Bitcoin mutual fund launched as crypto expands in fund world

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The time of dreams

Investors who don’t want to own Bitcoin through a wallet or digital exchange now have another mechanism for exposure: a traditional mutual fund.

Bitcoin Strategy ProFund (ticker: BTCFX), launched on Wednesday, provides exposure to cryptocurrency through futures contracts. It is the first open-end mutual fund or exchange-traded fund to track the price of Bitcoin in the United States, with a minimum investment of $ 1,000 and an expense ratio of 1.15% (after exemption expenses).

The fund plans to invest in first month futures that trade on the Chicago Mercantile Exchange. The idea is to carry over the proceeds of each expiring contract to new ones for the following month.

This is how it works. Let’s say the Bitcoin spot price is $ 39,750. A first-month contract for Bitcoin, expiring in late August, could cost $ 39,850. The fund would buy the contract at that price and make a profit if Bitcoin prices exceed $ 39,850 when the contract expires. If the price is lower when the contract expires, the fund would lose money. At the expiration of each contract, the fund transfers the proceeds into new ones.

One problem with the strategy is that the spot price of Bitcoin can diverge from the first month’s futures. It’s not exactly the same, says Simeon Hyman, head of investment strategy at ProShares. The correlation to Bitcoin spot prices is higher in first-month contracts than, say, six-month futures, he adds. For example, a simulation of spot price returns showed an almost exact correlation with the returns on futures from the first month of January 2019 through June 2021, according to ProFunds. However, this does not take into account transaction fees, taxes or other costs.

The first month stays pretty close to the point, so the chances of surprises are low, Hyman says.

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Still, investors shouldn’t expect to see gains (or losses) that correlate precisely with the price of Bitcoin, something the fund’s prospectus makes clear.

The performance of the Fund is expected to be different from that of the Bitcoin spot price, he says. These differences could be significant.

This is because since Bitcoin is so volatile, trading 24 hours a day, the fund could gain or lose money on a price action based futures contract in a fleeting window, lasting for a few hours or minutes. . Bitcoin prices can, and often do, jump by more than 10% in a day.

The mutual fund joins other types of investment vehicles that offer direct exposure to Bitcoin, including the Grayscale Bitcoin Trust (GBTC) and the Osprey Bitcoin Trust (OBTC). However, these vehicles each have higher initial minimum investments for direct private placement investments, at $ 50,000 for Grayscale and $ 25,000 for Osprey.

Trusts also trade on an exchange or over-the-counter, at a price higher or lower than their underlying net asset value.

Another consideration is taxes. Investors in the mutual fund may owe capital gains taxes on distributions. Bitcoin futures have special tax rules, usually imposed at a rate of 60% of long-term capital gains and at a short-term rate of 40%. And the higher the fund turnover, the higher the potential tax liability.

One way to avoid taxation, of course, is to buy and hold Bitcoin through a wallet or digital exchange. Companies such as PayPal Holdings (ticker: PYPL), Square (SQ), Robinhood, and Coinbase (COIN) now offer quick and easy exposure to Bitcoin and other digital currencies. Traders may owe tax if they sell their positions at a profit, but would not be taxed until then.

The Bitcoin Strategy fund is unlikely to remain the only option for investors looking for crypto exposure through a fund wrapper. More than a dozen fund companies have asked the Securities and Exchange Commission to approve a Bitcoin ETF. Grayscale is also aiming to convert its Bitcoin Trust into an ETF, recently signing an agreement with Bank of New York Mellon for ETF transfer and other services.

Still, the approval of the Bitcoin Strategy fund could pave the way for similar products, including ETFs. And the mutual fund can open the door for financial advisors to give clients some exposure to Bitcoin.

Bitcoin futures have been traded for some time, but placing them in a mutual fund is a game-changer for advisers, says Matthew Hougan, chief investment officer of Bitwise Asset Management. This is an important step.

Write to Daren Fonda at [email protected]

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