GBTC - 3 Bitcoin ETFs to Give Investors A Taste of the Hot Crypto
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Bitcoin (CCC:BTC-USD) saw new all-time highs in October, surging more than 24% over the past month. The world’s most valuable cryptocurrency boasts a market capitalization exceeding $1.15 trillion. Now, Bitcoin is hovering above $61,000, up almost 108% year-to-date (YTD). By comparison, the S&P 500 gained 24.4%, and NASDAQ Composite returned 23.4% so far this year.
Recent metrics indicate that the global cryptocurrency market was “valued at USD 1.49 billion in 2020 and is projected to reach USD 4.94 billion by 2030, growing at a CAGR of 12.8% from 2021 to 2030.”
Meanwhile, there has been growing demand for Bitcoin exchange-traded funds (ETFs). In fact, crypto fans prefer a product that holds Bitcoins, similar to the SPDR Gold Shares ETF (NYSEARCA:GLD) that holds physical gold.
However, such exchange-traded products that hold the “physical” crypto represent a significant regulatory challenge for the U.S. Securities and Exchange Commission (SEC). Nonetheless, there have been significant developments in recent months that act as a compromise.
ETFs for Investing in Bitcoin
The recent rally in BTC-USD was primarily fueled by the launch of two ETFs that allow investors to have exposure to the price moves in CME’s (NASDAQ:CME) Bitcoin futures, “a USD cash-settled contract based on the CME CF Bitcoin Reference Rate (BRR), which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin.”
These ETFs aim to replicate the price movement in the leading cryptocurrency. However, they don’t hold actual digital tokens. Bitcoin futures are derivatives of the leading cryptocurrency. In other words, the value of futures contract is derived from the underlying reference.
We need to remind our readers that ETFs based on Bitcoin futures may not be suitable for most investors, as Bitcoin futures are highly volatile in the short run. With a futures fund, investors are not investing in the price of Bitcoin, but in what people think the price of Bitcoin should be.
Steve Larsen, president of Columbia Advisory Partners, has recently expressed concern about the new ETFs. “The futures could be more volatile than Bitcoin itself,” he said. “If people get bullish on Bitcoin, the futures will rise even further, and the same slingshot effect will happen if investors sour on Bitcoin.”
With that said, here are three Bitcoin-related funds that could appeal to some investors:
- ProShares Bitcoin Strategy ETF (NYSEARCA:BITO)
- Valkyrie Bitcoin Strategy ETF (NASDAQ:BTF)
- Grayscale Bitcoin Trust (BTC) (OTCMKTS:GBTC)
Now, let’s dive in and take a closer look at each one.
Bitcoin ETFs: ProShares Bitcoin Strategy ETF (BITO)
52-week Range: $37.34 – $43.95
Expense Ratio: 0.95% per year
The ProShares Bitcoin Strategy ETF is the first Bitcoin-linked ETF to be listed in the U.S. The fund makes Bitcoin more accessible to long-term investors. Investors can now conveniently invest in the asset class via their regular brokerage accounts without having a wallet in cyberspace or trusting a custodial exchange.
However, as we have already noted, ETFs based on Bitcoin futures may not be appropriate for everyone, as prices of both Bitcoin and Bitcoin futures are choppy, especially in the short run.
Bitcoin futures price does not fully follow the spot price of Bitcoin. As futures markets generally trade “in contango,” where the futures price of a given asset is higher than the spot price, Bitcoin futures face a significant rolling cost. ETFs that are based on futures might lose between 7%-10% in a year due to rolling.
The fund started trading on Oct. 19 at an opening price of $40.88. It hit an intraday record high of $43.95 the following day and then fell to a low of $38.90 on Oct. 22. BITO is currently selling for shy of $40.
Valkyrie Bitcoin Strategy ETF (BTF)
52-week Range: $23.04 – $25.50
Expense Ratio: 0.95% per year
A few days after the launch of BITP, the Valkyrie Bitcoin Strategy ETF, was launched. It also invests indirectly in bitcoin futures contracts. BTF’s portfolio includes CME Bitcoin Futures, treasuries, corporate bonds, and cash, and does not have direct exposure to bitcoin. The futures contracts held by the fund are cash delivered.
BTF also came under pressure in its early days of trading as Bitcoin holders were selling the news of the launch of the two new funds. However, despite the short-term volatility, BTF is also likely to attract the attention of retail investors worldwide.
The Valkyrie Bitcoin Strategy ETF started trading on Oct. 22 at an opening price of $25.50. BTF fell to a low of $23.04 on Oct. 28, and currently hovers just above $24.
Bitcoin ETFs: Grayscale Bitcoin Trust (GBTC)
52-week Range: $15.81 – $58.22
Expense Ratio: 2% per year
Our final discussion centers around the Grayscale Bitcoin Trust (BTC). As the name implies GBTC is a trust rather than an ETF. Investing in the trust represents partial ownership in Bitcoin.
The investment objective is for GBTC shares to reflect the value of the leading cryptocurrency held by the trust, determined by reference to the Index Price, less the trust’s expenses and other liabilities.
Before the launch of the other two ETFs in our list, GBTC was the only option for investors to purchase Bitcoin through their equity brokerage accounts. As GBTC is regulated by the Securities Act of 1933 and the Securities Exchange Act of 1934, the trust discloses regular financial information. Since its inception in September 2013, assets under management have reached $40.4 billion.
Investors in GBTC follow whether the trust trades at a premium or discount to its Net Asset Value (NAV). Readers would likely know that “The discount/premium to NAV is a percentage that calculates the amount that an exchange traded fund or closed end fund is trading above or below its net asset value. This metric can be a valuable metric to track how far away a security is trading away from its true value.”
Until March 2021, GBTC was trading at a premium. Now it is at almost a 14% discount to the spot price of Bitcoin. This move premium to discount shows “The evaporation of the premium comes as competition in the space grows.”
GBTC currently hovers at around $50. It is up about 57.5% so far in 2021. By comparison Bitcoin has more than doubled in the past 10 months. In other words, interested investors would likely be better off by investing directly in BTC-USD.
On a final note, Grayscale has recently launched an application with the SEC to convert GBTC into an exchange-traded fund. As InvestorPlace.com contributor Samuel O’Brient recently wrote, there are other fund sponsors that have also applied for launching a number of ETFs. Put another way, 2022 is likely to become another busy year for crypto fans and regulators.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
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