ETF boom in crypto in 2026: Opportunity or ticking time bomb?

Over 100 new crypto-related ETF products are expected to appear within the next year – this is predicted by Bitwise based on recent SEC decisions. When on September 17 the commission approved universal listing standards for crypto ETPs, it shortened the product launch process from months to just 75 days. This opened the door for simple and quick implementations.

However, the explosive growth of products hides a serious problem. Crypto market infrastructure – especially the custody system – is not prepared for such scale. Coinbase alone holds assets for most existing crypto ETFs and controls up to 85% of global Bitcoin product holdings. This makes this entity a potential “system bottleneck.”

Centralization as a risk

The discussion about provider concentration is not new, but the scale of the problem can be understood by looking at the entire industry structure. When authorized participants (AP) and market makers need loans, valuations, or asset custody, they rely on a few platforms. For less liquid altcoins, the situation is drastic – lack of sufficient derivatives depth means that each ETF creation or redemption can impact market prices.

In July, the SEC allowed for physical settlement – Bitcoin and Ethereum funds can now receive actual coins instead of cash. This improves tracking of (tracking) results but requires APs to acquire, store, and manage taxes for each basket. This is feasible for BTC and ETH, but for shallow assets, the system creaks.

Liquidity gap as a nail in the coffin

When a new ETF debuts on a token with a limited lending market, APs start demanding wider spreads or withdraw altogether. Then the fund is forced to settle only in cash, and tracking error rapidly increases. Exchanges may suspend trading if reference prices stop updating – a risk that exists even with accelerated approval processes.

Coinbase’s position as a leading custodian is ambiguous. On one hand, it generates increasing revenue; on the other, it makes it a target for competitors. US Bancorp has resumed plans for institutional Bitcoin custody, Citi and State Street are exploring crypto-ETF custody relationships. Their message is simple: do you really want 85% of ETF flows to depend on one counterparty?

Battle for indices and benchmarks

Index providers (CF Benchmarks, MVIS, S&P, and recently CoinDesk and Galaxy) hold quiet power. General standards link qualifications to supervisory agreements and benchmark indices meeting exchange criteria. This determines who designs benchmarks and sets the rules of the game.

Several firms dominate traditional ETF indexing, and crypto follows the same pattern. Asset platforms default to well-known indices, making it harder for new entrants to break through, even if they propose better methodology. For analytical tools like the mix calculator, the choice of underlying index directly impacts potential outcomes.

Spectrum of products: From kings to the latest

Major single-asset (BTC, ETH) More spot BTC/ETH ETFs with zero or low fees from second-tier issuers. Coinbase dominates custody with over 80% share, but banks are returning on a smaller scale. Creations are smooth – SEC allows for physical settlement, spreads are narrow, infrastructure is in place. Competition mainly concerns fees and marketing. This is the coronation of Bitcoin: each new wrapper is a new platform for institutional capital, a source of loans, a reason for banks to build custody.

Altcoins with futures (SOL, XRP, DOGE, LTC, LINK, AVAX) Custody will be shallower and more concentrated – Coinbase plus a few specialists. Smaller custodians will struggle to sign enough agreements. Some funds will be purely single-asset, others will wrap indices linked to futures. APs face real lending constraints – spreads will be wider, creations more episodic. We can expect more frequent “no-arb” periods when tracking error spikes.

Long tail and meme coins (TRUMP, BONK, niche tokens) Very few custodians will handle truly illiquid names. These products may rely on smaller or foreign custodians, increasing operational and cyber risk. Valuations will be based on indices built from several centralized exchanges – each manipulation or wash trading directly pollutes NAV. APs will be linked to the issuers themselves, with creations practically only cash-based. Wide spreads, persistent discounts/premiums, and frequent halts – this is the future.

Baskets and sector indices Custody is usually consolidated with one provider for all components. This amplifies the “single point of failure” problem. During rebalancing days, several shallow altcoins must be liquidated simultaneously – creations may halt if one component fails.

Natural selection and fee wars

ETF.com tracks dozens of closures each year. Funds below $50 million struggle to cover costs. Seyffart from Bloomberg predicts closures by the end of 2026 or early 2027.

New Bitcoin ETFs launched in 2024 with a fee of 20-25 basis points, cutting previous filings in half. As shelf space fills, issuers will further cut fees on flagship products, leaving long-tail funds unable to compete.

Secondary market mechanics first break on shallow assets. When an ETF holds a token with low capitalization and limited lending, demand surges create premiums. If the loan disappears during volatility, APs stop creating – and the premium remains permanently.

For Bitcoin, Ethereum, and Solana, the dynamics reverse. More ETF wrappers deepen spot-derivative links, narrow spreads, and strengthen their status as primary institutional collateral. Bitwise predicts ETFs will absorb over 100% net of the new supply of these three assets – a feedback loop driving adoption.

Regulation and future outlook

General standards exclude actively managed, leveraged, and “innovative” ETPs, which must file individual 19b-4 applications. SEC Commissioner Caroline Crenshaw warned that standards could flood the market with products bypassing individual verification, creating correlated weaknesses that regulators will only discover during a crisis.

Rules steer inflows toward the most liquid, most institutionalized corners of crypto. The stakes are simple: will ETF-palooza consolidate infrastructure around a few dominant coins and custodians, or will it broaden access and spread risk?

For the long tail, more ETFs mean greater legitimacy but also more fragmentation, thinner product liquidity, and higher closure risk. Issuers assume some will survive and subsidize the rest. APs hope to extract spreads before someone gets stuck with an illiquid token. Custodians believe concentration pays off better until regulators or clients force diversification.

Overall standards have facilitated the launch of crypto ETFs but have not made their survival easier.