The first wave of crypto ETFs gave investors access to digital assets through regular brokerage accounts — including tax-advantaged retirement accounts. Given the long-term potential of cryptocurrencies, this looked like a lucrative solution.
But volatility hasn’t gone anywhere. Just last week, $19 billion was wiped out on the bitcoin market due to margin positions — more than during the crash amid Covid in March 2020. Even the FTX collapse in 2022 looked modest in comparison.
Income Crypto ETFs May Be Overrated
Investors from the world of traditional assets like the growth potential of crypto, but not everyone is ready to put up with its volatility.
Many need tools that smooth out sharp swings. Even if it means sacrificing part of the profit.
Now a new wave of ETFs is entering the market. They have higher fees, but also more active management. Instead of simple “buy and hold,” they try to profit from the very volatility of the crypto market.
For cautious investors, such funds look like an interesting option. But, as always, it’s worth taking a closer look.
If you look inside income ETFs, you can see: whether it’s funds purely for crypto or baskets of crypto companies, the final returns are rather disappointing.
Pros and Cons of Income Crypto ETFs
On paper, such funds look attractive: supposedly, you get profit from crypto growth and some payouts along the way. But it’s not that simple.
The main nuance — these ETFs don’t work with crypto itself, but with futures. This allows them to generate income from the difference between long and short contracts.
It looks nice, especially in a bull market. For example, ProShares Bitcoin ETF (ticker BITO) promises a dividend yield of over 50% annually.
But it’s important to look at the final return. BITO shares have dropped almost 20% since the start of the year.
BITO performance year-to-date. Source: Google Finance
Meanwhile, bitcoin itself has grown by more than 20% over the same period. So even with dividends, the return was modest. And if someone has to sell BITO shares, they will take a loss on price and still pay taxes on dividends. You also need to add the standard management fee: 0.95% per year.
How Income ETFs Lose Money Even in a Rising Market
It’s all about futures. ETFs essentially buy an asset with a time premium that gradually “burns off.” In a rising market, this is almost invisible. But in a sideways market, it can hit the portfolio hard.
If you add leverage to this, the result can easily go into the red. And quickly.
ETF Defiance Leveraged Long Income Ethereum (ticker ETHI) entered the market in early October. The fund was designed for returns of 150–200% of Ethereum’s daily performance plus additional income from credit spreads.
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The result? Minus 30% in the first weeks of trading.
The reason — a sell-off with liquidations that occurred on October 10. But looking more broadly, the very mechanism of ETHI is set up so that it will likely lose value simply over time.
Currently, income crypto ETFs are structured so that they can really make money only in a hot market phase. Neither sideways nor falling markets are good for them — in such conditions, they simply lose value.
But the crypto market has long since moved beyond just tokens. Today, there are ETFs for literally everything, and the emergence of funds focused on crypto companies is a logical continuation of this trend.
Income from Crypto Company ETFs Also Comes with Caveats
Since the start of the year, ETFs tracking shares of companies related to the crypto industry have begun to appear on the market.
At first glance, such funds look more attractive than classic income ETFs for a single crypto: they offer at least some diversification. Here are a couple of examples.
At the beginning of the year, the REX Crypto Equity Premium Income ETF (ticker CEPI) launched. It pays dividends every month and holds shares of several companies at once: from mining firms to MicroStrategy and even Visa.
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Shares of CEPI have behaved unstably since launch — and that’s in a rising market. But thanks to dividends, the total return was over 20% since the start of the year, which pulled the final yield into positive territory.
Another fund, with a long name YieldMax Crypto Industry Portfolio Option Income ETF (ticker LFGY), shows an annual dividend yield of 19.9%.
Although the LFGY portfolio includes rockets like Coinbase, IBIT and MARA, since launch the fund itself has dropped almost 25%.
LFGY performance year-to-date. Source: Google Finance
Assets under management total less than $200 million. Clearly, investors are in no hurry to jump in. Given such returns in the very first year — it’s quite understandable why.
How to Survive Volatility Wisely
Despite the increasingly close integration of crypto with traditional finance, October’s altcoin sell-off reminded us how wild this market still is.
Cryptocurrency remains extremely volatile. Theoretically, as the market matures, this should smooth out — but for now, swings can reach tens of percent.
Investors just entering crypto are not ready to calmly sit through a 30–50% drawdown. They want growth, but not at any cost. Willingness to sacrifice some profit for less risk is an understandable compromise.
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The problem is that income crypto ETFs do pay income for now, but don’t hold their value. And that’s a serious drawback in the long run.
Given how many new funds are entering the market, competition should push the industry to seek more sustainable solutions.
But for crypto enthusiasts, all this is not a reason to give up owning the real asset. And for those who just want to have crypto in their portfolio, spot ETFs remain the most reliable option.
