The boom in crypto ETFs has a downside for investors
Since U.S. regulators approved spot crypto ETFs in January 2024, 130 funds have launched with tens of billions in assets, but many struggle with high fees and low demand, risking closure within two years. Investors face potential tax disruptions and forced liquidations as up to a third of crypto ETFs may shut, with established firms like BlackRock and Fidelity dominating the market share at lower costs.
U.S. regulators approved spot cryptocurrency ETFs in January 2024, sparking a surge in new funds—130 launched since then, attracting tens of billions in assets. However, many newer crypto ETFs carry higher fees and lack investor traction, putting them at risk of closure within two years, according to Morningstar Direct data. Analysts warn that as many as 30-35% of these funds could liquidate, disrupting investor positions and potentially triggering capital-gains taxes. Investor demand remains concentrated in low-cost Bitcoin and Ethereum products from major issuers like BlackRock and Fidelity. BlackRock’s iShares Bitcoin Trust ETF (IBIT) and Fidelity’s Wise Origin Bitcoin Fund (FBTC) control roughly 72% of the market with annual fees of 0.25%, pressuring higher-cost competitors. Grayscale Bitcoin Trust ETF (GBTC), charging 1.5% annually, has seen over $26.3 billion in outflows since January 2024 as investors shift to cheaper alternatives. The average Bitcoin ETF holds about $8 billion in assets, nearly triple the $3 billion average for U.S. ETFs overall. Many altcoin-focused funds struggle to meet the $25 million to $100 million threshold needed for viability, leaving them vulnerable. Daniel Sotiroff of Morningstar notes that smaller issuers may subsidize underperforming funds, but the risk of closure remains high. FactSet data shows 12 U.S. crypto ETFs have already shut, with 34 more currently at high risk of closure. While investors don’t lose money in liquidations, forced sales can trigger taxable capital gains and force replacements during volatile markets. Elisabeth Kashner of FactSet explains that liquidated funds sell holdings to cash, distributing proceeds to investors like a dividend. Eric Balchunas of Bloomberg Intelligence estimates that about a quarter of all ETFs typically liquidate, but the crypto ETF rush could see a higher failure rate. The industry’s next phase may see further consolidation as only the most established and low-cost funds survive.
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