Home Bitcoin What You Need to Know About Bitcoin Funds

What You Need to Know About Bitcoin Funds

210
0
SHARE


What You Need to Know About Bitcoin Funds – WSJ

Price swings in the digital currency led to explosions in trading volume, assets under management and volatility at one of the most established bitcoin funds out there, Bitcoin Investment Trust

After all the tumult and rapid growth in bitcoin markets recently, you might wonder what is going on with the investment funds that own the digital currency.

Turns out there is even more tumult and growth than in bitcoin itself.

There has been a blizzard of cryptocurrency hedge-fund launches. The Securities and Exchange Commission has a pile of bitcoin ETF applications. And like children outside a Fingerlings store, institutional investors are lining up to get into the funds.

The largest is

Bitcoin Investment Trust
,

GBTC 6.07%

a de facto exchange-traded fund managed by Grayscale Investments, a unit of

Barry Silbert’s

Digital Currency Group. The fund, which has traded over the counter since 2015, is the only bitcoin investment that people can make in most retirement or brokerage accounts. Thanks to an unusual structure, the fund has seen bigger price swings than bitcoin itself recently. Amid the turbulence, Merrill Lynch has banned its roughly 17,000 advisers from executing client requests to trade it.

“We look forward to speaking with Merrill Lynch and addressing any questions or concerns they have about the Bitcoin Investment Trust,” Mr. Silbert said in an email.

Here is a quick update on the wild ride of these bitcoin funds.

What is a bitcoin fund, and how does it operate?

Firms that have filed for bitcoin ETFs, including ProShares, VanEck and others, seek to provide investors with a familiar way to invest in the cryptocurrency. Rather than going to unregulated exchanges such as Coinbase that deal in bitcoin directly, investors buy shares in a fund, leaving the fund managers to purchase bitcoin or bitcoin derivatives.

Those funds are intended to work like traditional stock or commodity ETFs. To date, the SEC hasn’t approved any bitcoin ETFs, leaving a few alternatives. Investors can buy secondary shares of the Bitcoin Investment Trust, which trade over the counter and are supposed to track the price of the cryptocurrency. Wealthy, or accredited investors, can buy primary shares of the Bitcoin Investment Trust, which more accurately reflect the price of bitcoin. Wealthy individuals and institutional investors can also buy into specialist hedge funds that trade bitcoin. There also are a handful of bitcoin-tracking funds that trade on overseas exchanges.

$4.2 mil.

0.0

2017

2016

2015

billion

$2.0

Paris

1.5

1.0

0.5

$2.3 mil.

$4.2 mil.

0.0

2016

2015

2017

billion

$2.0

1.5

1.0

0.5

$2.3 mil.

$4.2 mil.

0.0

2017

2016

2015

billion

$2.0

1.5

1.0

0.5

$2.3 mil.

$4.2 mil.

0.0

2015

2016

2017

What are the pros and cons of buying into a bitcoin fund rather than the digital currency itself?

There certainly are more dangerous ways to gamble on bitcoin, but Bitcoin Investment Trust may be one of the most expensive ways.

The ravenous demand of investors for anything bitcoin-related has resulted in the OTC shares trading at a hefty premium to the fund’s bitcoin holdings. The premium, which has sometimes meant that shares of the fund cost double the price of bitcoin, is what led short seller

Andrew Left

to bet against the price of the fund.

But as Mr. Silbert sees it: “The premium is just evidence that there is a tremendous institutional and retail demand for access to products that enable investors to buy bitcoin.”

How have bitcoin’s price swings affected Bitcoin Investment Trust?

The fund saw an explosion in trading volumes, assets under management and volatility last year, thrusting it among the top ranks of ETFs as measured by average daily volume, even though it isn’t exchange-traded.

When they first raised the concept of a bitcoin ETF a half-decade ago, developers such as the Winklevoss twins, Cameron and Tyler, and their rival, Mr. Silbert, predicted that such funds could one day be as popular as the mighty

SPDR Gold Shares

ETF. That seemed like a stretch, considering that most fund investors hadn’t heard of bitcoin and weren’t exactly shopping for strings of numbers that use mathematical proofs recorded in a shared ledger to verify exchanges.

But Bitcoin Investment Trust briefly surpassed the gold fund on some recent days by one key measure of popularity—daily dollar volume. It’s as if the TV band the Monkees outsold the Beatles before even learning to play their instruments.

At roughly $3.21 billion at last count, Bitcoin Investment Trust’s assets under management—counted as holders of the primary, restricted shares—are far shy of the gold fund’s $35 billion. Still, the bitcoin fund started 2017 with roughly $164 million in assets.

The fund’s stock chart, meanwhile, looks like it traces the path of a bungee jump. After starting 2017 at around $100 a share, the fund peaked at over $3,400 in early December, dipped to around $1,700 and is now trading around $2,300.

What is the status of the other proposed bitcoin funds?

ETF providers were among those most excited about the launch of bitcoin futures by

Cboe Global Markets


CBOE 2.87%

and CME Group in December. The market Grinches at the SEC had refused the first wave of bitcoin ETF applications from the Winklevoss twins, Mr. Silbert and SolidX, citing the lack of regulation on digital-currency exchanges. So the sense was that the SEC, which has endorsed funds tracking commodities futures in the past, would be more comfortable with a fund tracking futures on these major exchanges.

Almost as soon as the first futures traded on Cboe, the New York Stock Exchange filed for SEC approval for two ETFs based on bitcoin futures—one long and one short—to be managed by ProShares. Similarly, Cboe has applied for approval for funds managed by fund families REX, First Trust and GraniteShares.

Critics, including

Joe Saluzzi,

co-founder of agency brokerage Themis Trading, say that such an ETF would be “a recipe for a disaster.” An SEC approval for a futures-based ETF would be viewed as a “housekeeping seal of approval” even though the underlying bitcoin remained unregulated, Mr. Saluzzi says.

How have the futures on bitcoin started out?

Volumes on both Cboe and CME platforms are relatively muted, with trading in the millions of dollars a day compared with the billions of dollars traded on Asian spot bitcoin markets. That’s one reason Mr. Silbert says futures-tracking ETFs could be problematic.

“From a practical perspective, the size of the futures market as it exists today is not large enough to accommodate the demand that exists for an ETF,” says Mr. Silbert.

What are hedge funds doing?

According to Morgan Stanley, hedge funds invested about $2 billion in bitcoin and other cryptocurrencies in 2017. As many as 84 cryptocurrency hedge funds started over the same period. Reports that one of the largest, a bitcoin hedge fund operated by Pantera Capital, was counting its returns in tens of thousands of percentage points hardly hurt their popularity.

Lorenzo Di Mattia

has managed a macro hedge fund, Sibilla Global Fund, for more than a decade. While such funds often have a wide-ranging portfolio, he has never invested in digital assets. Recently, he says, not one but two people—an investor and a fund lawyer—asked him whether he would consider opening a cryptocurrency fund.

Joining the fray is Apex Token Fund, a “fund of funds” that plans to sell investors digital tokens that represent its interest in a group of other crypto funds.

Mr. Curran, a writer in Denton, Texas, is a regular contributor to Dow Jones Newswires and The Wall Street Journal. Email him at rob.curran@dowjones.com.

Appeared in the January 8, 2018, print edition as ‘Currency Craze: What Now for Bitcoin Funds?.’



Source link