The hidden problem with crypto ETFs

ETFs have been one of modern finance’s greatest innovations. They changed investing for millions of everyday people by making diversified investing liquid and accessible. They were products of off-chain financial infrastructure, optimized for the world in which they were conceived.

And that’s the problem: ETFs weren’t built for the onchain world. They were designed for markets that close daily, for settlements that take days, for a system dependent on middlemen to execute creations and redemptions. Layer on high fees and static composition, and what once made sense now looks increasingly outdated. 

We’re in a new era where assets have utility beyond just governance and dividends, where transactions are programmable and executed by code — not people — and where wealth can be grown onchain. It begs the question: why wrap next-generation assets in last century’s designs?​​ Crypto ETFs don’t move the model forward — they retrofit onchain assets into legacy financial structures.

Giving up more than you realize

When you buy an ETF, you own a wrapper around the assets — not the underlying assets themselves. The ETF issuer holds the actual assets, stripping the rights and benefits that come with ownership from you. The Big Three — BlackRock, Vanguard, and State Street — account for almost 60% of global ETFs with over $11 trillion in assets, wielding enormous voting power on your behalf. Most ETF investors have no say in how the companies they invest in are governed.

This problem gets worse in crypto, where assets often bestow staking rewards, governance rights, airdrops, lending opportunities, and other token utility when you hold the asset directly. Crypto ETFs may track price, but they don’t pass through the onchain benefits of direct ownership.

Crypto ETF investors also can’t trade when equity markets are closed, despite spot crypto markets operating 24/7. This inequality leaves ETF investors offside during any overnight volatility. Then come the limitations on asset inclusion. Investors are given pre-packaged options with no room for personalization. Not only do ETFs not exist for most cryptocurrencies, but the ETFs that do exist may include tokens you don’t believe in — or would prefer to exclude. 

Finally, the biggest downside for investors is the fees, which have driven unprecedented profits for issuers like BlackRock. Grayscale’s Bitcoin ETF charges 150 basis points. To put that in context, that’s 15 times the fee of SPY, the most popular ETF that tracks the S&P 500. For retail investors, this means paying ongoing ETF fees for limited exposure, even though they could buy and hold Bitcoin (BTC) directly on platforms like Coinbase without any custody costs.

Closing the personalization gap 

High-net-worth investors avoid ETFs as part of their core holdings. Instead, they replicate the index by buying the underlying stocks directly (a process called direct indexing). Not only does this give them voting rights, but it also unlocks something much more important: tax optimization. When you own the underlying assets, you can choose which ones to buy or sell, and when. During tax season, this control matters — hold the winners, sell the losers, then use those losses to offset gains. Meanwhile, ETF investors can only buy or sell the entire index. 

But the real breakthrough is onchain personalization. Portfolios can be built with customizable weights and exclusion lists, dynamic reallocation to new assets, immediately rebalance on dips, and decide when and how an individual asset sells, rather than having them stuck in an ETF wrapper. With onchain assets, this flexibility means choosing where to lend and earn yield at the asset level, which was never an option off-chain. The decimalization of onchain assets means anyone can now direct index, whether you’re investing $10 or $10 million. 

The infrastructure already exists to do this better. High-throughput blockchains like Base or Solana (SOL) make this kind of continuous, automated management practical with near-zero fees. Smart contracts are the new middle manager, automating portfolio management while you maintain ownership. They run continuously, executing strategies 24/7 without manual intervention. Unlike the clunky UX that defined early crypto, the new generation of systems hides all the complex steps under the hood, abstracting gas fees, signing multiple transactions, and cross-chain bridging.

Accessibility as a handicap

Crypto ETF evangelists say they make crypto more accessible through familiarity and regulatory clarity. It feels safer to buy something through existing brokerage accounts presented by legacy institutions. But accessibility shouldn’t require giving up the core benefits of an investment. Crypto investors shouldn’t have to choose between traditional interfaces and actual ownership, and that’s what the next generation of crypto apps needs to offer: the same familiarity and safety as traditional brokerage accounts with a much-needed focus on long-term diversified investing. The ease of buying an ETF will be the same as buying a custom, direct-indexed ETF built onchain. Investors won’t have to surrender control, transparency, and the ability to use their assets for governance or lending.

There have been some attempts at onchain solutions, such as tokenized ETFs, but most just replicate the wrapper model. The problem is that once tokenized, trading of that ETF is bound by the liquidity of the wrapper and not the liquidity of the underlying. For example, Bitcoin and Ethereum (ETH) have deep liquidity, whereas a tokenized 50/50 BTC and ETH index doesn’t. These tokenized ETFs miss the point entirely by trying to offer outdated financial primitives to an audience that is deeply crypto-native and aware of the utility that comes from direct ownership. The wrapper is the wrong model.

Crypto’s new destination

Between 2024 and 2025, the global ETF market grew from $11.5 trillion to over $15 trillion, and projections suggest it will reach $30 trillion by 2030. I see a different world: the world’s assets are moving onchain and can finally be freed from their wrappers. The future gives every investor direct ownership of their assets without middlemen and all of the novel utility that comes with ownership — a world where portfolios are automated, executed cross-chain seamlessly, and built for digital-native assets.

ETFs were brilliant for their time, solving real problems that existed in the 1990s — but we’re not living in the past century anymore. Instead of trying to adapt ETFs for crypto, we should be building new tools for the future of finance. The infrastructure for this new reality already exists. We just need the courage to use it.