Bitwise Pushes Crypto ETF Boundaries with 11 New Strategy Funds Targeting DeFi and AI Tokens

The cryptocurrency ETF landscape is about to get significantly more diverse. According to CoinDesk, Bitwise Asset Management has filed applications for 11 new crypto strategy ETFs that will provide exposure to tokens including AAVE, Zcash (ZEC), and Bittensor (TAO). This ambitious expansion represents a bold step beyond the Bitcoin and Ethereum funds that have dominated the crypto ETF space, potentially opening traditional investment channels to decentralized finance (DeFi), privacy coins, and artificial intelligence tokens.

Breaking New Ground in Crypto ETF Innovation

The filing marks a significant evolution in how institutional investors can access cryptocurrency markets. While Bitcoin and Ethereum ETFs have paved the way for mainstream crypto adoption, Bitwise's latest applications signal growing demand for more specialized exposure to the broader digital asset ecosystem.

These new strategy ETFs will employ both direct and indirect investment approaches, allowing the funds to navigate the complex regulatory landscape while providing investors with exposure to tokens that represent some of the most innovative sectors in cryptocurrency. The inclusion of AAVE, a leading DeFi lending protocol token, Zcash, a privacy-focused cryptocurrency, and Bittensor, an AI-focused blockchain network, demonstrates the breadth of Bitwise's vision for crypto investment products.

The Strategic Significance of Diversified Crypto ETFs

Moving Beyond Bitcoin and Ethereum

The crypto ETF market has experienced explosive growth since the approval of spot Bitcoin ETFs in early 2024, followed by Ethereum ETFs later in the year. However, these products only scratch the surface of the cryptocurrency universe. According to CoinMarketCap, there are thousands of cryptocurrencies with legitimate use cases and growing market capitalizations that remain inaccessible to traditional investors through regulated investment vehicles.

Bitwise's expansion into strategy ETFs addresses this gap by providing institutional-grade access to tokens that power specific blockchain ecosystems and use cases. This approach allows investors to gain targeted exposure to themes like decentralized finance, privacy technology, and artificial intelligence without the complexity of directly managing digital wallets or navigating cryptocurrency exchanges.

DeFi Tokens Enter the Mainstream

The inclusion of AAVE in Bitwise's ETF lineup is particularly noteworthy. As the governance token of one of the largest decentralized lending protocols, AAVE represents the potential of decentralized finance to reshape traditional banking and lending. The protocol has facilitated billions of dollars in lending activity and has become a cornerstone of the DeFi ecosystem.

However, bringing DeFi tokens into ETF structures presents unique regulatory challenges. These tokens often grant governance rights in decentralized protocols, raising questions about how traditional fund structures will handle voting and protocol participation. The SEC and other regulators will need to consider how these governance features align with existing investment company regulations.

Regulatory Hurdles and Compliance Considerations

Privacy Coins Face Scrutiny

Perhaps the most intriguing aspect of Bitwise's filing is the inclusion of Zcash, a privacy-focused cryptocurrency that uses zero-knowledge proofs to enable confidential transactions. Privacy coins have faced increasing regulatory scrutiny globally, with some exchanges delisting them due to compliance concerns related to anti-money laundering (AML) and know-your-customer (KYC) requirements.

The inclusion of ZEC in an ETF structure could provide a test case for how regulators view privacy-preserving technologies within traditional investment products. If approved, it would represent a significant validation of privacy coins' legitimacy in regulated markets, potentially setting a precedent for other privacy-focused digital assets.

AI Tokens and Emerging Technologies

Bittensor (TAO) represents another frontier in crypto ETF evolution. As the native token of a decentralized artificial intelligence network, TAO provides exposure to the intersection of blockchain and AI technologies. The protocol incentivizes the creation and sharing of machine learning models through a blockchain-based marketplace, positioning it at the forefront of two of technology's most transformative trends.

The inclusion of AI-focused tokens in ETF structures reflects growing institutional interest in blockchain projects that extend beyond traditional financial applications. As artificial intelligence becomes increasingly central to technological innovation, tokens like TAO could provide investors with exposure to the decentralized AI economy.

Market Demand and Institutional Appetite

Growing Sophistication in Crypto Investing

The breadth of Bitwise's new ETF applications suggests that institutional investors are becoming more sophisticated in their cryptocurrency allocations. Rather than seeking broad exposure to the entire crypto market, investors are increasingly interested in targeted strategies that align with specific themes or use cases.

This trend mirrors developments in traditional equity markets, where thematic ETFs focusing on areas like clean energy, cybersecurity, or genomics have gained popularity among investors seeking exposure to specific technological or social trends.

Addressing the Access Gap

For many institutional investors, direct investment in cryptocurrencies remains challenging due to custody concerns, regulatory uncertainty, and operational complexity. ETFs provide a familiar wrapper that allows these investors to gain crypto exposure while maintaining their existing operational frameworks and compliance procedures.

Strategy ETFs that focus on specific crypto sectors could be particularly appealing to investors who understand and believe in particular blockchain use cases but lack the expertise or infrastructure to invest directly in the underlying tokens.

Technical and Operational Considerations

Fund Structure and Management

Bitwise's strategy ETFs will likely employ a combination of direct token holdings and indirect exposure through derivatives or other financial instruments. This hybrid approach allows fund managers to optimize for factors like liquidity, custody security, and regulatory compliance while still providing meaningful exposure to the target assets.

The operational complexity of managing multi-token crypto funds cannot be understated. Unlike Bitcoin or Ethereum ETFs that focus on a single asset, strategy funds must navigate the custody, valuation, and risk management challenges associated with multiple tokens across different blockchain networks.

Liquidity and Market Making

One potential challenge for specialized crypto ETFs is ensuring adequate liquidity, particularly for smaller-cap tokens that may have limited trading volumes. Market makers and authorized participants will play crucial roles in maintaining tight bid-ask spreads and efficient price discovery for these new products.

What This Means for the Crypto Industry

Legitimacy and Mainstream Adoption

The potential approval of ETFs covering DeFi, privacy, and AI tokens would represent a significant milestone in cryptocurrency's journey toward mainstream acceptance. Regulatory approval of these products would signal that authorities view these token categories as legitimate investment assets worthy of inclusion in traditional portfolios.

Innovation Incentives

Access to traditional investment capital through ETF structures could provide significant funding and legitimacy to blockchain projects in these sectors. This capital flow could accelerate innovation and development in DeFi, privacy technology, and decentralized AI.

Looking Ahead: The Future of Crypto ETFs

Bitwise's ambitious filing represents just the beginning of what could be a wave of specialized crypto investment products. As the regulatory framework continues to evolve and investor sophistication grows, we can expect to see even more targeted crypto ETFs focusing on specific sectors, use cases, or investment strategies.

The success of these strategy ETFs will likely depend on several factors: regulatory approval timelines, market demand from institutional investors, and the underlying performance of the target tokens. However, the mere filing of these applications demonstrates the crypto industry's continued maturation and integration with traditional financial markets.

For investors, these products could provide new ways to participate in the cryptocurrency economy while maintaining the regulatory protections and operational simplicity of traditional investment vehicles. As the crypto market continues to evolve and diversify, strategy ETFs may become essential tools for capturing the full potential of blockchain innovation.

The crypto ETF revolution that began with Bitcoin is clearly far from over, and Bitwise's latest filing suggests that the most interesting chapters may still be ahead.

Sources

• CoinDesk: "Bitwise files for 11 'strategy' ETFs, tracking tokens including AAVE, ZEC, TAO" - https://www.coindesk.com/markets/2025/12/31/bitwise-files-for-11-strategy-etfs-tracking-tokens-including-aave-zec-tao