What to know about investing in bitcoin trusts

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Chris Ratcliffe / Bloomberg via Getty Images

As the Securities and Exchange Commission decides to approve bitcoin exchange-traded funds, companies have created other options to meet the growing demand for cryptocurrency.

An alternative, bitcoin trusts, hold digital currency, making it easier for investors to add cryptocurrency to their wallets.

“You are more or less buying a basket with bitcoin in it,” said financial planner Zechariah Schaefer, founder of Ascent Personal Finance in Lynchburg, Virginia.

Bitcoin trusts allow investors to purchase digital currency exposure through brokerage or retirement accounts without the wallet, key, or storage issues of cryptocurrency exchanges.

Learn more about personal finance: As the SEC delays bitcoin ETFs, investors have other choices.

“Trusts are just an easy way for investors to access the underlying bitcoin without buying it directly,” said Tyrone Ross, CEO of Onramp Invest, a company providing technology for managing “crypto assets”. to financial planners.

While bitcoin trusts may offer an easier way to invest in cryptocurrency, there are downsides to consider, according to financial advisers.

What to know before investing

A bitcoin trust works differently from a mutual fund or ETF. These trusts periodically sell a limited number of private shares to so-called accredited investors, who meet strict income, equity and experience requirements.

Later, these qualified investors can sell their shares on the public markets. But the prices may not match the underlying asset, known as trading at a haircut or premium.

For example, if someone buys $ 1 from a bitcoin trust, their share may have 70 cents of bitcoin or $ 1.10 of bitcoin, depending on the demand for the asset.

“There is another layer of supply and demand volatility surrounding it,” Schaefer said.

Currently, the most popular choice is the Grayscale Bitcoin Trust, with $ 21.7 billion in assets under management. Osprey Bitcoin Trust released a competing option in February, managing nearly $ 91.2 million.

By comparison, Vanguard’s 500 Index Fund, which tracks 500 of the nation’s largest companies, has $ 231.84 billion in assets.

Another downside to investing in bitcoin trusts is the fees, which are usually higher than the average for mutual funds or ETFs.

For example, the average ETF expense ratio fell to 0.45% in 2019, according to Morningstar. Grayscale charges an annual fee of 2%, while Osprey is 0.49%.

For most people, it can be cheaper to buy bitcoin through a cryptocurrency exchange, like Coinbase, Schaefer said.

However, someone may be willing to pay more to avoid cryptocurrency exchanges or to add bitcoin exposure to their regular individual retirement account.

“Right now, if you really want to have your crypto in a tax-advantaged retirement account, you just need to bite the bullet and pay those high costs,” Schaefer added.

Bitcoin ETF

Investors have been clamoring for bitcoin ETFs for years, hoping to find cheaper and easier ways to add cryptocurrency to their wallets. Experts say these funds can also offer more transparent pricing.

“You won’t get these big discounts or bonuses, which is huge,” Ross said.

While several companies have filed an application to release the first US bitcoin ETF, the SEC has continuously postponed its decisions. SEC Chairman Gary Gensler expressed the need for tighter cryptocurrency regulation in May, seeking greater investor protection.

Grayscale and Osprey have committed to converting their bitcoin trusts to ETFs when regulators are ready.

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