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. 

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:

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).

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:

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.

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.

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

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

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:

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.

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

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.

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

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

Tax rules vary wildly depending on your jurisdiction:

• 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.