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Over the past 5 years, Bitcoin has continued to see its popularity grow. It has become a mainstream investment class as well as a household name. The digital currency is the largest by market capitalization of the hundreds of coins now available.
According to CoinMarketCap crypto assets have a market capitalization of just short of $2 billion. Of these assets, Bitcoin represents a market share of 39.3%. The chart below shows the market capitalization share of Bitcoin compared to that of other major Altcoins.
Source CoinMarketCap
We are going to have a look at the world of Bitcoin securitization and what you need to know to invest in Bitcoin ETFs. Let’s first take a look at the digital assets within the world of alternative investments.
Digital Assets in Alternative Investments
Alternative investments have been securitized and available to everyday investors for decades now. Think of real estate securitized within REITs, or commodity baskets through a Commodity Trading Advisor, for example. However, digital assets haven’t even been around that long. So, we are only now beginning to see their securitization for general investing.
Crypto Hedge Funds
Thanks to the freedom of action hedge funds enjoy they have been the first to invest in Bitcoin and other cryptocurrencies. PWC’s Global Crypto Hedge Fund Report 2021, states that assets under management (AUM) for this sector of the industry have nearly doubled in 3 years. The report shows that AUM went from $2 billion in 2019 to $3.8 billion in 2021.
Crypto hedge funds have complete control over their choice of investment strategy. They can go long or short or invest all the funds in one digital asset only. However, they may not be a functional option for many investors. They have very high minimum investment requirements, apart from investors having to be accredited.
Bitcoin Mutual Funds
At the moment, there are no mutual funds that invest solely in Bitcoin. Some funds are adding exposure to Bitcoin through futures contracts. However, the SEC has warned investors on numerous occasions about the risks of funds investing in Bitcoin.
The alternative to a mutual fund available at the moment is the Grayscale Bitcoin Trust (GBTC:OTCQX). The fund holds $27.4 billion in assets, with 692,000 shares outstanding. This trust tracks the performance of spot Bitcoin through direct ownership.
The fund has a relatively high management fee of 2%, but you can include this security on your Self-directed IRA. Grayscale is an approved investment vehicle offered by several crypto IRA companies.
Bitcoin ETFs
These funds are well-known for investing in all types of assets such as stocks, bonds, real estate, or commodities. They allow investors to gain exposure to the returns of various investments without the need for specific know-how. Thanks to the increase in popularity investor interest has also grown for Bitcoin ETFs.
In the US the SEC has denied various applications for ETFs holding actual Bitcoin. However, it has approved ETFs holding Bitcoin futures. The rejection of physical Bitcoin funds was due to the excessive volatility and possible price manipulation of the virtual currency.
Considering the SEC’s concerns for fraud and high volatility it doesn’t look like 2022 will see any ETFs reaching an approval for a physical Bitcoin ETF. However, ETF.com notes that SEC chairman Gensler used to teach about blockchain and cryptocurrencies at MIT. Adding that in 2019 he wrote that he was intrigued by Satoshi’s innovation potential.
So, if you want to invest in spot Bitcoin ETFs you will have to look outside of the US. Canada and Europe already have this type of fund up and running. That you will be able to buy one of these funds as a resident in the US may prove complicated. Reach out to your bank or broker to find out if you can.
Physical Bitcoin Funds Already Trading
Purpose Bitcoin ETF (BTCC-U:TO) is the world’s first physical Bitcoin according to their website. Purpose launched this fund in February 2021 and holds $1.57 billion in assets. The fund trades on the Toronto stock exchange. For US residents that have their earnings in US dollars, you would want to invest in the US dollar series ETF.
In Europe, the first Bitcoin ETF was launched by alternative investment manager Melanion Capital on October 22, 2021. The fund has $3.2 million AUM and is quoted on the NYSE Euronext Paris stock exchange. However, the fund’s holdings are crypto equity rather than Bitcoin itself.
WisdomTree launched a Bitcoin ETP (Exchange Traded Product), this type of fund is open-ended, in November 2021. The term ETP is often interchangeable with the acronym ETF. This fund’s holdings are in Bitcoins only and has $277 million in assets. The fund is quoted on various exchanges throughout Europe.
Bitcoin Futures ETFs
The SEC has so far approved several Bitcoin ETFs; however, they can only invest in Bitcoin futures. Furthermore, many of these funds invest in other blockchain-related assets and not only in Bitcoin.
For Bitcoin-only ETFs there is currently only one fund available; ProShares Bitcoin Strategy ETF (BITO:NYSEArca). The fund has just over $1 billion in assets and was launched on October 19, 2021. This fund only invests in Bitcoin, treasury bills, or cash.
As the fund can hold other assets instead of always investing 100% in Bitcoin, it has managed a better YTD than spot Bitcoin. The chart below shows the performance of the ProShares fund compared to that of Bitcoin.
Source: YahooFinance
As you can see the ETF managed to lose only 6.9% since the start of 2022, outperforming Bitcoin which has lost 36.84%
Why Investors want Bitcoin ETFs
Holding Bitcoin is easy for some people, for others it may take more time and effort to set up all the necessary steps than they care. First, you have to open an online account with an exchange, then fund the account, and then set up storage.
The matter of storage for the individual investor is crucial, and just complicates things a bit more. Most exchanges store your Bitcoin automatically online. This solution puts your investment in the cryptocurrency in danger, as anything online can be hacked. To avoid online theft of your digital assets you need to open an offline wallet.
ETFs, take all the hassle out of investing in Bitcoin, especially organizing cold storage to keep the fund’s assets safe. Most importantly you can simply go straight to your bank or brokerage house and make your investment.
Advantages of Bitcoin ETFs
In my opinion, the most important advantage of a Bitcoin ETF is the fact you will not have to take care of storage. In fact, with an ETF that invests in futures contracts of Bitcoin rather than Bitcoin spot you have no storage risk at all.
If the fund invests in physical Bitcoin, it should still have state-of-the-art cold storage. This type of offline storage makes it extremely difficult for hackers to break into the fund’s wallets. However, the risk of online theft is still out there.
In January 2022, Crypto.com, one of the largest cryptocurrency exchanges, was hacked for a total of $35 million. The exchange has made itself responsible for all clients’ funds. But the risk is when the hackers manage to steal a large enough amount of clients’ cash that it bankrupts the exchange.
The second most important advantage of a Bitcoin ETF is the liquidity offered when it comes to buying and selling. ProShares Bitcoin ETF trades several million shares a day. Through an exchange, once you send your order, it may take simply seconds to fill.
Not the same can be said with a crypto exchange. No matter which one you may use, it can take several minutes to fill your order. This is due to the structure in place to confirm and register to the ledger the trade.
Key Takeaways
The marketplace for Bitcoin ETFs is still young and in an expanding phase. Only recently have various asset managers started to take interest in setting up tracker funds as a passive investment for cryptocurrencies.
The US is slightly behind its peers in Europe and Canada, due to a reluctant SEC. Although the current stand against Bitcoin ETFs from America’s regulatory authority may change, it may also take some time.
For now, the most valid options in my opinion remain the ProShares Bitcoin futures ETF and the Grayscale Bitcoin trust. The futures fund offers peace of mind, nothing can get hacked there, and it’s also cheaper than the Grayscale Trust.
For those who may prefer holding a physical asset, even though it’s digital, then your option is Grayscale. The extra fees are part of the cost of ownership for the moment.
Another choice you can make is to invest in Bitcoin on your own. This may seem like a task with a steep learning curve. But for some investors, there’s nothing like being hands-on. Check out our cryptocurrency investing guide for more information.
Gino D'Alessio is a Broker/Dealer with over twenty years experience in various OTC markets such as Bonds, FX and Derivatives. Currently a Financial Markets and Investments Writer & Analyst
