Crypto ETFs Have Bounced Back. But Don’t Get Too Excited

Of course, it’s merely a rebound from the depths of last year’s crypto crash, which wiped out $1 trillion in value from the cryptocurrency market as scandals such as the downfall of the FTX exchange triggered a slide in prices of digital currencies. Bitcoin, the world’s biggest cryptocurrency, dropped 65% to around $16,500 by year’s end.

“Investors are now reassessing crypto ETFs as the industry rebounds because they see long-term opportunity," says Roxanna Islam, associate research director at VettaFi LLC, an ETF market-research firm. “They think the prices of bitcoin and crypto-related equities have bottomed out and now is a good time to participate in the future of this emerging marketplace."

This year through March 31, the price of bitcoin is up around 72%, and ether (also called Ethereum) is up about 52%, according to CoinDesk.

“They are also encouraged by the increased regulatory scrutiny of the industry," says Leah Wald, chief executive officer of Valkyrie, a bitcoin investment-management group.

Other macroeconomic factors are also boosting investor confidence, financial analysts say. There is a feeling among some investors that the Federal Reserve is nearing the end of its rate-hike cycle, inflation is easing and many people are returning to riskier assets, Ms. Islam and others say.

There are now 26 cryptocurrency ETFs that hold about $1.89 billion in assets, according to Morningstar Direct. Most are equity crypto ETFs that come in many varieties. They are designed to allow investors to get exposure to the digital-currency marketplace without having to own or store the underlying assets. A few, such as the $929.5 million ProShares Bitcoin Strategy ETF (BITO), invest in bitcoin futures.

In the lead

Leading the league is the $5.69 million Valkyrie Bitcoin Miners ETF (WGMI). It has returned 96% this year through March 30. The actively managed fund invests at least 80% of its assets in companies that derive at least 50% of their revenue or profits from bitcoin mining operations.

It is followed by VanEck Digital Assets Mining ETF (DAM), a $1.34 million fund that tracks the MVIS Global Digital Assets Mining Index. It has total returns of 81.5% over the same period. Third is the $1.8 million Hashdex Bitcoin Futures ETF (DEFI), which has returned 68.7%.

Investors looking to invest in these funds should know that it’s a young fund class. The first U.S. blockchain ETF—Amplify Transformational Data Sharing ETF (BLOK)—launched in 2018. The first with crypto in its name was Bitwise Crypto Industry Innovators ETF (BITQ), started in May 2021. And the BITO fund, the first U.S. futures-based ETF, launched in October 2021.

“It’s still an immature market still without a lot of regulatory oversight," Ms. Islam says.

High volatility

“Keep in mind these funds are highly volatile, and it’s extremely difficult to time the market," says Bryan Armour, director of passive strategies research for North America at Morningstar. “Most of these ETFs are still underwater. The top-performing funds in 2023 declined by as much as 80% or more in 2022."

While the average expense ratio for these funds is 0.72%, according to Morningstar Direct, some come with an even higher price tag. For example, the expense ratio for AdvisorShares Managed Bitcoin Strategy ETF (CRYP) is 1.59%.

Taking all these factors into account, financial advisers typically say an individual investor should put no more than 1% to 5% of one’s tech-stock holdings in these vehicles. “Think of it as a gambling play," Mr. Armour says. “These small thematic funds have concentrated portfolios tied to the digital currency marketplace, so consider how much exposure you really want."

Ms. Ioannou is a writer in New York. She can be reached at reports@wsj.com.