign ETFs own cryptocurrencies, including Purpose Bitcoin ETF (TSX: BTCC), and CI Galaxy Ethereum ETF (TSX: ETHX.B), which are traded on the Toronto Stock Exchange in Canada. But investing in any of these has some of the same downsides as buying cryptocurrencies directly. It can be more complicated to figure out how to buy an ETF sold on a foreign stock exchange, and not all brokerage firms allow this.
And since these funds are focused only on a few cryptocurrencies — namely Bitcoin and Ethereum — you're still putting all your eggs into one or two baskets rather than making a broad bet on cryptocurrencies in general. Still, buying into these funds can be easier than figuring out how to purchase virtual currencies directly.
The safest bet right now
If you want the safest bet, your best option may be to invest in an ETF that gives you exposure to the broader cryptocurrency economy rather than solely in crypto tokens themselves. There are a number of these broader ETFs that invest in companies that research, develop, or support the blockchain technology behind most cryptocurrencies or that invest in companies expected to benefit from blockchain technology.
ETFs like Siren Nasdaq NextGen Economy ETF (NASDAQ: BLCN), Amplify Transformational Data Sharing ETF (NYSEMKT: BLOK) and First Trust Indxx Innovative Transaction & Process ETF (NASDAQ: LEGR) are all heavily invested in companies that stand to profit from blockchain's growth. Although each has a slightly different focus, their holdings generally include a mix of software and technology companies, online payment system providers, and merchant banks dedicated to digital assets.
Since blockchain technology is used in other sectors besides cryptocurrency — and since these ETFs spread your money around to multiple regulated companies rather than a few virtual currencies subject to limited regulations that may not be around for the long term — any of these funds presents much less risk than buying cryptocurrencies directly.
Of course, whether you're buying individual cryptocurrencies, foreign ETFs that invest in them, or ETFs that invest in emerging technologies related to the crypto industry, you need to make sure you understand what you're investing in, know how the investment aims to make money, and what fees you'll pay. You should also assess the risks and make sure you'll be happy to hold your investments for the long term as part of a diversified portfolio.
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