(Photo: Shutterstock)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.
Besides investments in Bitcoin and other cryptocurrencies, many of these funds invest in other applications around blockchain. There are some 1,200 blockchain startups across the country and some 800 institutional blockchain and cryptocurrency investment firms.
If these types of investments are appropriate for some of your clients, reviewing the opportunities available via venture capital funds and other private investments will require due diligence on your part. This includes gaining familiarity with the managers of the fund and their track record, minimum investment levels, fund liquidity and other factors.
When will there be a spot bitcoin ETF?
It’s hard to say at this point when we will see the first spot Bitcoin ETF that will actually hold Bitcoin. The SEC recently rejected applications from VanEck and WisdomTree.
The regulator rejected a proposed rule change that would have allowed the VanEck ETF to be listed and traded. They indicated that the proposed rule change didn’t meet their bar requiring that “the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest.’”
The struggle to get an ETF backed by physical crypto assets versus futures or other derivatives has been going on for several years. The SEC indicates that in their view, the futures market is regulated whereas the actual market for crypto is not.
There is no timetable for approving the first spot Bitcoin ETF at this point.
Do your homework
Investing in Bitcoin and other cryptocurrencies is certainly not as straightforward as investing in stocks, bonds or even some other types of alternative assets. For clients who are interested in crypto or for whom it is an appropriate portfolio diversifier, it pays to do your homework up front.
This will certainly be an investing area that evolves over the next several years. It’s important for advisors to stay informed to be able to provide their clients with the best advice as things evolve.
Image: Chris Nicholls/ALM, Adobe Stock
Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.
