The case for and against investing in crypto ETFs

Charles Schwab recently launched a new exchange-traded fund designed for private investors who want indirect exposure to the crypto market without the direct risk of holding cryptocurrencies. The new Schwab Crypto Thematic ETF (STCE -0.94%) will invest in companies that may benefit from the development or exploitation of cryptocurrencies, such as cryptocurrency mining companies and cryptocurrency exchanges. But it will not take position in any cryptos directly.

For investors who may be wary of buying crypto now, this could be a more diversified way to gain exposure to crypto in a volatile and uncertain market. The ETF tracks the Schwab Crypto Thematic Index, which consists of companies active in crypto and digital assets. But just remember that you won’t get the same upside potential as you would by investing in cryptocurrencies directly.

What is in the Schwab crypto ETF?

Like any standard ETF, the Charles Schwab crypto ETF mixes together a large number of investments in a wide range of companies, all in the name of hedging out risk while giving investors exposure to companies whose business model is largely based on crypto. . As a result, there are only a handful of companies currently in the ETF mix where Charles Schwab has taken an allocation above 5%.

Image source: Getty Images.

In addition, there are around 30 other companies active in crypto and digital assets, none of which have an allocation above 5%. These include financial services firms and cryptocurrency mining stocks. But there are also some companies you might not expect, in sectors like e-commerce.

Risk management

It’s easy to see how investing in this ETF can be a way to reduce your overall risk as a crypto investor. You might like the idea of ​​that MicroStrategy, Inc. have a huge Bitcoin position on the balance sheet or that chairman Michael Saylor is known for his extremely aggressive stance on Bitcoin. But since MicroStrategy only makes up 7.91% of the total crypto mix in the ETF, you don’t have to worry about the price of Bitcoin taking a steep dive and wiping out your investment.

Or, if you are having a hard time understanding which crypto mining stock is the best investment right now, you no longer need to worry about calling. There are a handful of different mining stocks in the current ETF mix, including Marathon Digital Holdings, Inc. and Riot Blockchain, Inc.both of which are among the top five holdings.

Upside potential

However, it is important to note that you simply will not have access to the upside potential of a direct cryptocurrency investment via this new ETF. For example, if the price of Bitcoin increases by 10% in a relatively short period of time, it does not mean that the price of the ETF will also increase by 10% in the same period of time.

This inability to accurately track the Bitcoin market was one of the concerns of the first official Bitcoin ETF, the ProShares Bitcoin Strategy ETF. When it first launched in October 2021, it caused quite a stir because retail investors finally had a way to invest in crypto without, well, investing in crypto. Instead of buying Bitcoin directly, you bought shares in Bitcoin ETFs, which used derivative contracts to create what can best be called “synthetic” Bitcoin.

A fully diversified crypto portfolio?

Looking through the holdings of the Schwab crypto ETF, it appears that the only holdings that will give you anything close to heavy exposure to Bitcoin are the mining stocks. Also, if you’re looking for ways to gain exposure to other cryptos beyond Bitcoin, you’ll most likely need to open an account on a cryptocurrency exchange to buy them directly.

It will be interesting to see what happens next in the crypto ETF space. There are now a growing number of crypto ETF options for investors who don’t want to get directly involved in holding crypto. Each has a slightly different risk-reward profile. As the regulatory environment becomes more favorable to crypto, one can imagine that future crypto ETFs will become even more creative in how they track overall market performance.