Maximizing Passive Income with Index Funds and ETFs in the Crypto Space

Main insights

• Crypto index funds and ETFs offer varied exposure to digital currencies, aiding investors in generating passive income without the need for active portfolio management.

• There are both centralized and decentralized alternatives, with ETFs listed on stock exchanges and DeFi-native index tokens available through Web3 wallets.

• Revenue streams encompass asset appreciation, staking, DeFi returns, and covered call tactics, contingent on the fund’s framework — not all funds will accommodate every source.

• Potential hazards involve market fluctuations, smart contract risks, and management fees, making thorough research essential prior to investing.

If you’re interested in putting money into crypto but prefer to avoid the pressures of continual trading, passive investing could be your optimal choice. Similar to conventional finance, crypto index funds and exchange-traded funds (ETFs) provide access to a wide array of digital currencies, enabling you to benefit from the market without selecting specific winners.

These financial vehicles can act as effective means for creating passive crypto income, and with the growth of decentralized alternatives and tokenized ETFs, the options are rapidly increasing.

This article will detail how you can earn passive income by investing in digital asset vehicles like index funds and crypto ETFs.

What are crypto index funds and ETFs?

Both crypto index funds and ETFs are structured to give investors access to a diversified selection of cryptocurrencies without requiring active management or rebalancing of their holdings. However, they exist in various formats, designed for distinct kinds of investors.

A crypto index fund is a collective investment vehicle that tracks a selected group of cryptocurrencies, typically the top 10 or 20 by market capitalization. These funds undergo periodic rebalancing to reflect market dynamics, providing passive, long-term engagement with the crypto landscape.

Consider them the crypto counterpart to mutual funds, generally available through crypto-focused platforms. Index funds can be:

A crypto ETF, on the other hand, is a fund traded on conventional stock markets (like the NYSE) that reflects the value of a particular cryptocurrency or a collection of digital assets. Investors can buy and sell ETF shares similar to regular stocks, making them suitable for individuals who want crypto involvement through their brokerage accounts.

Some ETFs are exclusively focused on Bitcoin (BTC) (such as ProShares’ BITO). Conversely, others combine several assets or even incorporate strategies like covered calls to generate income (like Harvest Portfolio’s high-yield crypto ETFs).

Why opt for crypto index funds and ETFs for passive income?

In the crypto realm, passive income refers to earning money from your assets without actively engaging in trading or managing them day-to-day. Considering the volatility of markets, employing a hands-off approach can facilitate gradual wealth growth while reducing emotional decision-making. This is where index funds and ETFs become beneficial.

These instruments provide inherent diversification, distributing risk across a range of assets, ensuring that you’re not wagering everything on a single currency. They are perfect for long-term investors looking to capitalize on crypto’s potential while avoiding constant tinkering with their portfolios.

Common methods by which crypto index funds and ETFs can produce passive income:

• Appreciation of underlying assets, like BTC, Ether (ETH), Solana (SOL), etc.

• Staking rewards (for those funds that include proof-of-stake assets)

• DeFi yields (for decentralized index tokens)

• Income distributions: monthly or scheduled (offered by certain crypto ETFs).

These vehicles are ideal for long-term investors desiring exposure with diminished risk and effort. Whether you’re in pursuit of yield, growth, or peace of mind, crypto index products enable you to engage in the ecosystem without putting all your resources into any single venture.

Did you know? After more than a decade of expectation, the US Securities and Exchange Commission approved 11 spot Bitcoin ETFs in January 2024, including offerings from BlackRock, Grayscale, and ARK Invest. This monumental decision granted conventional investors regulated access to Bitcoin, significantly enhancing institutional involvement in the crypto sphere.

Examples of crypto index funds for passive investing in 2025

In 2025, numerous crypto index funds have surfaced as leading options for passive investors:

• Bitwise 10 (BITW): The Bitwise 10 crypto index fund offers access to the top 10 cryptocurrencies by market capitalization. Rebalanced on a monthly basis, it provides investors a method to engage in the broader performance of the crypto market without the necessity of managing individual assets. BITW is available through traditional brokerage accounts, making it appropriate for both institutional and retail investors pursuing diversified crypto exposure, as illustrated below.

• TokenSets: TokenSets presents a range of decentralized index products, including the DeFi Pulse Index (DPI) and the Metaverse Index (MVI). These indexes operate entirely on-chain, permitting transparent and automated portfolio management through smart contracts. Investors can hold these index tokens within their wallets, stake them for extra yield, or utilize them across various DeFi protocols, merging diversification with the advantages of DeFi.

• Nasdaq Crypto Index (NCI): The NCI monitors the performance of a diverse collection of USD-traded digital assets, heavily weighted towards Bitcoin. It includes several leading cryptocurrencies, such as ETH, SOL, XRP (XRP), and more.

By choosing the right fund, investors can align their crypto investments with their risk tolerance and financial objectives.

Examples of crypto ETFs for passive investing in 2025

The landscape for crypto ETFs has changed swiftly, particularly since the approval of Bitcoin ETFs in the US at the beginning of 2024. These products provide traditional investors easier, regulated access to crypto markets without necessitating wallets, exchanges, or private keys.

Some of the most discussed and high-yielding crypto ETFs in 2025:

• ProShares Bitcoin Strategy ETF (BITO): BITO was the first Bitcoin futures ETF approved in the US, launching in October 2021. Rather than tracking the spot price of Bitcoin,

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it follows CME Bitcoin futures agreements, rendering it a viable choice for US investors seeking crypto exposure through traditional brokerage platforms. Although it doesn’t possess actual BTC, its accessibility and liquidity have established it as a staple in numerous portfolios.

These ETFs are gaining traction not solely because they monitor crypto assets, but due to their design for generating passive income, a characteristic particularly appealing in today’s unpredictable market. They symbolize the convergence of conventional finance infrastructure and innovative crypto-based income methodologies.

How to invest in crypto ETFs and index funds?

• Centralized platforms: You can utilize stockbrokers (for ETFs like BITO, Purpose, etc.) or crypto exchanges such as Coinbase, Binance or Bitwise for index-style funds.

• Decentralized platforms: Link a Web3 wallet (such as MetaMask) on platforms like Index Coop or TokenSets to create your own custom indexes or utilize existing ones like the DeFi Pulse Index (on Index Coop).

Hodling vs. trading crypto ETFs and the risks involved

Passive investing revolves around hodling rather than trading. Nonetheless, crypto ETFs can still be bought and sold like stocks, providing investors:

• Liquidity in fluctuating markets

• Tax harvesting opportunities

• Flexibility to exit positions as necessary.

However, frequent ETF trading might undermine the essence of a passive strategy, so it’s generally wiser to buy and hodl for the long term.

Risks to keep in mind

While passive income appears enticing, crypto index funds and ETFs carry their own risks:

• Market volatility: Your portfolio value will vary with the crypto market.

• Smart contract risks: Particularly with decentralized index funds.

• Management fees: Some funds impose 1%-2% annually, which can diminish profits.

• Tracking error: Index products may not accurately reflect the performance of the underlying asset.

Ensure to examine the fund composition, rebalance strategy, and yield mechanism before investing.

Taxation of crypto ETFs and index funds’ passive income

Tax regulations vary significantly based on your jurisdiction:

• In the US, ETFs are taxed according to capital gains (short-term or long-term).

• Token sales from index funds are treated similarly to any crypto asset.

• Staking rewards within index products may be subject to taxation as income.

In the US, the tax treatment of decentralized index funds (e.g., tokenized funds like DPI) may be more intricate compared to centralized ETFs due to their connection with DeFi protocols, potentially involving additional taxable events (e.g., token swaps during rebalancing). Always consult a tax advisor, particularly when dealing with DeFi protocols or cross-border platforms.

Is passive crypto income worth it?

If you believe in the long-term expansion of crypto but prefer not to endure the daily ups and downs, crypto ETFs and index funds provide a savvy way to remain engaged.

They amalgamate:

• Diversification

• Automation

• Yield potential.

Whether you choose centralized or decentralized, passive crypto investing is becoming increasingly attainable each day. In a realm where tokenized ETFs, on-chain robo-advisers, and AI agents are on the rise, the distinction between traditional finance and decentralized finance continues to merge.

So, relax, earn yield, and let your portfolio do the work.

This article does not provide investment advice or recommendations. Every investment and trading decision carries risk, and readers should perform their own research before making a decision.