Crypto Stock ETFs Outperform Bitcoin in 2023

Which has grown faster in 2023, the price of bitcoin or of ETFs investing in cryptocurrency-related equities?

If you guessed bitcoin, you’d be like many other investors, but also wrong.

While the potential launch of a spot bitcoin ETF has held the attention of investors in 2023, crypto stocks have quietly outperformed the popular cryptocurrency itself, as well as futures-based bitcoin ETFs.

Crypto Stock ETF, BITQ, Outperforms Bitcoin

As of Dec. 20, crypto stocks, as measured by the Bitwise Crypto Industry Innovators ETF (BITQ), have leaped an astounding 245% in 2023, while the price of bitcoin (BTC) has jumped 165% and the futures-based ProShares Bitcoin Strategy ETF (BITO) gained 145%.

Might 2023’s performance provide clues about how these ETFs may perform if the SEC approves a spot bitcoin ETF early in 2024, as is widely anticipated?

A marketing campaign around spot bitcoin ETFs has already started and the advertising drive is expected to grow exponentially from multiple issuers upon SEC approval. This awareness, combined with the building excitement over bitcoin, would no doubt draw investors to the new spot bitcoin ETFs, pushing the BTC price higher.

SEC approval could then turn into a rising tide that lifts the new spot bitcoin ETFs, crypto stock ETFs like BITQ, and futures-based bitcoin ETFs like BITO.

BITQ vs. BITO: Crypto Stocks Versus Bitcoin Futures

Neither BITQ, nor BITO, hold cryptocurrencies; the former holds stocks of companies that derive either most or some of their revenue from crypto-related assets and activities, while the latter is an actively managed portfolio of bitcoin futures.

Here’s how BITQ and BITO compare:

• Bitwise’s BITQ ETF tracks an index of 30 crypto companies from around the world, including emerging markets. The crypto stock fund primarily holds what are considered crypto innovators, which are pure-play companies that derive more than 75% of their revenue directly from crypto assets. BITQ also holds large-cap companies with diversified business interests that include at least one significant business focused on the crypto economy.
• Proshares’ BITO ETF provides exposure to bitcoin returns by investing in cash-settled, front-month bitcoin futures, traded on commodity exchanges registered with the Commodity Futures Trading Commission, or CFTC, such as the CME Futures Exchange.

BITQ and the ‘Pick and Shovel’ Investing Strategy

The BITQ ETF implements a “pick and shovel” strategy, which harkens back to the California Gold Rush of the 19th century, where those who supplied miners with tools like picks and shovels often had more consistent and stable profits than individual miners.

In modern investing, the pick and shovel strategy involves identifying and investing in companies that are integral to an industry or sector’s operations, regardless of the specific products or commodities being produced. The idea is that companies providing essential tools, technologies, or services will continue to thrive, regardless of fluctuations in consumer demand or changes in specific product trends.

Bottom Line on Investing in Bitcoin ETFs in 2024

Thus, assuming the SEC approves a spot bitcoin ETF in 2024, investors will be able to choose between ETFs offering direct exposure to bitcoin and ETFs providing indirect exposure through either bitcoin futures or an equity approach by holding crypto stocks. Investors may also choose to invest in a combination of strategies.

Investors should keep in mind that SEC approval of any security does not imply that the investment is suitable for all investors. Bitcoin and other cryptocurrencies and related investments can be much more volatile than traditional investment assets, such as stocks and bonds.

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