The launch of spot Bitcoin (BTC +2.63%) exchange-traded funds (ETFs) in January 2024 was arguably one of the most successful in recent memory for Wall Street. All told, more than $150 billion has now flowed into these spot Bitcoin ETFs.
So it's perhaps no surprise that Wall Street is now preparing an onslaught of new crypto ETFs, especially now that the SEC has streamlined the process for crypto ETF listings. According to some estimates, as many as 100 new crypto ETFs could be on the way during the next six to 12 months.
Image source: Getty Images.
But how many of these new ETFs will actually be worth buying? To answer that question, it's helpful to come up with a few common sense rules.
Focus on cryptocurrencies that institutional investors are buying
While there are literally thousands of different cryptocurrencies, there's really only a handful that institutional investors are interested in buying. There's Bitcoin, of course. And there's also Ethereum (ETH +3.29%). But once you get beyond Bitcoin and Ethereum, it's slim pickings.
By analyzing the latest institutional fund flow data from CoinShares, it's possible to see where institutional investors are putting their money. Year to date, $25 billion has flowed into Bitcoin. Another $12.5 billion has flowed into Ethereum. An additional $1.5 billion has flowed into Solana (SOL +1.99%), and another $1.5 billion has flowed into XRP (XRP +1.97%). Other than these, a handful of coins have attracted some interest, but nothing of significance.
So when the new spot ETFs arrive, I will be focusing on Solana and XRP. According to data from JPMorgan Chase (JPM 0.24%), as much as $6 billion could flow into Solana, and as much as $8 billion could flow into XRP. That type of steady buying is sure to lift their prices. With other cryptocurrencies, though, there may not be any price bump at all, due to the paucity of new buying.
Focus on spot crypto ETFs
It's already getting confusing making sense of all the ETF products for cryptocurrencies. Some claim to offer "spot exposure" to the crypto market, but they are not "spot" ETFs. Instead, they may create synthetic positions in the underlying cryptocurrency or use complicated operating structures to achieve U.S. compliance.
CRYPTO: XRP
Key Data Points
Take the Rex-Osprey XRP ETF (XRPR +1.69%), for example. It claims to be "the first U.S.-listed ETF offering exposure to spot XRP." As a result, many investors may actually think they are getting a spot XRP ETF. But Rex-Osprey clearly says that, "Investing in XRPR is not equivalent to investing directly in XRP."
If you read the offering prospectus, you will see why: "The Fund, under normal market conditions, invests at least 80% of its net assets (plus any borrowings for investment purposes) in the Reference Asset and other assets that provide exposure to the Reference Asset."
In other words, the fund is likely not 100% invested in XRP. And even the money that the ETF is investing in XRP may not be direct (i.e. spot) purchases of XRP. The fund has a lot of wiggle room to invest in all sorts of other assets that are XRP-related, but not necessarily XRP itself.
By way of contrast, the spot Bitcoin ETFs are 100% invested in Bitcoin, and they do nothing but buy Bitcoin in the spot crypto market. As a result, investors are getting "pure" Bitcoin, not some sort of synthetic Bitcoin. This is why these spot Bitcoin ETFs are such a phenomenal investment.
Buyer beware of these ETFs
It's highly likely that a good percentage of the new crypto ETFs will offer all sorts of bells and whistles. Some, for example, may offer investors the opportunity for leverage. Others might offer investors a clever way to get exposure to financial products that are not yet approved by U.S. regulators.
Avoid these like the plague. All of these fancy bells and whistles likely come with high fee structures, and will only encourage you to stray from a long-term, buy-and-hold strategy.
Some have also suggested that the most popular meme coins -- including Dogecoin (DOGE +4.36%) and Shiba Inu (SHIB +1.49%) -- may soon get spot ETFs of their own. Meme coins are already highly risky, highly speculative investments, and spot ETFs are not going to change that. As a result, you can safely avoid any crypto ETFs that feature meme coins.
At the end of the day, the advent of new crypto ETFs may not be everything it's cracked up to be. I will have some interest in the new spot ETFs for XRP and Solana when they hit the market, but I probably will pass on everything else.
