Crypto funds grow as investors seek exposure without holding Bitcoin or Ether

Investors in the United States are increasingly putting money into crypto funds that allow them to track Bitcoin and Ether without ever holding the coins.

The attraction is simple:- coins can be stolen or lost, but funds can be traded like any other security. According to research carried out by economist and professor Lilia Benrabia with assistant Seongjun Lee, the best performing product so far is the spot ETF, while the worst has been the strategy ETF.

Crypto trusts, strategy ETFs, and spot ETFs all aim to give investors exposure to the coins, but they do so in very different ways. Crypto trusts buy and store Bitcoin or Ether, then let investors trade shares of the trust on public exchanges.

Strategy ETFs, which were created before regulators signed off on spot ETFs, rely on futures contracts and sometimes options to mimic coin movements. Spot ETFs, launched in 2024, buy the actual coin at its current trading price and have quickly become the closest match to the real thing.

Spot ETFs beat rivals in Bitcoin performance

Benrabia and Lee examined every U.S. dollar-denominated crypto product for Bitcoin and Ether starting from January 2024, placing them into three groups:- trusts, strategy ETFs, and spot ETFs, then measured their performance against the real coins.

They compared the average monthly return of each product to the monthly return of Bitcoin or Ether, and they also measured tracking error, which is the average monthly gap between the coin’s return and the product’s return.

For Bitcoin, since 2024 began, the average Bitcoin spot ETF delivered a monthly return of 6.85%, while Bitcoin itself delivered 6.77%. That small gap worked in favor of the ETFs, with a difference of 0.08 percentage point per month.

Benrabia explained that “while it may look strange that the ETF outpaces Bitcoin, the difference likely comes from timing techniques used by the funds or the timing of purchases.”

Tracking error for Bitcoin spot ETFs stood at 0.88 percentage point per month. If Bitcoin gained 10% in a given month, a Bitcoin spot ETF would typically show either 10.88% or 9.12%.

The worst performer has bitcoin strategy ETFs. On average, they delivered a monthly return of 6.28% over the same period, underperforming the coin itself by 0.49 percentage point a month on average. And their tracking error was the worst of the group, coming in at 1.24 percentage points a month.

Their tracking error was also the worst at 1.24 percentage points. That means investors in these products were not only earning less but also seeing more deviation from the coin’s actual moves.

Crypto trusts, meanwhile, came closer to spot ETFs in tracking Bitcoin but were still less precise. They performed better than strategy products but could not quite match the accuracy of spot ETFs.

Ether shows similar results with new spot ETFs

Meanwhile, spot Ethereum ETFs were only launched in August 2024, but they have averaged 4.17% monthly returns over the past year, while Ether delivered 4.16%. That left spot ETFs with an outperformance of 0.01 percentage point per month.

Strategy ETFs for Ether once again posted the weakest results. They averaged 3.55% per month, falling behind the coin by 0.61 percentage point. These products, based on futures and options, showed the same flaws as their Bitcoin counterparts.

Trusts for Ether ended up in the middle ground. They tracked the coin closer than strategy ETFs but were not quite as sharp as the spot ETFs.

Benrabia’s review concluded that for both Bitcoin and Ether, the clear winner for investors has been the spot ETFs. “The data shows that buying a spot Bitcoin or Ether ETF is almost as good as buying the cryptocurrency directly,” she said.