New ways to invest in Bitcoin

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The launch of an exchange-traded fund (ETF) based on bitcoin futures in October was epic. Less than a month after it opened, ProShares Bitcoin Strategy ETF (BITO) held $ 1.26 billion in assets – one of the largest ETFs ever. A second bitcoin futures fund, Valkyrie Bitcoin Strategy ETF (BTF), opened two days after the ProShares fund.

Bitcoin futures ETFs are actively managed and use similar strategies. Managers buy one-month futures contracts – the earliest date contract – tied to bitcoin prices. Each month, they close or sell these contracts before they expire and buy new contracts dated the following month.

You can’t actually invest in the spot price of bitcoin – the price at which an asset can be bought or sold for immediate delivery – says Simeon Hyman, head of investment strategy at ProShares. “So the futures market is a good place to get exposure to bitcoin,” he says. Due to the way futures contracts are sold, a certain amount of money per contract must be held as collateral. This is why these ETFs are heavy on treasury bills and cash.

Both ProShares and Valkyrie have looked at the performance of their respective futures strategies in the past, relative to the spot price of bitcoin, and found a high correlation – a so-called beta of 0.87 to 0.99 – between the two. For context, S&P 500 index funds typically have a beta of 1.0 with the benchmark.

But term investing comes with unique risks. Due to the way these securities are priced, changes in the supply and demand for the underlying asset – in this case bitcoin – can affect contract prices and returns. fund.

ETFs also have limits on how much of a given contract they can hold, says Steven McClurg, chief investment officer of Valkyrie Funds. Funds with large assets may be forced to buy longer-term futures contracts, which can increase volatility. At the beginning of November, for example, ProShares’ BITO had contracts for November and December.

Even so, ETFs offer an easier way to gain exposure to bitcoin than to buy actual cryptocurrency. You don’t need to open a digital currency account or remember your passwords. But if you are planning to invest, only devote a small portion of your portfolio to this type of term ETF.

There are other ways to gain exposure to bitcoin and blockchain, the technology behind the digital asset. The Invesco Alerian Galaxy Crypto Economy (SATO) ETF focuses on companies that enable the crypto economy, such as Canaan (CAN), a Chinese maker of servers and microprocessors used to create bitcoin. Grayscale Bitcoin Trust (GBTC) has yet another approach: every part of the trust is backed by bitcoin.

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