How to earn crypto passively without trading

Key takeaways

Crypto index funds and ETFs provide diversified exposure to digital assets, helping investors earn passive income without actively managing portfolios.
Centralized and decentralized options exist, with ETFs available on stock exchanges and DeFi-native index tokens accessible via Web3 wallets.
Income sources include asset appreciation, staking, DeFi yields and covered call strategies, depending on the fund’s structure — though not all funds support all these sources.
Risks include market volatility, smart contract vulnerabilities and management fees, so it’s crucial to research before investing.

If you’re looking to invest in crypto but don’t want to stress over constant trading, passive investing might be your best bet. Just like in traditional finance, crypto index funds and exchange-traded funds (ETFs) offer exposure to a broad range of digital assets, allowing you to ride the market without picking individual winners.

These financial instruments can serve as powerful tools for generating passive crypto income, and with the rise of decentralized versions and tokenized ETFs, options are expanding fast.

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

What are crypto index funds and ETFs?

Both crypto index funds and ETFs are designed to give investors exposure to a diversified basket of cryptocurrencies without the need to actively manage or rebalance their holdings. But they come in different formats, tailored for different types of investors.

A crypto index fund is a pooled investment vehicle that tracks a curated group of cryptocurrencies, often the top 10 or 20 by market capitalization. These funds are rebalanced periodically to reflect market changes, offering passive, long-term exposure to the crypto market.

Think of them as the crypto equivalent of mutual funds, usually provided via crypto-native platforms. Index funds can be:

Centralized: Managed by professional firms or brokerages. Most often focus on appreciation or covered calls.
Decentralized and tokenized: Through smart contracts onchain within the decentralized finance (DeFi) ecosystem and are often governed by a decentralized autonomous organization (DAO) or community. These may include staking and DeFi yields.

A crypto ETF, on the other hand, is a type of fund traded on traditional stock exchanges (like the NYSE) that mirrors the price of a specific cryptocurrency or a basket of digital assets. Investors can buy and sell ETF shares just like regular stocks, making them ideal for those who want crypto exposure through their brokerage account.

Some ETFs focus solely on Bitcoin (BTC) (like ProShares’ BITO). In contrast, others bundle multiple assets or even incorporate strategies like covered calls to generate yield (such as Harvest Portfolio’s high-income crypto ETFs).

Why use crypto index funds and ETFs for passive income?

In crypto, passive income means earning money on your holdings without actively trading or managing them daily. With markets this volatile, having a hands-off strategy can help you grow wealth steadily while minimizing emotional decision-making. That’s where index funds and ETFs come in.

These products offer built-in diversification, spreading risk across multiple assets, so you’re not betting everything on one coin. They’re ideal for long-term investors who want to benefit from crypto’s upside while avoiding constant portfolio tinkering.

Common ways in which crypto index funds and ETFs can generate passive income:

Appreciation of underlying assets, such as BTC, Ether (ETH), Solana (SOL), etc.
Staking rewards (for funds that include proof-of-stake assets)
DeFi yields (in the case of decentralized index tokens)
Income distributions: monthly or time-based (offered by some crypto ETFs).

These instruments are ideal for long-term investors who want exposure with less risk and effort. Whether you’re in it for yield, growth or peace of mind, crypto index products let you participate in the ecosystem without going all-in on any single bet.

Did you know? After over a decade 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 landmark decision provided mainstream investors with regulated access to Bitcoin, significantly boosting institutional participation in the crypto market.

Examples of crypto index funds for passive investing in 2025

In 2025, several crypto index funds have emerged as prominent choices for passive investors:

Bitwise 10 (BITW): The Bitwise 10 crypto index fund provides exposure to the top 10 cryptocurrencies by market capitalization. Rebalanced monthly, it offers investors a way to participate in the broader crypto market’s performance without the need to manage individual assets. BITW is accessible through traditional brokerage accounts, making it suitable for both institutional and retail investors seeking diversified crypto exposure, as seen below.

Cryptocurrencies, Investments, Trading, How to, Passive Income, Bitcoin ETF

TokenSets: TokenSets offers a suite of decentralized index products, including the DeFi Pulse Index (DPI) and the Metaverse Index (MVI). These indexes are fully onchain, allowing for transparent and automated portfolio management via smart contracts. Investors can hold these index tokens in their wallets, stake them for additional yield, or use them within various DeFi protocols, combining diversification with the benefits of DeFi.
Nasdaq Crypto Index (NCI): The NCI tracks the performance of a diverse basket of USD-traded digital assets, with a heavy weighting toward Bitcoin. It includes many leading cryptocurrencies, such as ETH, SOL, XRP (XRP) and others.

By selecting the appropriate fund, investors can align their crypto investments with their risk tolerance and investment goals.

Examples of crypto ETFs for passive investing in 2025

The crypto ETF landscape has evolved rapidly, especially since the approval of Bitcoin ETFs in the US in early 2024. These products give traditional investors easier, regulated access to crypto markets without the need for wallets, exchanges or private keys.

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

ProShares Bitcoin Strategy ETF (BITO): BITO was the first Bitcoin futures ETF approved in the US, debuting in October 2021. Instead of tracking the spot price of Bitcoin, it follows CME Bitcoin futures contracts, making it an accessible option for US investors who want crypto exposure via traditional brokerage platforms. Though it doesn’t hold actual BTC, its ease of access and liquidity have made it a mainstay in many portfolios.
Purpose Bitcoin Yield ETF (BTCY): Listed in Canada, the Purpose Bitcoin Yield ETF was among the first ETFs to combine Bitcoin exposure with a yield strategy. It uses covered call options to generate monthly income, making it appealing to investors who want a steady cash flow alongside BTC’s long-term upside. BTCY paved the way for a new breed of yield-focused crypto ETFs.
Harvest Bitcoin and Ethereum Enhanced Income ETF (HBEE): Offered by Harvest Portfolios, HBEE focuses on generating high monthly income from both Bitcoin and Ether. The fund writes covered calls on BTC and ETH, earning option premiums while holding the underlying assets. It targets investors who prefer regular income over pure price speculation, striking a balance between crypto exposure and cash flow. However, one may bear in mind that such ETFs may underperform in strongly bullish markets because covered calls cap the upside potential in exchange for premium income.

These ETFs are gaining popularity not just because they track crypto assets, but because they’re designed to generate passive income, a feature especially attractive in today’s uncertain market. They represent the intersection of traditional finance infrastructure and innovative crypto-based income strategies.

How to invest in crypto ETFs and index funds?

Centralized platforms: You can use stockbrokers (for ETFs like BITO, Purpose, etc.) or crypto exchanges like Coinbase, Binance or Bitwise for index-style funds.
Decentralized platforms: Connect a Web3 wallet (such as MetaMask) on platforms like Index Coop or TokenSets and create your own custom indexes or use pre-existing ones like the DeFi Pulse Index (on Index Coop).

Hodling vs. trading crypto ETFs and the risks involved

Passive investing is all about hodling rather than trading. That said, crypto ETFs can still be bought and sold like stocks, giving investors:

Liquidity in volatile markets
Tax harvesting opportunities
Flexibility to exit positions as needed.

However, frequent ETF trading may defeat the purpose of a passive strategy, so it’s often better to buy and hodl for the long term.

Risks to keep in mind

While passive income sounds appealing, crypto index funds and ETFs come with their own risks:

Market volatility: Your portfolio value will fluctuate with the crypto market.
Smart contract risks: Especially with decentralized index funds.
Management fees: Some funds charge 1%-2% annually, eating into profits.
Tracking error: Index products might not perfectly mirror the underlying asset performance.

Make sure to review the fund composition, rebalance strategy and yield mechanism before investing.

Taxation of crypto ETFs and index funds’ passive income

Tax rules vary wildly depending on your jurisdiction:

In the US, ETFs are taxed based on capital gains (short-term or long-term).
Index fund token sales are treated like any crypto asset.
Staking rewards within index products may be taxable as income.

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

Is passive crypto income worth it?

If you believe in the long-term growth of crypto but don’t want to ride the rollercoaster every day, crypto ETFs and index funds offer a smart way to stay in the game.

They combine:

Diversification
Automation
Yield potential.

Whether you go centralized or decentralized, passive crypto investing is becoming more accessible by the day. And in a world where tokenized ETFs, onchain robo-advisers and AI agents are trending, the line between TradFi and DeFi continues to blur.

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

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.