Key takeaways
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Crypto index funds and ETFs offer diversified access to digital assets, enabling investors to generate passive income without the need for active portfolio management.
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Both centralized and decentralized options are available, with ETFs traded on stock exchanges and DeFi-native index tokens accessible through Web3 wallets.
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Income sources can include asset appreciation, staking, DeFi yields, and covered call strategies, depending on the fund’s structure — though not every fund encompasses all these avenues.
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Risks encompass market volatility, smart contract vulnerabilities, and management fees, making thorough research essential before investing.
If you aim to invest in crypto without the hassle of continuous trading, passive investing could be the ideal option. Similar to traditional finance, crypto index funds and exchange-traded funds (ETFs) provide exposure to a broad array of digital assets, allowing you to benefit from market trends without selecting individual assets.
These financial instruments serve as effective means to earn passive crypto income, and with the growth of decentralized alternatives and tokenized ETFs, choices are expanding rapidly.
This article will discuss how to earn passive income by investing in digital asset instruments such as index funds and crypto ETFs.
What are crypto index funds and ETFs?
Crypto index funds and ETFs aim to give investors access to a diversified portfolio of cryptocurrencies without requiring active management or rebalancing. They are tailored for various types of investors.
A crypto index fund is a pooled investment vehicle that tracks a selected group of cryptocurrencies, typically the top 10 or 20 by market capitalization. These funds are periodically rebalanced to adapt to market changes, providing passive, long-term exposure to the cryptocurrency market.
Consider them the crypto equivalents of mutual funds, generally available through crypto-native platforms. Index funds can be:
A crypto ETF, in contrast, is a fund traded on conventional stock exchanges (like the NYSE) that mirrors the price of a specific cryptocurrency or a collection of digital assets. Investors can buy and sell ETF shares just like traditional stocks, making them suitable for those seeking crypto exposure through their brokerage accounts.
Some ETFs focus solely on Bitcoin (BTC) (such as ProShares’ BITO), while others combine multiple assets or even implement covered call strategies to generate yield (like Harvest Portfolio’s high-income crypto ETFs).
Why use crypto index funds and ETFs for passive income?
In the crypto space, passive income refers to earning from your holdings without actively trading or managing them daily. Given the market’s volatility, adopting a hands-off approach can help you steadily grow your wealth while reducing emotional decision-making. That’s where index funds and ETFs shine.
These products provide inherent diversification, distributing risk across various assets to minimize reliance on any single coin. They are ideal for long-term investors who wish to capitalize on the potential growth of crypto without constant portfolio adjustments.
Typical ways crypto index funds and ETFs generate passive income include:
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Appreciation of underlying assets, such as BTC, Ether (ETH), Solana (SOL), etc.
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Staking rewards (for funds holding proof-of-stake assets)
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DeFi yields (for decentralized index tokens)
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Income distributions: offered monthly or at specific intervals by some crypto ETFs.
These instruments cater to long-term investors desiring exposure with lower risk and effort. Whether your goal is yield, growth, or peace of mind, crypto index products allow you to engage in the ecosystem without overcommitting to any one asset.
Did you know? After years of anticipation, the US Securities and Exchange Commission approved 11 spot Bitcoin ETFs in January 2024, including offerings from BlackRock, Grayscale, and ARK Invest. This significant decision provided mainstream investors with regulated access to Bitcoin, greatly enhancing institutional engagement in the crypto market.
Examples of crypto index funds for passive investing in 2025
In 2025, several crypto index funds have surfaced as notable options for passive investors:
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Bitwise 10 (BITW): The Bitwise 10 crypto index fund offers exposure to the top 10 cryptocurrencies by market capitalization. It is rebalanced monthly, allowing investors to partake in the overall performance of the crypto market without managing individual assets. BITW is accessible through traditional brokerage accounts, making it suitable for both institutional and retail investors seeking diversified crypto exposure, as illustrated below.
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TokenSets: TokenSets provides a range of decentralized index products, including the DeFi Pulse Index (DPI) and the Metaverse Index (MVI). These indexes are fully onchain, enabling transparent and automated portfolio management via smart contracts. Investors can hold these index tokens in their wallets, stake them for additional yield, or utilize them across various DeFi protocols, combining diversification with DeFi benefits.
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Nasdaq Crypto Index (NCI): The NCI monitors the performance of a diverse set of USD-traded digital assets, predominantly focused on Bitcoin. It encompasses many major cryptocurrencies such as ETH, SOL, 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 of crypto ETFs has evolved swiftly, especially following the approval of Bitcoin ETFs in the US in early 2024. These products facilitate easier, regulated access to crypto markets for traditional investors without the need for wallets, exchanges, or private keys.
Some of the most discussed and promising crypto ETFs in 2025 include:
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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, it follows CME Bitcoin futures contracts, making it a convenient choice for US investors seeking crypto exposure through traditional brokerage platforms. Although it doesn’t hold actual BTC, its accessibility and liquidity have made it a staple in many portfolios.
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Purpose Bitcoin Yield ETF (BTCY): Listed in Canada, the Purpose Bitcoin Yield ETF was one of the first ETFs to blend Bitcoin exposure with a yield strategy. It employs covered call options to produce monthly income, appealing to investors who seek steady cash flow alongside BTC’s long-term growth potential. BTCY has set the stage for a new category of yield-oriented crypto ETFs.
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Harvest Bitcoin and Ethereum Enhanced Income ETF (HBEE): Offered by Harvest Portfolios, HBEE aims to generate substantial monthly income from both Bitcoin and Ether. The fund writes covered calls on BTC and ETH, collecting option premiums while maintaining the underlying assets. It targets investors favoring regular income over speculative trading, balancing crypto exposure with cash flow. However, be mindful that such ETFs may perform less favorably in strongly bullish markets, as covered calls limit upside potential in exchange for premium income.
These ETFs are gaining traction not just for tracking crypto assets, but also because they are structured to produce passive income, a particularly attractive feature in today’s unpredictable market. They exemplify the intersection of traditional finance frameworks and innovative crypto-based income strategies.
How to invest in crypto ETFs and index funds?
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Centralized platforms: You can utilize brokers (for ETFs like BITO, Purpose, etc.) or crypto exchanges such as Coinbase, Binance, or Bitwise for index-style funds.
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Decentralized platforms: Connect a Web3 wallet (like MetaMask) on platforms such as Index Coop or TokenSets to create custom indexes or use existing ones like the DeFi Pulse Index (on Index Coop).
Hodling vs. trading crypto ETFs and the risks involved
Passive investing revolves around holding assets instead of trading them. That being said, crypto ETFs can still be traded like stocks, providing investors with:
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Liquidity during volatile market conditions
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Tax harvesting possibilities
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Flexibility to exit positions as required.
Nonetheless, frequent ETF trading may undermine a passive strategy, so it’s often advisable to buy and hold for the long term.
Risks to keep in mind
While passive income is appealing, crypto index funds and ETFs carry their own set of risks:
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Market volatility: Your portfolio value will fluctuate with the crypto market.
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Smart contract risks: Especially relevant for decentralized index funds.
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Management fees: Some funds charge 1%-2% annually, diminishing profits.
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Tracking error: Index products may not perfectly reflect the performance of the underlying assets.
Always analyze fund composition, rebalancing strategies, and yield mechanisms before investing.
Taxation of crypto ETFs and index funds’ passive income
Tax regulations vary significantly based on your jurisdiction:
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In the US, ETFs are taxed according to capital gains (either short-term or long-term).
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Index fund token sales are regarded as any crypto asset.
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Staking rewards from index products may be subject to income tax.
In the US, the tax treatment of decentralized index funds (e.g., tokenized funds like DPI) can be more intricate compared to centralized ETFs due to their involvement with DeFi protocols, which may entail additional taxable events (e.g., token swaps during rebalancing). It’s advisable to consult a tax adviser, especially regarding DeFi protocols or cross-border engagements.
Is passive crypto income worth it?
If you believe in the long-term growth of crypto but wish to avoid daily market fluctuations, crypto ETFs and index funds offer a strategic way to remain invested.
They encompass:
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Diversification
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Automation
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Yield potential.
Whether you opt for centralized or decentralized options, passive crypto investing is becoming increasingly accessible. In a landscape where tokenized ETFs, on-chain robo-advisers, and AI agents are emerging, the boundaries between traditional finance and decentralized finance are continually blurring.
So, relax, earn yield, and let your portfolio work for you.
This article does not constitute investment advice or recommendations. Every investment and trading decision carries risk, and readers should perform their due diligence prior to making any decisions.
