Many advisors are seeing interest among some clients in cryptocurrencies and other digital assets. As their advisor, you are faced with several questions and issues regarding this. Is this type of investment appropriate for your client? What are the best ways, if any, to invest their money in digital assets?
Bitcoin Futures ETFs
Several exchange-traded funds tracking Bitcoin futures have burst onto the scene in recent weeks. The first ETF, the ProShares Bitcoin Strategy ETF (BITO), launched on Oct. 19 with the biggest initial trading day of any ETF in history. BITO also topped $1 billion in new assets faster than any other new ETF.
On the heels of the launch of BITO, the Valkyrie Bitcoin Strategy ETF (BTF) was launched. Its initial trading volume, however, was a fraction of what we saw for BITO.
One of the issues with Bitcoin futures ETFs is their expense. With an expense ratio of 0.95%, both BITO and BTF are expensive.
These and similar Bitcoin ETFs do not invest directly in Bitcoin; rather, they invest in Bitcoin futures contracts. Like all futures contracts, Bitcoin futures contracts expire. Futures contracts can expose investors in Bitcoin ETFs to a condition called contango. Under this scenario, the ETF fund manager could be forced to sell relatively low-priced contracts that are expiring and purchase higher-priced contracts to replace them.
As of Nov. 16, three Bitcoin futures ETFs were trading. A recent Wall Street Journal article cited at least three firms that have decided to either delay or scrap their planned launches of new Bitcoin futures ETFs. The firms are VanEck, Bitwise and Invesco.
As of the close on Nov. 23, Morningstar listed the following stats for the BITO ETF:
- Assets at $1.4 billion, compared with $994 million in trading volume on its first trading day, according to data from Morningstar.
- The ETF's return over the past month was a loss of 6.33%, roughly double the loss of Bitcoin itself, according to Morningstar data as of the close on Nov. 23.
Crypto Trusts and Funds
There are a number of private crypto funds and trusts. The Grayscale Bitcoin Trust ($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 was originally limited to accredited investors, gathers funds from investors at the $50,000 minimum and buys Bitcoin. The trust itself is currently closed to new investments, but shares of the trust trade under the ticker GBTC on the over-the-counter market.
Registering the trust as an SEC reporting company opened the opportunity to list the shares and to provide a level of liquidity for investors.
The Grayscale Bitcoin Trust offers a number of advantages:
- Investors don't have to worry about the storage of Bitcoin.
- GBTC is under the regulation of the SEC and must follow the appropriate rules.
- The ability to sell shares on the stock exchange provides investors with liquidity.
- Nonaccredited investors can purchase shares via their brokerage accounts, including IRAs.
Some disadvantages of GBTC include:
- As a closed-end fund, shares often trade at a premium or discount to the actual price of Bitcoin.
- The trust doesn't track the actual price of Bitcoin.
ETFs With Crypto Exposure
No ETFs currently invest directly in Bitcoin or other cryptocurrencies. Yet there are a number of ETFs and stocks that you can consider for your clients that offer varying degrees of crypto exposure. The table below compares some of these investments, along with some vehicles that hold Bitcoin directly.
Crypto Venture Capital Funds
There are a growing number of venture capital firms and hedge funds investing in the crypto space. These funds are typically available only to accredited investors, so they would be limited to high-net-worth clients.
