Exploring Investment Options for Bitcoin and Ether
Many investors are keen on acquiring cryptocurrencies like Bitcoin or Ether without the risks associated with direct ownership, such as the potential for theft or loss. They can choose from several investment vehicles, including crypto trusts, strategy exchange-traded funds (ETFs), and spot ETFs. Crypto trusts acquire and securely store the actual digital assets, with their shares being traded on public exchanges similar to closed-end funds. On the other hand, strategy ETFs, which emerged prior to the approval of spot ETFs, utilize futures and occasionally options linked to the cryptocurrency to capitalize on its price movements. Meanwhile, spot ETFs, introduced in 2024, purchase the underlying cryptocurrencies at the current market price. The question remains: which investment option closely mirrors the performance of the cryptocurrencies themselves?
Performance Analysis of Crypto Investment Vehicles
In our investigation, my research assistants, Lilia Benrabia and Seongjun Lee, and I found that spot ETFs emerged as the superior choice for both Bitcoin and Ether. In contrast, strategy ETFs lagged significantly behind their underlying assets. To analyze this, we examined all Bitcoin and Ether products available to U.S. investors since the beginning of 2024, categorizing them into three groups: trusts, strategy ETFs, and spot ETFs. We then assessed the average returns of each product against the spot returns of the respective cryptocurrencies. Additionally, we computed the average tracking error by evaluating the monthly absolute differences between the returns of the cryptocurrencies and those of the investment products.
Bitcoin Performance Insights
Our findings for Bitcoin indicate that spot ETFs lead in overall returns while effectively minimizing tracking errors. Since early 2024, the average monthly return for spot ETFs has been 6.85%, compared to an average of 6.77% for Bitcoin itself, resulting in an excess performance of 0.08 percentage points monthly from the spot ETFs. This unexpected outperformance might be attributed to specific timing strategies employed by the ETFs or the timing of investor purchases. The average tracking error for Bitcoin spot ETFs stood at 0.88 percentage points per month. This suggests that if Bitcoin achieves a 10% return within a month, the average spot ETF could return between 9.12% and 10.88%. Conversely, Bitcoin strategy ETFs were the least effective, with an average monthly return of only 6.28%, trailing the actual Bitcoin returns by 0.49 percentage points and exhibiting the highest tracking error at 1.24 percentage points monthly.
Ether Performance Overview
For Ether, whose spot ETFs became available in August 2024, the trend mirrors that of Bitcoin. Over the past year, Ether spot ETFs recorded an average monthly return of 4.17%, slightly surpassing the 4.16% average monthly return of the Ether coin itself, resulting in a marginal outperformance of 0.01 percentage points. Similar to Bitcoin, Ether strategy ETFs performed poorly, with an average monthly return of 3.55%, falling short by 0.61 percentage points relative to the actual spot Ether returns. When comparing the performance of crypto trusts, they fared comparably to spot ETFs for both Bitcoin and Ether but did not quite match the returns achieved by spot ETFs.
Conclusion on Investment Choices
The results underscore that investing in spot ETFs for Bitcoin or Ether is nearly as effective as directly purchasing the cryptocurrencies themselves. Investors seeking a more secure and straightforward method to gain exposure to these assets may find spot ETFs to be an attractive option.
