For investors, Bitcoin (BTC) may be the most surprising asset class in recent times. Even as it displays schizophrenic and volatile price swings, the cryptocurrency has also emerged as one of the best-performing assets in history for early adopters.
These developments have stoked investor demand for financial instruments that provide exposure to Bitcoin. Many brokers have created funds that meet these demands. The Grayscale Bitcoin Investment Trust (GBTC), the Valkyrie Bitcoin Miners ETF (WGMI), and the Van Eck Bitcoin Strategy ETF (XBTF) are three investment vehicles that investors can use to profit from Bitcoin’s wild price swings.
If you have the stomach for risk and are looking for potential income, these funds might be a good choice. Here is a brief introduction to three prominent investment trusts that provide exposure to Bitcoin.
Key Takeaways
- Bitcoin investment trusts hold Bitcoin for investors, track prices of Bitcoin and other cryptocurrencies, trade in over-the-counter (OTC) markets, and offer exposure to cryptocurrencies for investors willing to stomach the risk.
- Bitcoin strategy ETFs do not invest directly in Bitcoin or other cryptocurrencies; they usually invest in Bitcoin futures contracts on the Chicago Mercantile Exchange.
- Some brokers create ETFs that invest in companies involved in the Bitcoin industry, like a miner's ETF, which holds shares of companies involved in Bitcoin mining.
1. Grayscale Bitcoin Trust (GBTC)
Established as an open-ended private trust by Alternative Currency Asset Management in 2013, this fund is now sponsored by Grayscale Investments LLC. It began trading publicly in 2015 under the symbol GBTC. The fund’s objective is to track the underlying value of Bitcoin, much like the SPDR Gold Trust ETF (GLD) tracks the underlying value of gold. It had $17.7 billion worth of assets under management (AUM) as of Oct. 17, 2023.
Coinbase Custody is the custodian for the fund’s assets. The trust is open only to accredited and institutional investors. GBTC trades in OTC markets and is available through many brokerages and tax-advantaged accounts like individual retirement accounts (IRAs) and 401(k)s. It has a management fee of 2%.
2. Valkyrie Bitcoin Miners ETF (WGMI)
WGMI is an actively traded fund on the Nasdaq exchange, debuting in February 2022. As of Oct. 17, 2023, the fund has an AUM of $13.59 million and an expense ratio of 0.75%.
The Bitcoin Miners ETF is unique in that it invests in companies involved in the Bitcoin ecosystem, such as mining on the Bitcoin blockchain. The fund's top 10 holdings and allocations are:
- Marathon Digital Holdings Inc., 10.88%
- Riot Platforms, 10.08%
- Cipher Mining Inc., 9.71%
- Hive Blockchain Technologies, 9.20%
- Bit Digital, Inc., 8.94%
- Iris Energy LTD, 4.89%
- Bitfarms LTD, 4.77%
- Cleanspark, Inc., 4.74%
- Terawulf, Inc., 4.73%
The fund's strategy is to invest 80% of its assets in Bitcoin blockchain-related endeavors that generate at least 50% of revenues from mining, developing hardware and software, or providing services for the blockchain. According to the fund's latest semi-annual report, it allocated 90.89% of its holdings to companies developing or running software, 6.93% to semiconductor companies, and 1.63% to storage and peripheral companies.
3. VanEck Bitcoin Strategy ETF (XBTF)
XBTF is a fund that invests in Bitcoin futures and U.S. Treasuries, much like other Bitcoin "Strategy" funds. The fund trades on Cboe BZX and debuted in November 2021. As of Oct. 17, 2023, the fund had $46.97 million in net assets and operating expenses of 0.66%.
The fund's active management strategy is to provide investors with exposure to Bitcoin prices but reduce the risk and expenses of owning bitcoins by purchasing and selling Bitcoin Futures. The fund also holds U.S. Treasuries and will invest in money market funds, cash, or cash equivalents to provide it with the liquidity, collateral, or margin needed to deal with bitcoin price fluctuations.
Other Bitcoin Funds
Since the mid-2010s, several ETFs have been created by different brokers. Here are a few more that may sound familiar:
- ProShares Bitcoin Strategy ETF (BITO)
- ARK Next Generation Internet ETF (ARKW)
- Valkyrie Bitcoin and Ether Strategy ETF (BTF)
- Invesco Alerian Galaxy Crypto Economy ETF (SATO)
- ProShares Bitcoin & Ether Market Cap Weight Strategy ETF (BETH)
Special Considerations
While publicly traded Bitcoin funds offer exposure to a coveted and volatile asset class, several caveats are associated with investing in such vehicles.Most notable is the lack of funds providing direct exposure to Bitcoin—however, there is a possibility that this will change. In August 2023, courts decided to overrule the SEC's denial of Grayscale's proposed Bitcoin ETP and ordered a review, which could open the way for funds to hold and securitize Bitcoin (or other cryptos) in instruments called Crypto Spot ETFs.
Price Risks
The price movements for current publicly traded Bitcoin instruments magnify those of the underlying asset, thereby increasing the downside risk. This means that investors may end up paying a significant premium over and above the actual price of Bitcoin during a bull run and a notable discount when a drawdown is in progress. An example of such a price premium occurred during the 2017 bull run when GBTC shares traded at a premium of as much as 100% to Bitcoin’s actual trading price on cryptocurrency markets.
Markets
Another problem with current Bitcoin investment instruments is that many of the trusts and futures funds are traded in over-the-counter (OTC) markets. Trading in OTC markets is characterized by low liquidity, meaning there are not enough players or money in the market, resulting in more price volatility.
Companies trading in OTC markets are also not subject to the stringent disclosures required of publicly listed companies. Thus, traders do not have access to critical information to plan their trading strategies.
What Is the Difference Between a Bitcoin Trust and a Bitcoin Exchange-Traded Fund (ETF)?
Investment trusts differ in their construction from exchange-traded funds (ETFs). In an investment trust, investors pool funds for a portfolio manager to directly purchase assets (Bitcoin, in this case), and shareholders (known as unit holders) are given proportional ownership of the fund. ETFs, on the other hand, are constructed to track a particular asset or index (in this case, Bitcoin). ETFs use a process of creations and redemptions based on the supply and demand for ETF shares in the market. With an investment trust, there is a fixed number of units. ETFs typically carry lower fees, tend to be more liquid, and have a net asset value (NAV) that more closely tracks the asset. Investment trust NAVs may often trade at a discount.
Are There Any Approved Bitcoin ETFs?
There are several Bitcoin ETFs, but they are not allowed to hold Bitcoin. Instead, the closest they come to it is tracking Bitcoin futures contracts that trade on the Chicago Mercantile Exchange (CME).
Is It Better To Buy a Bitcoin Trust or ETF, or Directly Own Bitcoin?
For most retail investors, a Bitcoin trust or ETF is easier since shares can be purchased directly from a broker and maintained in the same portfolio as other holdings. To buy bitcoin directly, you’ll need to create an account with an online crypto exchange and fund your account there—in addition to trusting the exchange to securely hold your money and bitcoin.
The Bottom Line
Bitcoin funds have been desired by investors since the first one was proposed by the Winklevoss twins in 2013. Since then, brokers have struggled to find SEC-approved ways of offering exposure to cryptocurrency. Trusts, funds that track crypto futures, and funds that track crypto- and blockchain-related companies are all that are available—at least until the SEC decides to approve funds that directly hold crypto.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
