What Are Crypto ETFs? A Beginner's Guide for Canadians  

Cryptocurrency has taken the financial world by storm, but navigating the crypto investment landscape can feel overwhelming for beginners. Crypto ETFs (exchange-traded funds) offer a way to gain exposure to digital assets like Bitcoin or Ethereum without requiring direct ownership.

If you're a Canadian investor looking to diversify your portfolio with crypto but feel hesitant to manage wallets or private keys, this guide is for you. We'll explore what crypto ETFs are, how they work, and why they might be the ideal steppingstone into the world of cryptocurrency. 

Before we jump into crypto ETFs, let's briefly define ETFs in general. Exchange-traded funds (ETFs) are investment vehicles that track the price of a specific asset or a basket of assets, such as stocks, commodities, or indexes. They are traded on stock exchanges, and their share prices fluctuate throughout the trading day. 

Some ETFs hold the underlying assets directly, while others use financial instruments like futures to replicate asset performance. For example, most Canadian ETFs tend to hold the actual assets, whereas some U.S. ETFs—particularly crypto-focused ones—may rely on futures contracts instead.

ETFs offer a simple, cost-effective, and diversified method for investing in various markets. For example, instead of buying multiple individual stocks, you could invest in a single ETF that tracks the S&P 500.   Similarly, crypto ETFs allow investors to gain exposure to cryptocurrency markets in a hassle-free and regulated way. 

Crypto ETFs are a type of exchange-traded fund designed to provide exposure to cryptocurrencies or, in some cases, related sectors such as blockchain technology. By purchasing units in a crypto ETF, investors can gain exposure to the price movements of assets like Bitcoin (BTC) or Ethereum (ETH) without directly owning or managing the digital assets themselves.

While some crypto ETFs use derivatives to track the price of cryptocurrencies, most—particularly in jurisdictions like Canada—hold the actual assets. It's important to note that ETFs marketed as "blockchain" ETFs typically invest in companies involved in blockchain-related businesses, rather than tracking the technology itself. 

Crypto ETFs work by either holding the actual cryptocurrency (spot ETFs) or investing in associated financial instruments like futures contracts (futures ETFs). For example:

• Spot Bitcoin ETFs hold Bitcoin directly within the fund, offering investors indirect exposure that reflects real-time price movements.
• Futures Bitcoin ETFs, on the other hand, track Bitcoin futures contracts—agreements to buy or sell Bitcoin at a predetermined price on a future date. 

Why invest in crypto ETFs instead of buying Bitcoin, Ethereum, or other cryptocurrencies directly? Here are some compelling advantages that make crypto ETFs a popular choice among Canadian investors.   
 

1. Simplified Investment Process   
   Buying cryptocurrency directly often involves using specialized platforms and, in some cases, managing digital wallets and private keys. However, many modern crypto exchanges offer custodial services, simplifying the process for users.

   For those who prefer traditional financial channels, crypto ETFs offer an accessible alternative. These funds can be traded on stock exchanges like the TSX through regular brokerage accounts, much like stocks. This makes them appealing to investors who are more comfortable with conventional markets or who wish to avoid managing digital assets directly.
    

2. Regulated Environment  
   Crypto ETFs operate within a regulated financial framework, which can provide added transparency, investor protections, and oversight through traditional market regulators.
   
   While some crypto exchanges are unregulated, many—including those operating in Canada, like Ndax—adhere to regulatory standards and are registered with financial authorities. However, for investors who prefer to stay entirely within the traditional financial system, ETFs offer a familiar and regulated way to gain exposure to digital assets.
    
3. Tax Advantages  
   Investing in crypto ETFs through tax-sheltered accounts like TFSAs (Tax-Free Savings Accounts) or RRSPs (Registered Retirement Savings Plans) allows Canadians to benefit from tax-free or tax-deferred gains. This can be an advantage compared to holding cryptocurrencies directly in taxable accounts, where profits are subject to capital gains tax.
   
   However, it’s important to note that within registered accounts like TFSAs or RRSPs, investors cannot claim capital losses to offset gains. In contrast, trading cryptocurrencies in non-registered accounts allows for the possibility of claiming losses, which can help reduce overall taxable income.
    
4. Diversification  
   Some crypto ETFs don’t just track a single cryptocurrency—they may include a mix of multiple digital assets or invest in blockchain-related companies and technologies. This diversification can help spread risk across various holdings rather than relying on the performance of a single coin like Bitcoin.
   
   At the same time, diversification can also dilute exposure to the strongest-performing assets in the portfolio, which is something investors may want to consider depending on their goals.
    

5. No Custodial Concerns  
   Owning cryptocurrencies directly typically means you’re responsible for securing private keys and protecting your assets from theft or loss. With crypto ETFs, these custodial responsibilities are managed by the fund provider, which can simplify asset management for investors.

   However, some crypto platforms—such as Ndax—offer custodial services that handle security and storage on behalf of users, reducing the burden of managing private keys directly. 

While crypto ETFs can be advantageous, they're not without their downsides. Here are a few factors to consider before investing.

1. Management Fees: Crypto ETFs charge management fees that can range from 0.20% to 1.5% annually, which erodes your investment returns.  
    
2. Price Discrepancies: Futures-based crypto ETFs can experience tracking errors due to market volatility or the expiration of futures contracts. This means the ETF's performance may not perfectly mirror the price of the underlying cryptocurrency.  
    
3. Limited Asset Variety: Most crypto ETFs focus on popular assets like Bitcoin or Ethereum, offering limited exposure to the thousands of other cryptocurrencies available in the market. If you're looking to invest in altcoins or diversify across multiple digital assets, direct ownership might be a better choice.  
    
4. No Ownership of Cryptocurrencies: Investing in a crypto ETF means you never actually own the cryptocurrency itself. For investors who prioritize the ability to use or transfer their crypto, ETFs may feel limiting.   

Crypto ETFs bridge the gap between traditional finance and digital assets, offering Canadians a way to diversify their portfolios while gaining exposure to the cryptocurrency market. However, as with any investment, weighing the pros and cons is essential. Consider your financial goals, risk tolerance, and investment strategy before jumping in. If direct cryptocurrency ownership or exploring a broader range of digital assets is more aligned with your interests, platforms like Ndax can offer alternatives.   

Crypto ETFs are reshaping the way Canadians invest in digital assets, making cryptocurrency more convenient and accessible than ever. Whether you're seeking simplicity, security, or diversification, these investment vehicles offer a gateway to the exciting world of crypto.   

Are you ready to start your crypto investment journey? Learn more about how you can invest in crypto yourself without going through ETFs, and sign up with Ndax today to explore even more options. 

Disclaimer: This content is for informational purposes only and does not constitute investment, financial, legal, or tax advice. Any examples provided are for illustrative purposes only and should not be interpreted as recommendations. Investment decisions should be based on individual circumstances and made in consultation with a qualified advisor. While registered accounts such as TFSAs and RRSPs offer potential tax advantages, losses incurred within these accounts cannot be claimed for tax purposes. All investments involve risk, including the potential loss of principal. References to simplicity, safety, or ease of investing are not guarantees and should not be interpreted as assurances of performance or security.