We're About to See a Rush of Crypto ETFs. Here's How to Sort Them Out

Key Points

• The crypto market is braced for a flurry of altcoin ETFs.

• Compare cryptocurrencies, expense ratios, assets under management, and liquidity.

• Don't assume SEC approval automatically makes crypto ETFs safe investments.

• 10 stocks we like better than Bitcoin ›

When Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) launched, it would have been hard to believe where we are today, with a host of crypto-related products available to all kinds of investors. First, it was crypto futures exchange-traded funds (ETFs). Then came spot Bitcoin ETFs, followed by spot Ethereum ETFs.

More recently, we've seen a smattering of altcoin ETFs and even a couple of funds with a handful of cryptocurrencies in them. But that's just the start. Recent changes in Securities and Exchange Commission (SEC) rules mean the floodgates are about to open for a host of cryptocurrency ETFs. We can expect spot ETFs for popular altcoins like Solana (CRYPTO: SOL), XRP (CRYPTO: XRP), Cardano (CRYPTO: ADA), and more.

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ETFs make it easier for both retail and institutional investors to get exposure to cryptocurrencies by wrapping them in familiar -- and accessible -- packaging. They also remove the headache of having to think about custody, so you don't need an account with a crypto exchange or a digital wallet to store your crypto.

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How to choose the right crypto ETF for you

There are a few factors to think about when choosing a crypto ETF. As we will see, fees matter. But the biggest consideration is what fits with your investment strategy -- particularly how much risk you're comfortable taking on.

1. What is in the fund?

The ETFs awaiting approval include single-crypto funds for various altcoins, as well as baskets containing a mixture of cryptocurrencies. Look at what cryptos are in the fund and how it is structured. A spot crypto ETF owns the actual cryptocurrency, whereas a futures ETF holds derivatives contracts. Some funds may hold crypto, alongside holdings in other ETFs and cash or cash equivalents.

In terms of which cryptos to consider, if you're new to cryptocurrency, start with Bitcoin and Ethereum. These are the two most established cryptocurrencies and tend to be more liquid. Bitcoin is gaining traction as a form of digital gold, while Ethereum is the engine behind many decentralized finance (DeFi) and stablecoin projects. In terms of ETFs, these also got SEC approval first, so you can see the funds' track records.

If you want to branch out into ETFs containing smaller cryptocurrencies, check out the whitepapers and look for projects with utility, strong leadership, and a clear plan. The attraction of smaller cryptocurrencies is the potential for higher rewards. The trouble is that the risk is also significantly elevated.

Another consideration is staking. Some cryptocurrencies, such as Ethereum and Solana, use a proof-of-stake model to validate transactions and keep the network secure. Investors who tie up their coins as part of this process can earn steady interest-like returns. The SEC may soon approve ETFs that pay staking rewards.

2. What are the expense ratios and fees?

If you use a crypto exchange, the main cost you need to think about is the trading fee. ETFs work differently because you will pay an ongoing fee for management of the fund. That's known as an expense ratio, which should include all the costs involved -- including any custody fees.

The expense ratio gets deducted from the fund's assets, so it isn't something you will actively have to pay out of pocket. Expense ratios on existing top Bitcoin ETFs range from less than 0.25% to 1.5%. If you hold $5,000 worth of Bitcoin, that might translate to between $12.50 and $75 in annual fees.

3. Who is the ETF issuer, and who has custody of the underlying assets?

There are a few benefits to going with established ETF issuers such as BlackRock, Fidelity, and Grayscale. First, they are less likely to shut down. If your ETF closes, it can be inconvenient and problematic for taxes.

Issuers with more experience may have fewer tracking errors, meaning the ETF's market price deviation from the value of the underlying assets. Their funds will also be more liquid and have more assets under management (AUM). Liquidity matters because it can make it easier to buy or sell the ETF -- which also likely translates into a narrower bid-ask spread.

For spot crypto ETFs, check to see which company is managing the custody and what security they have in place. Right now, Coinbase (NASDAQ: COIN) is a popular custodial choice, boasting advanced security systems and a solid track record. However, there's a slight risk in having a single point of failure. I would like to see more custodial routes emerge as crypto ETFs become more established.

Do the new SEC rules mean crypto ETFs are safe investments?

The SEC's attitude toward crypto ETFs has shifted considerably in the past year. On Sept. 17, it said that it would allow generic listing standards for certain exchange-traded products (ETPs) holding commodities and digital assets.

Under the previous rules, each crypto product had to be reviewed individually. Now, the SEC has set broad criteria to streamline the approval process, such as trading on a regulated market or having futures contracts available for trading for the past six months.

However, the new process doesn't make crypto any safer per se; it just makes it easier to bring products to market. Cryptocurrencies -- especially altcoins -- are still relatively new and high-risk investments that can be volatile and subject to speculation. In the past, the SEC hesitated to approve altcoin ETFs because of concerns about market manipulation, wash trading to artificially boost prices, and fraud. Unfortunately, those things have not gone away.

The expected approval of crypto ETFs is exciting and could offer a way to get exposure to different assets. However, whichever crypto ETFs you choose, be sure to limit crypto to only a small part of your portfolio.

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Emma Newbery has positions in Cardano, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Solana, and XRP. The Motley Fool recommends BlackRock and Coinbase Global. The Motley Fool has a disclosure policy.