Crypto Index ETFs vs. Bitcoin ETFs: which one makes sense for your portfolio?

As cryptocurrency continues to grow as an investment asset class, exchange-traded funds (ETFs) offer a convenient way for investors to gain exposure to digital assets. Among the many available products, single-asset ETFs and crypto Index ETFs –such as DIME– provide two distinct approaches to investing in the crypto market. In this article, we’ll explore why a crypto Index ETF may make sense for a diversified portfolio, highlighting its broader market exposure and reduced concentration risk compared to a bitcoin-only strategy.

What are Crypto ETFs?

Crypto ETFs are financial products traded on traditional stock exchanges, designed to track the performance of one or more cryptocurrencies. They allow investors to participate in the cryptocurrency market without directly holding digital assets, which can involve complexities such as managing self-hosted digital wallets and security. A digital wallet, in the context of crypto, is a software application or hardware device that allows users to securely store and manage the private keys needed to access and control their cryptocurrency holdings.

Two main types of crypto ETFs are single-asset ETFs–which focus solely on bitcoin or ethereum in the US as other digital assets have yet to be approved–and crypto index ETFs, which provide exposure to a basket of cryptocurrencies, including both established assets like bitcoin and newer, potentially high-growth cryptocurrencies.

Single-asset ETFs: concentrated exposure to the leading cryptocurrency

A single-asset ETF tracks the price of one asset. For instance, Bitcoin ETFs - commercialized starting January 2024 in the U.S. only tracks the performance of Bitcoin, the world’s largest cryptocurrency by market capitalization. This product is popular among investors who believe in Bitcoin’s long-term potential as a store of value, often referred to as "digital gold." The approval of Bitcoin Spot ETFs by regulators such as the U.S. Securities and Exchange Commission in 2024 marked a significant milestone, making it easier for traditional investors to gain direct exposure to Bitcoin.

However, focusing solely on Bitcoin comes with concentration risk. Bitcoin, while dominant, is not immune to market fluctuations, and relying entirely on its performance can expose investors to the ups and downs of a single asset. This lack of diversification may limit investors from capitalising on the broader trends and innovations happening in the cryptocurrency market. In the past, it also happened that, in shorter timeframes, altcoins (meaning cryptocurrencies other than Bitcoin) outperformed the leading capitalization. In such circumstances, allocating an exposure to the broader market makes sense.

Crypto Index ETFs: broader market exposure and reduced concentration risk

A Crypto Index ETF, on the other hand, tracks a diversified portfolio of cryptocurrencies.

Key Benefits of Crypto Index ETFs:

1. Broader Market Exposure: The cryptocurrency market is continuously evolving, and while Bitcoin is the dominant asset, other cryptocurrencies—like Ethereum, Solana, and Cardano—are playing increasingly important roles. A Crypto Index ETF allows investors to benefit from the overall growth of the crypto market, capturing the performance of various assets rather than being dependent on a single cryptocurrency. As new technologies and innovations emerge, smaller "rising star" cryptocurrencies have the potential to outperform Bitcoin, particularly in sectors like decentralised finance (DeFi) or smart contract platforms. An index ETF helps investors tap into these broader opportunities by including such assets in its portfolio.
2. Reduced Concentration Risk: By investing in a basket of cryptocurrencies, a crypto Index ETF reduces the reliance on the performance of a single asset, such as Bitcoin. If Bitcoin underperforms or faces regulatory or market challenges, other assets in the index may balance out the overall performance. This diversification helps spread risk across the crypto market, which can be especially beneficial in a highly volatile environment.
3. Capture of Emerging Cryptocurrencies: While bitcoin often dominates the headlines, other cryptocurrencies have shown substantial growth and innovation in recent years. For example, Ethereum has become the backbone of decentralised applications and smart contracts, while Solana and Tron have gained recognition for their scalability, transaction speeds or their high stablecoin usage. A Crypto Index ETF allows investors to capture the growth of these emerging assets without having to manage multiple individual positions.

The role of crypto index ETFs in portfolio diversification

Diversification is a key principle of portfolio management, and it’s particularly important in volatile markets like cryptocurrency. A crypto index ETF can complement traditional assets (such as stocks, bonds, or commodities) and offer investors a way to participate in the crypto market without the concentration risk associated with single-asset investments.

Depending on their structure and promises, crypto index ETFs can be rebalanced regularly to reflect changes in market capitalization. This means that investors gain access to the most important and influential digital assets - including Bitcoin - in the market, while also benefiting from the automatic adjustments as the crypto landscape evolves.

Real-world example: Bitcoin ETF vs. crypto index ETF in a portfolio

Let’s take an example of a balanced portfolio:

• A Bitcoin ETF would provide concentrated exposure to the performance of Bitcoin. If Bitcoin performs well, this can significantly boost portfolio returns, but if Bitcoin underperforms, the portfolio could experience sharp declines.
• A Crypto Index ETF, on the other hand, includes Bitcoin but also offers exposure to other leading cryptocurrencies. If Bitcoin's performance is flat or volatile, the index may still perform well due to the gains of other assets like Ethereum or Solana, providing a more balanced source of returns.

DIME, an innovative solution to diversify a portfolio

U.S. investors now have the opportunity to gain exposure to a regulated index of securities including digital assets, DIME (ticker: DIME). Approved by the SEC, this vehicle provides diversified exposure to 10 of the leading altcoins beyond Bitcoin and Ethereum through a portfolio of crypto ETPs accessible via traditional brokerage accounts.

Directly selecting a basket of cryptocurrencies is time-consuming and particularly challenging—especially in an ecosystem where, beyond Bitcoin and a few others, many previously top-ranked assets have disappeared. DIME provides a passive means to gain exposure to industry leaders through an actively managed and quarterly rebalanced portfolio, reducing concentration risk and maintaining alignment with market capitalization trends.

Furthermore, by using products with a proven track record to compose its index, DIME prioritizes efficiency and security, maximizing investors peace of mind as they navigate this ever-evolving industry.

Disclosure & Risks

Investing involves risks. The loss of principal is possible. The Fund’s investment objectives, risks, charges and expenses should be considered before investing. The fund may not be suitable for all investors. The prospectus contains this and other important information, and it may be obtained at https://coinshares.com/us/etf/documents/. Read it carefully before investing.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Any applicable brokerage fees and commissions will reduce returns.

Management Risk. The Fund is subject to management risk because it is an actively managed portfolio. The Adviser will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that the Fund will meet its investment objective.

Exchange-Traded Products (“ETPs”) Risk. The Fund is subject to the risks as those associated with the direct ownership of the investments held or represented by the ETPs in which it invests. In addition, the shares of certain ETPs may trade at a premium or discount to their intrinsic value (i.e., the market value may differ from the net asset value of an ETP’s shares) for a number of reasons. For example, supply and demand for shares of an ETP or market disruptions may cause the market price of the ETP to deviate from the value of the ETP’s investments, which may be exacerbated in less liquid markets. The value of an ETP may also differ from the valuation of its reference market due to changes in the issuer’s credit rating.

Exchange-Traded Notes (“ETNs”) Risk. The Fund’s investments in cryptocurrency-linked instruments may include investments in ETPs such as ETFs and ETNs. ETNs are senior, unsecured, unsubordinated debt securities whose returns are linked to the performance of a particular market benchmark or strategy minus applicable fees. ETNs are traded on an exchange during normal trading hours. However, investors can also hold the ETN until maturity. At maturity, the issuer pays to the investor a cash amount equal to the principal amount, subject to the day’s market benchmark or strategy factor. ETNs do not make periodic coupon payments or provide principal protection. ETNs are subject to credit risk and the value of the ETN may drop due to a downgrade in the issuer’s credit rating, despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuer’s credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset. When the Fund invests in ETNs, it will bear its proportionate share of any fees and expenses borne by the ETN. The Fund’s decision to sell ETN holdings may be limited by the availability of a secondary market. ETNs are also subject to tax risk. There may be times when an ETN share trades at a premium or discount to its market benchmark or strategy.

Digital Asset Investing Risk. The Fund is indirectly exposed to the risks of investing in digital assets through its investments in the ETPss.

Digital assets are a new and highly speculative asset class. The risks associated with digital assets include the following:

Digital assets are a new technological innovation with a limited history. There is no assurance that usage of digital assets will continue to grow. A contraction in use of digital assets may result in increased volatility or a reduction in the price of the ETPs, which could adversely impact the value of the Fund. The Bitcoin Network, the protocol for bitcoin, the first digital asset, was launched in January 2009, platform trading in bitcoin began in 2010, and Bitcoin Futures trading began in 2017. Other digital assets tracked by the ETPs were launched even more recently which limits a potential shareholder’s ability to evaluate an investment in the Fund.

The Fund’s investments are exposed to risks associated with the price of digital assets, which are subject to numerous factors and risks, including:

• The total and available supply of digital assets, including the possibility that small groups of early adopters hold a significant proportion of the digital asset supplies and that sales of digital assets by such large holders may impact the price of digital assets; Global demand for digital assets, which is influenced by the growth of retail merchants’ and commercial businesses’ acceptance of digital assets as payment for goods and services, the security of online exchanges and public addresses that hold digital assets, the perception that the use and holding of digital assets is safe and secure, the lack of regulatory restrictions on their use, and the reputation regarding the use of digital assets for illicit purposes;
• Global digital asset supply, which is influenced by similar factors as global digital asset demand, in addition to fiat currency (i.e., government currency not backed by an asset such as gold) needs by miners, stakers, and taxpayers who may liquidate digital asset holdings to meet tax obligations;
• Investors’ expectations with respect to the rate of inflation of fiat currencies;
• Foreign exchange rates between fiat currencies and digital assets;
• Interest rates;
• The continued operation of digital asset exchanges in the United States and foreign jurisdictions, including their regulatory status, trading and custody policies, and cyber security;
• Investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in digital assets;
• Regulatory measures, if any, that restrict the use of digital assets as a form of payment or the purchase or sale of digital assets, including measures that restrict the direct or indirect participation in the digital asset markets by financial institutions or the introduction of digital asset instruments;
• The maintenance and development of the open-source software protocols of various digital assets;
• Increased competition from other cryptocurrencies and digital assets, including forks of existing digital asset networks;
• Developments in the information technology sector;
• Global or regional political, economic or financial events and situations;
• Investor or participant sentiments on the value or utility of digital assets; and
• The mining or staking activities of participants on digital asset networks and the willingness of participants to clear transactions on digital asset networks.

Negative developments in any of these factors could adversely impact an investment in the Fund.

Tax Risk. The Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes. Accordingly, the Fund generally is subject to U.S. federal income tax on its taxable income at the rates applicable to corporations (currently 21%). In addition, as a regular corporation, the Fund is subject to state and local income tax. The extent to which the Fund is required to pay U.S. corporate income tax could materially reduce the Fund’s cash available to make distributions on the Shares. The Fund will recognize gain or loss on the sale, exchange or other taxable disposition of its assets equal to the difference between the amount realized by the Fund on the sale, exchange or other taxable disposition and the Fund’s adjusted tax basis in such asset. Any such gain will be subject to U.S. federal income tax at regular corporate rates, regardless of how long the Fund has held such asset. To the extent that the Fund has a net capital loss in any tax year, the net capital loss can be carried back three years and forward five years to reduce the Fund’s current taxes payable, subject to certain limitations. The use of ordinary net operating loss carryforwards is subject to limitation under the Internal Revenue Code. In the event a capital loss carryover or net operating loss carryforward cannot be utilized in the carryover periods, the Fund’s federal income tax liability may be higher than expected which will result in less cash available to distribute to Shareholders.

Distributions by the Fund of cash or property in respect of the Shares will be treated as dividends for U.S. federal income tax purposes to the extent paid from the Fund’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Subject to certain holding period and other requirements, any such dividend will be eligible (i) to be treated as “qualified dividend income” taxable at long term capital gain rates (subject to certain holding period requirements) in the case of Shareholders taxed as individuals and (ii) for the dividends received deduction (subject to certain holding period requirements) in the case of corporate Shareholders. If the Fund’s distributions exceed the Fund’s current and accumulated earnings and profits, such excess will be treated first as a tax-deferred return of capital to the extent of the Shareholder’s tax basis in the Shares (thus reducing a Shareholder’s adjusted tax basis in the Shares), and thereafter as capital gain assuming the Shares are held as a capital asset. There can be no assurance as to what portion of any future distribution will consist of return of capital (as opposed to taxable dividend income). Unlike a regulated investment company, the Fund will not be able to pass-through the character of its recognized net capital gain by paying “capital gain dividends.” Upon the sale of Shares, a Shareholder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale and the Shareholder’s adjusted tax basis in the Shares sold. Because the Fund anticipates that some distributions will be returns of capital, a Shareholder’s basis may be lower, and gain on sale higher, than it would have been had all distributions been made out of earnings and profits.

Unlike a fund that qualifies as a regulated investment company, distributions in kind will result in gain (but not loss) recognition to the Fund, which may increase its liability for income taxes.

This is a new ETF with limited operating history.

• Digital assets are subject to unique and substantial risks, including significant price volatility and lack of liquidity. The value of a digital assets may decline significantly without warning, including to zero.
• Digital assets are largely unregulated and digital asset-linked investments, including the ETPs may be more susceptible to fraud and manipulation than more regulated investments.
• If a fund’s ability to obtain exposure to digital asset-linked investments consistent with their investment objectives is disrupted for any reason, including as a result of a lack of liquidity, volatility, or a disruption in the digital asset or digital asset futures market, or as a result of margin requirements, position limits, or other conditions, factors, or limitations of a particular fund, the fund may not be able to achieve its investment objective and may experience significant losses.

The Fund is distributed by ALPS Distributors, Inc.

CoinShares & ADI do not offer tax advice. Please consult your tax advisor or a tax professional.

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