How Crypto ETFs Work (2026)

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A spot crypto ETF is an investment fund traded on traditional stock exchanges that directly holds a cryptocurrency, allowing investors to gain exposure without having to buy the digital asset themselves. Bitcoin and Ethereum ETFs work by holding the underlying assets 1:1, facilitated by custodian wallets which are verifiable on-chain.

Leading asset management firms, such as BlackRock, Fidelity, and Grayscale, have become the biggest providers in this space. When these ETFs are bought or sold, they finalize on a T+1 basis (BlackRock's IBIT finalises on a T+2 basis). This means the on-chain confirmation occurs a day (or two) after the purchase is announced.

ETF providers are able to settle on a T+1 basis by using sophisticated custody and creation/redemption processes, managed by institutional partners.

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This guide walks through the fundamentals of how ETFs work, why they are significant, and how to use on-chain analysis with Arkham Intelligence to monitor ETF inflows, outflows, and holdings and use the information to make more informed trading decisions. 

Summary

• A spot crypto ETF is an investment fund traded on traditional stock exchanges that directly holds a cryptocurrency, allowing investors to gain exposure without having to buy the digital asset themselves.
  
  
• Bitcoin and Ethereum ETFs work by holding the underlying assets 1:1, facilitated by custodian wallets which are verifiable on-chain.
  
  
• Arkham Intelligence allows anyone to track ETF wallet balances, inflows, and outflows, all in real-time.
  
  
• The gap between traditional finance and the crypto world is narrowing and the flow of capital in crypto markets has been permanently altered by ETFs.

What is an ETF?

An Exchange-Traded Fund (ETF) is an investment vehicle that trades on a stock exchange, just like the shares of companies that most investors are familiar with. However, instead of being a single company’s stock, an ETF represents ownership in a basket of assets such as stocks, bonds, commodities, or in this case, a single digital asset like Bitcoin or Ethereum.

A key point of difference in purchasing a share of an ETF as compared to buying a company’s stock, is that as an ETF shareholder, you are not the owner of the underlying asset. Instead, you own shares of the fund that holds the underlying asset. This is different to buying shares in companies like Nvidia and Apple, where the shares you own are representative of direct ownership in the company.

For each of these ETFs, there are several key players involved, including:

• Issuer: The Issuer is the company creating the ETF, such as BlackRock, Grayscale, Fidelity and many more companies.
• Custodian: The Custodian is the company that holds the underlying asset for the fund. For the majority of crypto ETFs, Coinbase serves as their custodian.
• Authorized Participants: Authorized Participants are large, well-capitalized financial institutions that facilitate the creation and redemption of ETF shares, through working with the Issuers and Custodians.

How Does a Bitcoin ETF Work?

Bitcoin ETFs are backed 1:1 by actual BTC.

When investors invest into the ETF to create new shares, cash paid by the investor is sent to the Authorized Participant, which is transferred to the Issuer. The Issuer then swaps the cash for BTC, which is then stored securely by the Custodian. The ETF shares are then issued to the investor.

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When a redemption occurs, the inverse occurs. The Issuer sells BTC held with the Custodian for cash, which is transferred to the Authorized Participant, to be returned to the investor.

Since these ETFs hold real Bitcoin, the holdings of Bitcoin ETFs can be easily verified on-chain. Tracking wallets managed by the custodians of the respective Bitcoin ETFs therefore provides transparency to investors that their assets are truly backed by real Bitcoin.

How Does an Ethereum ETF Work?

Ethereum ETFs work much like Bitcoin ETFs, with shares backed directly by ETH held by a custodian. However, with Ethereum, staking adds a new layer of complexity.

Ethereum’s proof-of-stake (PoS) mechanism enables ETH holders to earn yield by staking their assets to help validate the network. While US investors were initially limited to non-staking funds, the regulatory landscape has begun to shift. Although the SEC initially blocked staking rewards for spot ETFs, Grayscale successfully introduced staking functionality to its Ethereum products (the Grayscale Ethereum Trust) in late 2025, making it a standout in the US market.

Major competitors like BlackRock and Fidelity are still navigating regulatory delays for similar features. Outside the US, staking funds have long been established, with the biggest global examples including the CoinShares Physical Staked Ethereum ETP and the 21Shares Ethereum Staking ETP in Europe, as well as the 3iQ Ether Staking ETF in Canada.

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The other regulatory hurdle for Ethereum was its classification as an asset. For years, regulators debated whether Ethereum should be classified as a security or a commodity. Despite no explicit clarification from the SEC, the approval of Ethereum ETFs was seen to be an implicit classification of Ethereum as a commodity, just like Bitcoin.

The Clarity Act, a crypto market structure bill, that is currently making its way through Congress seeks to clarify what is considered a commodity and what is considered a security in the US. Commodities are regulatedf by the CFTC whilst securities are regulated by the SEC.

When Were Crypto ETFs Approved?

The spot Bitcoin ETF was first approved on January 10th, 2024, by the US SEC. The approval was a momentous decision for the crypto industry after more than 10 years of rejection since the Winklevoss twins submitted the first filing for a Bitcoin ETF, the Winklevoss Bitcoin Trust, in 2013.

Just 4 months after the initial Bitcoin ETF approval, the US SEC approved spot Ethereum ETFs through the acceptance of their 19b-4 filings.

The political catalyst which finally tipped the SEC towards the approval of spot crypto ETFs after years of dismissal came in Grayscale’s legal victory against the US SEC in August 2023, in which Grayscale questioned the difference in treatment of crypto futures ETFs and crypto spot ETFs. The lawsuit forced the US SEC into a corner, eventually forming the driving force for the US SEC to work with Bitcoin ETF issuers to finalize their filings, leading to their landmark approval in January 2024.

Why Are Spot Crypto ETFs So Significant?

Although crypto trading has been around for more than a decade now, the spot crypto ETFs remain a hugely important turning point for the industry for many reasons. Spot crypto ETFs significantly increased the accessibility of crypto investment to the average retail investor. Spot crypto ETFs removed technical barriers to entry such as wallet setup and seed phrase management, which often paralyze new investors in the crypto space.

Moreover, the approval of the US SEC has provided the industry with the much needed legitimacy for an industry that, to much of the general public, seemed to only exist for crime and speculation. This was especially so with memories of the FTX bankruptcy and the Terra-Luna collapse still fresh in the minds of many retail investors.

Finally, but perhaps most importantly, the approval of spot crypto ETFs opened the doors of the crypto market to the multi-trillion dollar asset management industry, channeling a new wave of capital to grow the industry further.

Which are the Biggest ETFs?

‍The spot crypto ETF market has grown significantly, with BlackRock and Fidelity becoming the dominant leaders. According to data from SoSoValue.com, the top 5 largest ETFs by Assets Under Management (AUM) are:

1. BlackRock iShares Bitcoin Trust (IBIT): ~$76 Billion
2. Fidelity Wise Origin Bitcoin Fund (FBTC): ~$18 Billion
3. Grayscale Bitcoin Trust (GBTC): ~$15.6 Billion
4. BlackRock iShares Ethereum Trust (ETHA): ~$11 Billion
5. Grayscale Bitcoin Mini Trust (BTC): ~$4.3 Billion

BlackRock’s IBIT is the clear frontrunner. It made history by becoming the fastest ETF to ever surpass $70 billion in AUM, achieving in under a year what took previous record-holders significantly longer.

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Beyond Bitcoin and Ethereum, the market has expanded to other major assets. Both Solana and XRP ETFs have seen impressive adoption, with each category successfully crossing the $1 billion AUM milestone. This success signals a widening appetite among investors for diversified crypto exposure beyond just the top two coins.

A notable change in the traditional finance world was Vanguard’s decision to soften its stance. After years of blocking crypto products, the investment giant finally updated its policy in late 2025 to allow clients to trade crypto ETFs on its platform.

While Grayscale remains a top-tier issuer with massive holdings in GBTC and ETHA, its older trust products experienced significant outflows following their conversion to ETFs. Investors who had bought shares at a discount in previous years sold them to lock in profits once the price gap closed. To counter this, Grayscale successfully launched "Mini Trusts" (like the Grayscale Bitcoin Mini Trust) with lower fees, which have quickly become some of the largest funds in the market.

How To Keep Track of ETFs?

Using Arkham Intelligence, anyone can now keep track of the holdings of spot crypto ETFs.

1. Begin by searching for the respective entity you wish to track, for example: "BlackRock iShares Bitcoin Trust (IBIT)".

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2. Identify addresses linked to the respective ETF and assign custom labels to them as necessary.

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3. Users can also create custom alerts via Arkham to receive real-time notifications for movements in and out of the respective ETF addresses. Filters may also be used to narrow down to specific tokens, transaction values, chains and entities.

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How to Make Sense of Inflows and Outflows?

Crypto transfers on Arkham can be broken down into two main types: inflows and outflows.

Inflows represent new money entering an ETF product. On-chain, this translates to the custodian wallets acquiring more BTC or ETH to back the new shares. 

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Outflows, on the other hand, represent money leaving the ETF product.  On-chain, this is seen as the custodian wallets sending BTC or ETH out, usually to a centralized exchange, to be sold to meet investor redemptions.

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ETF providers typically report inflow and outflow data on the evening of the same day the trading occurs. For example, BlackRock generally releases flow data for its IBIT ETF after the market closes on a given day, occasionally the morning after. 

The on-chain movement of the crypto assets themselves, however, typically settle on a T+1 basis, or the following business day. So, if IBIT processed $200M in redemptions on Monday and reported it that evening, the corresponding crypto would be seen moving on-chain on Tuesday.

The value of on-chain data, therefore, is not necessarily in being the first signal, but in providing ultimate transparency. It allows anyone to publicly verify that the reported flows have settled and that the fund's holdings are what they claim to be.

Conclusion

The approval of Bitcoin and Ethereum ETFs fundamentally altered the flow of capital in crypto markets. The SEC's new listings framework altered the flow of capital even more, leading to the launch of may more spot and staking ETFs from a range of different digital assets. Spot crypto ETFs provide increased accessibility and regulatory legitimacy, bridging the gap between traditional finance and the digital asset space.

Thanks to on-chain analysis, anyone, even the average retail investor, is able to audit on-chain flows, and make more informed investment decisions. With tools like Arkham Intelligence, you can track ETF wallets, monitor inflows and outflows, and gain insights into billions of dollars moving through the blockchain.

Looking forward, ETFs are just the beginning for this new era for crypto. The gap between traditional finance and the crypto world is narrowing and it is not just crypto entering the TradFi world, the reverse is happening too. As tokenization continues to expand, everything from real estate to commodities could soon be represented and traded as digital assets on a blockchain.