Crypto ETFs vs. crypto exchanges and digital wallets

Wall Street or the digital frontier of crypto markets? That’s the choice facing investors seeking exposure to this rapidly maturing asset class, which offers both potential returns and portfolio diversification. The traditional path provides structure and simplicity, while the crypto-native approach allows flexibility and control. Before deciding which one is most appropriate, it’s important to understand the trade-offs.

What is self-custody ?  

Holding crypto directly involves purchasing it through a crypto exchange, which may be unregulated or underregulated. While these platforms are becoming increasingly user-friendly, investors still face the challenge of storing their holdings. They can either trust a third party, like an exchange, or sign up for a digital wallet (known as self-custody).

Opting for a digital wallet means managing a set of ‘keys’- a public key, used to create the wallet address, and a private key to authorize transactions. Securing the private key is crucial because if the holder loses it, they lose access to their funds. Holders must also choose between a ‘hot’ wallet, which is connected to the internet, and a ‘cold’ wallet, which remains offline. Hot wallets are convenient but vulnerable to hacks, whereas cold wallets offer greater security.

What is a crypto ETF?

Crypto ETFs track the performance of an underlying digital asset or basket of assets and trade on mainstream exchanges, just like stocks. They either buy and hold the ‘physical’ crypto or rely on derivatives to replicate its price (referred to as ‘synthetic’ ETFs).

While a synthetic bitcoin product started trading in 2021, the SEC approved the first ETFs tracking bitcoin’s ‘spot’ or live price in January  2024, issued by some of the finance industry’s major players, including BlackRock and Fidelity. Capital has flowed into these products since launch- total assets under management have exceeded $140B as of June 2025.

The current range only track bitcoin and ether, Ethereum’s native token, but the SEC has received over 70 applications for products replicating other cryptos such as SOL, XRP, Litecoin and DOGE. The Commission also recently permitted Grayscale to launch the first product offering exposure to a basket of cryptos, before announcing that the decision was under review.

Risk: what to consider with direct holding

Loss of private keys isn’t the only risk holders face. For instance, third parties are vulnerable to hackers and subject to mismanagement. FTX was one of the leading crypto exchanges when it collapsed in November 2022, owing creditors over $11B, after reports emerged that it had misused customer funds to support its trading arm (reimbursements started in 2025).

Human error can be costly too, as we have seen with many instances of mismanagement of private keys or loss of hard drives storing bitcoins. 

Inconsistent regulation is another risk. The rules governing the crypto sector vary from state to state- some, like New York, have developed specific frameworks, whereas others expect crypto firms to behave like traditional financial institutions. Only one federal law has been passed as of July 2025- regulating stablecoins- although several are in the pipeline.

Why many investors choose ETFs

Crypto ETFs avoid these risks. First and foremost, they remove the burden of custody as the issuer manages the underlying assets, so investors don’t need to worry about the reliability of third parties or managing keys.

Familiarity also plays a part—ETFs have been popular among retail investors since State Street launched the SPDR S&P 500 ETF in 1993. What’s more, trading on traditional exchanges means that crypto ETFs can sit in portfolios alongside assets like stocks and bonds and contribute to overall returns.

Crypto ETFs offer the same protections as their mainstream equivalents. Issuers must regularly disclose holdings, ensure investors are fully informed about a product’s risks, and file financial statements with the SEC twice each year.

From an operational standpoint, crypto ETFs also make life easier when it comes to accounting, tax reporting, and credit relationships. Since they’re structured like traditional securities, they are easier to integrate into existing back-office systems, and their tax treatment is familiar to most accountants. Investors using margin or managing collateral benefit from the fact that ETFs can be pledged or used as credit-enhancing assets—something that’s far more complex with self-custodied crypto.

Plus, on July 29, 2025, the U.S. Securities and Exchange Commission (SEC) approved in-kind creations and redemptions for crypto exchange-traded funds (ETFs), meaning investors who wish to redeem their digital assets will be able to do so.

Conclusion: match your choice to your comfort level

ETFs serve as the main entry point into crypto for many investors, primarily due to their familiarity. They offer the same experience as a mainstream product, but the underlying asset is crypto. Accessible through traditional accounts, they provide ease of mind with security, accounting and they can be used as a collateral to borrow against. Buying directly, on the other hand, is suitable for those who want greater control over their holdings and are tech-savvy, due to the complexity of storage. Self-custody also requires investors to feel comfortable with the risk of managing their own assets or relying on a third party.