What would you like to know
- The SEC recently rejected an application for a spot Bitcoin ETF.
- Bitcoin futures ETFs track futures contracts, which can deviate significantly from actual Bitcoin returns.
- Funds like Grayscale Bitcoin Trust offer a way to trade a Bitcoin fund through the exchange.
Many advisers are seeing interest from some clients in cryptocurrencies and other digital assets. As their advisor, you are faced with several questions and issues in this regard. Is this type of investment right for your client? What are the best ways, if any, to invest their money in digital assets?
Bitcoin futures ETF
Several exchange-traded funds that track Bitcoin futures have burst onto the scene in recent weeks. The first ETF, the ProShares Bitcoin Strategy ETF (BITO), launched on October 19 with the largest initial trading day of any ETF in history. BITO also surpassed $ 1 billion into new assets faster than any other new ETF.
In the wake of the launch of BITO, the Valkyrie Bitcoin Strategy ETF (BTF) was launched. Its initial trade volume, however, was a fraction of what we saw for BITO.
One of the problems with Bitcoin futures ETFs is their cost. With an expense ratio of 0.95%, BITO and BTF are expensive.
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These Bitcoin ETFs and the like do not invest directly in Bitcoin; instead, they invest in Bitcoin futures contracts. Like all futures, Bitcoin futures expire. Futures contracts can expose investors in Bitcoin ETFs to a condition called contango. In this scenario, the ETF fund manager might be forced to sell relatively low priced contracts that expire and buy higher priced contracts to replace them.
As of November 16, three Bitcoin futures ETFs were traded. A recent Wall Street Journal article cited at least three companies that have decided to delay or abandon their planned launches of new Bitcoin futures ETFs. The companies are VanEck, Bitwise and Invesco.
As of the close on November 23, Morningstar listed the following statistics for the BITO ETF:
- Assets at $ 1.4 billion, compared to $ 994 million in trading volume on the first trading day, according to Morningstar data.
- The ETF’s return over the past month was a loss of 6.33%, about double the loss of Bitcoin itself, according to Morningstar data at the close on November 23.
Trusts and crypto funds
There are a number of private crypto funds and trusts. The Bitcoin Trust in Grayscale ($ 50,000 minimum investment), the Bitwise Bitcoin Fund ($ 10,000 minimum) and the Bitwise Ethereum Fund ($ 25,000 minimum) are a few examples of some of the private funds available to investors.
The Grayscale Bitcoin Trust, which was originally limited to accredited investors, raises funds from investors of at least $ 50,000 and buys Bitcoin. The trust itself is currently closed to new investment, but the shares of the trust trade under the symbol GBTC in the over-the-counter market.
Registering the trust as a reporting company with the SEC opened up the possibility of listing the shares and providing a level of liquidity to investors.
The Grayscale Bitcoin Trust offers a number of advantages:
- Investors don’t have to worry about storing Bitcoin.
- GBTC is subject to regulation by the SEC and must follow appropriate rules.
- The ability to sell stocks on the stock exchange provides investors with liquidity.
- Unaccredited investors can buy stocks through their brokerage accounts, including IRAs.
Some disadvantages of GBTC include:
- As a closed-end fund, stocks often trade at a premium or discount to the actual price of Bitcoin.
- Trust does not follow the actual price of Bitcoin.
ETF with crypto exposure
No ETF currently invests directly in Bitcoin or other cryptocurrencies. Still, there are a number of ETFs and stocks that you can consider for your clients that offer varying degrees of exposure to crypto. The table below compares some of these investments, as well as some vehicles that directly hold Bitcoin.
Crypto venture capital fund
There are a growing number of venture capital firms and hedge funds investing in the crypto space. These funds are generally only available to accredited investors, so they would be limited to high net worth clients.