Spot crypto exchange-traded funds (ETFs) have attracted significant inflows of capital since the first ones were approved at the start of 2024. They offer a regulated and accessible way for institutional and retail investors to add crypto to their portfolios, but they've mostly only included Bitcoin (BTC +1.93%) and Ethereum (ETH +3.83%). That's changing with a pro-crypto administration and evolving guidance from the Securities and Exchange Commission (SEC) on crypto ETF approvals.
September 19 saw the launch of the Grayscale CoinDesk Crypto 5 ETF (GDLC +2.19%), the first-ever multi-crypto ETF, containing five of the biggest cryptos by market cap. Grayscale managed to beat competitors to the punch by converting its existing Digital Large Cap Fund into an ETF. It was closely followed by a similar multi-crypto ETF from Hashdex, and we will see more crypto basket ETFs in the coming months.
Let's dive in for more on how the fund works and whether it's worth adding to your portfolio.
What investors need to know about the Grayscale CoinDesk Crypto 5 ETF
The cryptocurrencies in Grayscale's first multi-crypto ETF represent a large proportion of total crypto market capitalization. With XRP (XRP +2.58%), Solana (SOL +1.07%), and Cardano (ADA +3.45%) to inject a little potential fuel into the Bitcoin and Ethereum engine, it's a pretty solid mix of cryptocurrencies.
Here's how it breaks down:
- Bitcoin: 72%
- Ethereum: 17%
- XRP: 6%
- Solana: 4%
- Cardano: 1%
In terms of fees, the expense ratio on Grayscale's multi-crypto ETF is 0.59%. That's not as high as some crypto ETFs, but some spot Bitcoin ETFs have much lower rates. For example, the Grayscale Bitcoin Mini Trust ETF's (BTC +1.94%) expense ratio is 0.15%. For the ARK 21Shares Bitcoin ETF (ARKB +1.95%), it's 0.21%.
Reputation-wise, the fund is administered by BNY Mellon (BK +2.88%), and Coinbase (COIN +8.79%) is responsible for custody. Coinbase CEO Brian Armstrong said recently that the company is responsible for over 80% of the ETFs in terms of custody. That's good because it has a reputation for security and compliance, but it does also present a risk. A security breach at Coinbase could cause shockwaves across various funds.
Is it a buy?
If you're considering buying a multi-crypto ETF, bear in mind that diversification works very differently with cryptocurrency than, say, stocks. Cryptocurrencies are becoming more mainstream, but Bitcoin and Ethereum still dominate. Together, they make up almost 90% of the total value of the market. Every step you take down the crypto ladder introduces significantly more risk and less liquidity.
Buying an ETF that tracks even the top five cryptocurrencies is not the same as an ETF that tracks, say, the S&P 500. An S&P 500 ETF is a relatively safe way to get exposure to the 500 biggest companies in the U.S. Not only are they all relatively large and established companies, the S&P 500 also has a number of listing requirements.
In the case of cryptos, there's no S&P 500 index committee behind the scenes. Having even 10% of your crypto holdings in XRP, Solana, and Cardano introduces significantly more risk. Consider how each one fits into your portfolio to decide whether the GDLC ETF is a buy.
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Key Data Points
More broadly, think about what sectors of digital currencies you think will perform well, and how that affects your allocation. Ethereum, Solana, and Cardano are programmable smart contract cryptos, so they can act as ecosystems where other cryptocurrencies are built. Ripple's XRP has established itself as a bridge asset for global payments.
Bitcoin and Ethereum ETFs have already started to transform the crypto industry. It's easier than ever to get exposure to crypto without having to open an account with a crypto exchange or manage a digital wallet. ETFs can be more tax-efficient, and they'll take care of the security and custody.
But there are downsides, too. A multi-crypto ETF means you can't control what proportion of your crypto holdings you want to allocate to smaller coins. Right now, the Grayscale fund will not pay staking rewards, so you'd be missing out on potential yields from Ethereum, Solana, and Cardano if you own them through the ETF.
It's early days for multi-crypto ETFs
I can understand the attraction of a crypto fund that gives easy exposure to the top cryptocurrencies. However, until cryptocurrencies are more evolved and more mainstream, I want more control of my altcoin allocation -- not least because some of those assets pay staking rewards.
While I plan to hold them long-term, altcoins aren't completely passive set-and-forget investments. If there's another Terra-LUNA-style collapse of a major coin that sends shockwaves through the industry, I want to be able to manage my holdings right then, rather than waiting for an ETF's quarterly review.
Ultimately, allocating a small portion of your portfolio to crypto is already risky. If you don't have the time or desire to research and monitor the smaller cryptocurrencies, you're better off sticking with Bitcoin and Ethereum. There are no guarantees, but so far, these two giants have come through turbulent times and delivered solid returns.
