Are you interested in virtual currency, now trading at half the price it had last fall? Shop around. Among the many ways to get a piece of the action, there are wide differences in ownership costs. My favorite: a somewhat obscure bitcoin trust to be found in Fairfield, Connecticut.
There are pros and cons to every means of getting cryptocurrency exposure, including the little outfit in Fairfield. This survey covers eight bitcoin bets in descending order of my views on their desirability. You may have a different ranking, especially if you are speculating on a quick turnaround.
#1. Osprey Bitcoin Trust
This quasi-fund (ticker: OBTC), created a little over a year ago, is a knockoff of the much better-known Grayscale Bitcoin Trust. Both trusts are closed-end, in that investors have no right to redeem shares in return for cash or underlying assets.
Osprey is a lot more cost-efficient, with an annual expense ratio of 0.8% versus Grayscale’s 2%. These expense figures incorporate both portfolio management and custody costs.
The trusts trade at discounts to the value of the bitcoins they hold: recently 26% at Osprey, 28% at Grayscale. With either, you are making a bet both on crypto and on that discount. If the discount widens, you’re worse off than you would have been with a coin purchase. If it narrows, you have a windfall.
What might widen the discounts: a continued fall in crypto prices. Bear markets have a way of doing double damage to closed-ends, depressing their share prices even faster than prices decline on the assets they hold. That’s been true of stock funds since the Great Depression and it’s likely to be true of crypto trusts.
It’s happening right now. A 12% fall in bitcoin between Friday afternoon on May 6 and Monday afternoon precipitated a 16% fall in Grayscale’s price.
But the discounts might go away. That would happen if the Securities & Exchange Commission permits exchange-traded funds to hold virtual currencies. Both Grayscale and Osprey have vowed to convert their closed-end trusts to ETFs as soon as such things are allowed.
The ETF structure allows market makers to cash in unwanted fund shares (or buy new shares when shares are sought after) via a swap for underlying assets. That sets up an arbitrage that keeps an ETF’s price close to the fund’s net asset value.
So far the agency has rejected every application for a coin ETF, although last year it did green-light an ETF that holds bitcoin futures contracts. Why the distinction? The futures trade on the heavily regulated Chicago Mercantile Exchange, while coins trade in somewhat murkier venues.
A bearish view of coin trusts comes from Tyler Odean, publisher of Something Interesting, an insightful Substack newsletter on crypto. “The time horizon [for an SEC approval] is long,” he says. “Between now and then the discount is likely to deepen as the number of competitive ways to hold bitcoin also deepens.”
Still, I think the bet in favor of an eventually favorable ruling from the regulators is a reasonable one. Risky, yes, but not as risky as the underlying asset. It’s far more likely that bitcoin will crash another 50% than that the discount will make a comparable move from 26% to 63% (meaning: Your trust collapses from 74 cents on the dollar to 37 cents).
One more concern: liquidity. Osprey has but $100 million of coins in its vault, and its average daily share volume over the past year would be worth $400,000 at today’s share price. Big bettors have to step in cautiously.
#2. Your wallet
You can purchase bitcoins on an exchange, then have them exported to your cold-storage wallet. Market analyst Odean has used this for his long-term bets.
Pros: No counterparty risk. No management fee. If you do it right, no hacker risk.
Con: You might not do it right.
Self-storage entails a fairly elaborate procedure to protect your private key from being lost or stolen. Next week you might walk into an open elevator shaft, so you need some mechanism for survivors to retrieve that key. The computer you use to generate the private and public keys for your coin repository has to be permanently isolated from the internet. The medium on which the secret is stored must be secure; Odean mentions an etched piece of metal as an option.
There are services (Casa, Ledger and others) that make this process less painful, but ease of use comes with some increment of risk.
#3. Exchange storage
At Coinbase Global, where the minimum account size for this service is $500,000, the fee is 0.5% a year. Some customers get a better deal. Osprey, which recently switched its custody from Fidelity Investments to Coinbase, appears to be paying 0.25% or less (its financial statements don’t reveal an exact amount).
If you can stomach some counterparty risk, or you just want assets available for trading, you can leave your coins in a deposit account at no charge. This is the crypto equivalent of keeping your Tesla shares in a margin account. But, unlike stocks at a brokerage firm, coins left with an exchange have no Securities Investor Protection Corp. to back them if the middleman gets into financial trouble.
#4. Foreign ETF
While our SEC bides its time, the Canadian regulator has authorized exchange-traded funds that hold cryptocurrency. One of them is the Purpose Bitcoin ETF, which holds coins now worth just over $1 billion.
Pro: The fund trades at very close to net asset value. The shares that are quoted (in Toronto) in U.S. dollars see $4 million of average daily volume.
Cons: The 1.5% annual expense ratio is a lot higher than Osprey’s. It’s not easy to get your hands on these shares in the U.S., as most brokers will refuse the buy order. On the Fidelity platform you can find Purpose under the ticker BTCC_U:CA, but it takes some digging.
#5. Grayscale Bitcoin Trust
This entity (GBTC) is the elder cousin of Osprey.
Pro: Liquidity. This trust has $20 billion of coins and sees an average daily share volume now worth $140 million.
Con: The stiff fee, 2% a year.
CME Group’s Chicago Mercantile Exchange lists bitcoin futures contracts, each for five coins. Trading volume, almost all of it in the nearest month, typically runs to $1 billion a day. Settlement is in dollars; no wallets are involved.
Cons: Taxes, trading costs and contango. Bitcoin futures share these three afflictions with many commodity futures.
At tax time you have to declare paper gains and losses on futures, with 40% treated as short-term (at high tax rates).
Rolling over your futures position monthly, which you probably would do in order to stay in the most actively traded contract, will cost you 12 commissions and bid/ask spreads per year.
The contango is a big deal. It means that the futures price at which you’re buying is at a premium to the spot price. On bitcoins the contango is a volatile number usually falling between 3% and 6% annualized. Contango reflects both the cost of financing a stockpile of a commodity and the cost of securing it. In the case of crypto, securing the asset against hackers is not simple (see #2 above).
Futures aren’t bad for day-to-day trading. They are a poor choice for someone hoping to achieve a long-term gain.
#7. Futures ETF
The ProShares Bitcoin Strategy ETF (BITO) holds long positions in bitcoin futures. Here, atop the steep contango of the Chicago trading pits, you have the opportunity to fork over an additional fee: the 0.95% a year assessed by the fund.
ProShares has attracted $900 million for this product. From naïfs.
The stock had an interesting day May 9. With bitcoin down 14% from where it was Friday afternoon, MicroStrategy shares went down 26%.
Tyler Odean sees these shares as a simultaneous bet on three things: crypto, a mediocre software business and Saylor’s ability to withstand margin calls. He likes the first bet but not the other two.
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