Cryptocurrency investing at Schwab

The topic of cryptocurrency has been in the media for years, but we're now seeing it take a more prominent place in the mainstream investing landscape with more advisors—and their clients—expressing interest in this asset class. If you're new to the discussion, you're not alone. In fact, 88% of advisors received questions about cryptocurrency from their clients in 2023, which was reflected in the Bitwise/VettaFi 2024 Benchmark Survey of Financial Advisors Attitudes Toward Crypto Assets conducted in January 2024.

This article will provide an overview of how cryptocurrency works, insight into why it has become so popular, and how you can gain exposure to cryptocurrency through Schwab.

Cryptocurrency basics

Cryptocurrency is a virtual (or digital) currency secured through one-way cryptography. It appears on a distributed ledger called a blockchain that is transparent and shared among all users in a permanent and verifiable way.

The original intent of cryptocurrency was to allow parties to make online payments to each other without the need for a central third-party intermediary, like a bank. However, with the introduction of smart contracts, non-fungible tokens, stablecoins, and other innovations, additional uses and capabilities are rapidly evolving.

Cryptocurrency's value stems from a combination of scarcity and the perception that it is a store of value, an anonymous means of payment, or a hedge against inflation. You can buy or sell cryptocurrency directly in a spot market, or you can invest indirectly in a futures market or in investment products that provide cryptocurrency exposure.

Why are cryptocurrencies so popular?

Cryptocurrencies appeal to investors for many reasons. Some see them as the currency of the future and want to buy them now because they believe that they will become more valuable. A prime example is bitcoin, the most popular of the cryptocurrencies, with an estimated total market cap of about $1.3 trillion as of March 15, 2024.1 Other investors are mainly interested in the underlying blockchain technology because they see it as more secure than traditional payment systems.

Ways to invest in cryptocurrency at Schwab

Schwab has several choices for gaining exposure to the cryptocurrency markets, though spot trading of cryptocurrency is not currently available.

Cryptocurrency-related ETFs

Several ETFs with cryptocurrency-related investments have been available for several years. This type of ETF does not invest directly in cryptocurrencies such as bitcoin but may invest in companies that operate in the digital asset and cryptocurrency ecosystem. For example, these may include companies that offer trading, custody, or mining of cryptocurrencies. They may also invest in derivatives such as cryptocurrency futures, which are agreements to buy or sell a specific quantity of bitcoin at a specified price on a particular future date.

More recently, the SEC approved several ETFs that hold spot bitcoin and seek to track the price of bitcoin. A spot bitcoin ETF, or spot cryptocurrency ETF, refers to an ETF that invests directly in bitcoin or other cryptocurrencies, as opposed to investing in derivatives, such as futures. Spot bitcoin ETFs are available at Schwab.

Cryptocurrency-related ETFs carry a substantial level of risk and are not suitable for all investors. Investments in cryptocurrencies are relatively new, highly speculative, and may be subject to extreme price volatility, illiquidity, and increased risk of loss, including your entire investment in the fund. Spot markets on which cryptocurrencies trade are relatively new and largely unregulated, and therefore, may be more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments. Cryptocurrency-related products that use futures contracts to attempt to duplicate the performance of an investment in cryptocurrency may have unpredictable pricing, higher transaction costs, and performance that fails to track the price of the reference cryptocurrency as intended.

Go to the Research tab of Schwab Advisor Center® and use the screener to view all cryptocurrency-related ETFs in the Digital Assets Morningstar Category.

Cryptocurrency Coin Trusts

Cryptocurrency coin trusts, such as GBTC, BCHG, ETHE, OBTC, and LTCN, allow investors to trade shares in trusts holding large pools of a cryptocurrency. However, these products can involve high volatility, hefty fees, commissions, and other risks. They trade over the counter and behave like closed-end funds. These are not appropriate for all investors.

Cryptocurrency Stocks

Some stocks provide indirect and varied exposure to cryptocurrency because their businesses have a focus on electronic payments or products that utilize blockchain or cryptocurrency. Examples of such stocks include COIN, SI, MSTR, SQ, and PYPL.

In summary, we suggest that clients interested in cryptocurrency can approach them as speculative and more high-risk investments and consider their goals as well as the risks involved since cryptocurrencies are also not regulated. There are some potential benefits that can make it attractive to some investors, including the potential for appreciation and the addition of a non-correlated asset for diversification. However, there is still potential for financial loss as cryptocurrency prices have been highly volatile, and fluctuations could result in significant financial losses. Certain cryptocurrency products, like Coin Trusts, can have high expenses, with fees exceeding 2% or more of investment. Given the potential opportunity and increased media coverage, you may start to get more questions from clients on cryptocurrency—especially younger clients.

We'll continue to bring you insights on this important topic, along with updates on any new opportunities to gain exposure to cryptocurrency through the Schwab platform.

What you can do next

  • Get expert perspectives on market and investing trends through the Schwab Center for Financial Research (SCFR) and Schwab Asset Management®.
  • Consider a custodian that invests in your success. If you're thinking about becoming an independent advisor, contact us to learn more about the benefits of a custodial relationship with Schwab.

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1 Source: https://coinmarketcap.com/.

Investing involves risk, including loss of principal. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or geopolitical conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Cryptocurrency-related products carry a substantial level of risk and are not suitable for all investors. Investments in cryptocurrencies are relatively new, highly speculative, and may be subject to extreme price volatility, illiquidity, and increased risk of loss, including your entire investment in the fund. Spot markets on which cryptocurrencies trade are relatively new and largely unregulated, and therefore, may be more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments. Some cryptocurrency-related products use futures contracts to attempt to duplicate the performance of an investment in cryptocurrency, which may result in unpredictable pricing, higher transaction costs, and performance that fails to track the price of the reference cryptocurrency as intended. Please read more about risks of trading cryptocurrency futures here.

Currency trading is speculative, volatile, and not suitable for all investors.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Digital currencies, such as Bitcoin, are highly volatile and not backed by any central bank or government. Digital currencies lack many of the regulations and consumer protections that legal-tender currencies and regulated securities have. Due to the high level of risk, investors should view Bitcoin as a purely speculative instrument.

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.

Virtual Currency Derivatives trading involves unique and significant risks. Please read NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin and CFTC Customer Advisory: Understand the Risk of Virtual Currency Trading.

You should carefully consider whether trading in virtual currency derivatives is appropriate for you in light of your experience, objectives, financial resources, and other relevant circumstances.

Please note that virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Virtual currencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional fiat currencies. Profits and losses related to this volatility are amplified in margined futures contracts.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.