Cryptocurrencies are increasingly establishing themselves as an asset class, as has been clear at least since the approval of Bitcoin spot ETFs by the U.S. Securities and Exchange Commission (SEC). Growing confidence among investors is reflected in record-breaking levels of investment: in the first half of 2024, a net total of almost 15 billion US dollars flowed into the various Bitcoin ETFs. The SEC has also given the green light to the spot ETF for Ethereum, the second largest cryptocurrency.

The big advantage of crypto spot ETFs: they simplify access for private investors and for professional investors such as pension funds, foundations and portfolio managers. For professional investors in particular, this is key – as they are generally only permitted to invest in regulated products. These new spot ETFs meet high regulatory requirements and can be acquired through traditional trading platforms.

If improved accessibility and growing acceptance of cryptocurrencies as an asset class continues to attract significant investment, we will see a positive impact on the market capitalization and price performance of cryptocurrencies as the entry of institutional investors provides market stability, in turn boosting private demand.
What are the options available to interested investors? How do they differ? In what follows, we answer the most important questions about the various investment options.

What is an exchange-traded fund?

Exchange-traded funds, or ETFs, are exchange-traded funds that track a specific asset, such as an index, a commodity, a currency or an entire basket of investments.

ETFs allow investors to diversify their investment in a particular area without having to buy the individual components. ETFs for gold, or indeed cryptocurrencies, are an exception: you invest only in a single underlying asset, but still benefit from the advantages of an ETF.

The advantages of ETFs are low costs, high liquidity and transparency – and security, as they are classified as segregated assets. That means that they are not legally allocated to the assets of the fund management company, but rather held in custody by a custodian bank. Even in the event of bankruptcy of the ETF provider, the invested assets are protected and do not flow into the bankruptcy estate, so that investors retain full rights to their invested capital.

What is the role of market makers?

In the trading of ETFs, market makers play a crucial role as the providers of liquidity – irrespective of provider. They ensure that adequate numbers of offers for purchase and sale of ETFs are available at all times during stock market opening hours, allowing investors to buy or sell their positions at any time. Before any purchase, however, the current prices of the various ETFs should be compared with a view to obtaining the best conditions.

The six advantages of ETFs

• Precise tracking of the underlying assets
• Regulated daily stock exchange trading
• Attractive cost structure
• High transparency
• Protection in the event of provider insolvency
• Wide range of underlying assets

What are crypto spot ETFs?

A spot ETF is an investment made directly in the underlying asset – in this case a cryptocurrency such as Bitcoin. In this example, its performance is therefore directly linked to the price in real time (the spot price) of Bitcoin.

A spot ETF allows investors to invest in Bitcoin without having to deal with the technical and security challenges of direct custody. ETFs are easy to manage and offer regulatory security. In addition, the asset statement (as with any other investment) makes it easier to complete your tax return.

What is the difference between a spot ETF and a conventional ETF?

The main difference is in the type of assets in which a particular ETF invests. The hallmark of conventional ETFs is that they offer broad diversification and exposure to different markets and asset classes. Spot ETFs for Bitcoin or Ethereum, on the other hand, invest only in the cryptocurrency in question. The term “spot” here means that the ETF tracks the current market price at all times.

ETFs on individual assets are rare, with well-known examples including gold ETFs that invest in physical gold. In the EU, the issuing of a spot ETF for a single underlying asset such as Bitcoin would not be possible. European fund regulation requires diversification on the basis of several underlying assets in order to spread the risk.

Why is the domicile of an ETF important?

Spot ETFs for Bitcoin are domiciled in the United States and are therefore subject to the regulatory framework and laws in place there. Swiss investors can also buy these ETFs, although there are a number of things you should bear in mind.

• Trading times: the time difference means that US stock exchanges have different trading hours.
• Currency: these funds are traded in US dollars, and the fund currency is also the US dollar. For Swiss franc investors, this entails an additional currency risk.
• Tax implications: bear in mind that US-based ETFs are taxed differently from investment vehicles domiciled in Switzerland. For Swiss investors, these products may be subject to US inheritance tax.

What are the risks associated with a Bitcoin spot ETF?

Essentially similar to a direct investment: price fluctuations, the possibility of regulatory changes and risks associated with the technology and security of cryptocurrencies. 

How can costs and tracking quality be compared?

All providers attempt to track the Bitcoin price as accurately as possible – but not all manage to do so equally well. To assess the quality of replication, it’s a good idea to compare the net asset value (NAV) of the ETF with the price performance of Bitcoin. This is because the NAV takes all costs and potential return of the ETF into account.

A practical tip: to assess the quality of tracking, the use of a chart tool to compare the prices of the ETF and Bitcoin over a longer period of time is recommended. Most price information sites, and often also the product providers, offer such tools.

A simpler method of assessing the quality of replication is the “tracking error” indicator, which shows the difference between the performance of an ETF and its benchmark, in this case Bitcoin. The lower the tracking error, the smaller the difference between ETF performance and Bitcoin price. A low tracking error therefore indicates that the ETF is achieving its objective.

The total expense ratio (TER) can also be used, representing as it does the ongoing costs of an ETF and enabling a simple cost comparison between different ETFs.

What are ETFs for Bitcoin futures?

A future is a contract that specifies the purchase of an investment at a fixed price and at a specific time – also possible with ETFs. Because ETFs track the price of futures contracts and not the current spot price of Bitcoin, investors are directly exposed. Following the approval of spot ETFs, ETFs for Bitcoin futures have lost some of their attractiveness and are increasingly falling out of favour with investors. 

Buying Bitcoin directly: self-custody or custody by a bank?

Before there were cryptocurrency ETFs, investors had only one option: buying cryptocurrencies directly. This option is still available, with two variants to choose from: self-custody or custody by a bank. Read more about the advantages and disadvantages of both approaches in this post: Crypto as an asset class.

Self-custody

To buy bitcoins directly and hold them in their own custody, investors acquire bitcoins through a cryptocurrency exchange and transfer them to their personal wallet. This method requires technical understanding and strict security measures to adequately protect the assets against theft and loss. The greatest risk lies in the loss of the access data – the private key. If you lose it, you no longer have any way to access your crypto assets. 

Custody by a bank

An easier and less risky option is direct trading using a bank’s e-banking platform, which not only facilitates buying and selling, but also ensures safe custody (by the bank). Most providers hold cryptocurrencies as part of their traditional securities trading portfolio, giving investors a comprehensive overview of all securities positions in their portfolio. Importantly, when held by a bank, the painstaking work of recording individual crypto positions is no longer necessary, as they are included in the bank’s asset statement.

Custody by a bank – what you need to bear in mind

If you want to invest in cryptocurrencies through a bank, you should compare the various offers on the basis of the following criteria:

• Range of cryptocurrencies
• Costs of buying and selling
• Custody costs (custody account fees)
• Foreign currency costs: because cryptocurrencies are denominated in US dollars, exchange fees are incurred for buying and selling using an account in Swiss francs. Some banks also levy a surcharge on the exchange rate. 

Comparison of fees for Bitcoin spot ETFs versus direct investment

Costs are key, as small variations can lead to big differences in the long term. The table below shows the difference between the costs of a spot ETF and buying Bitcoin directly with PostFinance.

Comparison: buying Bitcoin spot ETFs versus buying Bitcoin directly

To illustrate the differences in fees between the purchase of a Bitcoin ETF and a Bitcoin direct investment using PostFinance e-finance, let’s take a look at the following sample calculation.

The underlying data was collected at the end of June 2024 and can change at any time. This example is used only to illustrate the cost overview.

The sample calculation clearly shows that with fees amounting to 95 US dollars, buying Bitcoin directly is more expensive than buying a Bitcoin spot ETF, which costs only 50 US dollars. However, this is not the full picture, because in addition to the one-off purchase fees, ongoing costs play a major role. These costs can significantly reduce long-term returns. Higher fees mean that a greater share of profit is used to cover costs, which in turn reduces the capital available for further growth.

The figures shown as an example below illustrate the annual costs incurred for the two forms of investment. While direct investment in Bitcoin only incurs a portfolio fee of 0.15 percent per year, Bitcoin spot ETF also incur an annual management fee.

Assuming that the investment is held for a period of 10 years and the Bitcoin price remains unchanged, the total cost of the ETF investment would be 1,379 US dollars, compared to only 243 US dollars in fees for buying Bitcoin directly.

Costs eat into returns

• Higher fees for ETFs reduce returns more in the long term than fees for direct Bitcoin investments because ETFs incur an additional management fee.
• It is worth your while comparing the trading costs and the annual custody account fees, as these will also eat into your assets.
• Higher fees mean that less capital is available for further investment.

Summary

For many investors, buying through a bank is probably the more straightforward and suitable approach. Both ETFs and direct investments are held off the bank’s balance sheet, offering additional security in the event of bankruptcy of the provider. If you are willing to take on the technical challenges and focus on personal responsibility, you can manage your cryptos yourself.

Whether self-custody, purchase with a bank or a crypto spot ETF, the fees should never be neglected, as they have a decisive impact on potential long-term returns.

In addition to ETFs and direct investments, the Swiss stock exchange also offers so-called ETPs (exchange-traded products) for various cryptocurrencies. These products are similar to ETFs in their structure, but they are not segregated assets, which means that in the event of any issuer insolvency, the invested assets may be lost. However, many ETP providers hedge this risk.

There are also various structured products, such as tracker certificates, which replicate the underlying asset 1:1. For speculative purposes, a wide variety of mini-futures are also available on the SIX Swiss Exchange. For all of these products, investors should keep a close eye on both the additional counterparty risks and the costs incurred.

One argument in favour of direct investment is the ability to trade around the clock. Because the global crypto market is active around the clock, this can offer exciting opportunities. With regulated products such as ETFs, which are tied to stock market opening hours, investors have less flexibility.

Last but not least, it’s a good idea to consider your crypto investments in the context of your portfolio as a whole. Looking at it in its entirety will help you to reconcile the various risks and opportunities and develop a balanced investment strategy that is successful in the long term.