Mutual Funds: Exploring Bitcoin Investment Opportunities

Bitcoin and other cryptocurrencies have become increasingly popular in recent years, and investors are now looking for ways to gain exposure to this asset class. One way to do this is through mutual funds, which are professionally managed portfolios that include stocks, bonds, and other securities. While there are currently no mutual funds that invest directly in Bitcoin, there are a few alternative options for investors seeking Bitcoin exposure. These include Bitcoin futures contracts, ETFs, and investment trusts.

Bitcoin mutual funds vs. blockchain ETFs

Bitcoin and blockchain technology have emerged as exciting and lucrative investment opportunities in recent years, with investors flocking to digital assets. This has led to a growing number of financial instruments designed to provide exposure to Bitcoin and blockchain technology. Two of the most popular investment vehicles are Bitcoin mutual funds and blockchain exchange-traded funds (ETFs). In this article, we will compare and contrast these two investment options to help investors understand their unique characteristics and make informed decisions.

Bitcoin Mutual Funds

Bitcoin mutual funds are a type of investment fund that focuses specifically on investing in Bitcoin and other cryptocurrencies. These funds pool investors' money to purchase a diverse portfolio of cryptocurrencies, providing investors with exposure to the digital asset class. The first Bitcoin mutual fund, the Bitcoin Strategy ProFund (BTCFX), was launched in 2021 and quickly made history as the first-ever Bitcoin strategy mutual fund. However, it is important to note that there are very few Bitcoin mutual funds available, with BTCFX being the only option for US investors.

Blockchain ETFs

Blockchain ETFs, on the other hand, are thematic ETFs that invest in a wide range of companies that use or develop blockchain technology. Blockchain ETFs tend to have a broader focus than Bitcoin mutual funds and aim to provide exposure to the broader blockchain industry. The first blockchain ETF, the Amplify Transformational Data Sharing ETF (BLOK), was launched in 2018 and has since become the largest blockchain ETF in terms of assets under management (AUM). Other popular blockchain ETFs include the Global X Blockchain ETF (BKCH) and the Bitwise Crypto Industry Innovators ETF (BITQ).

Key Differences

One of the main differences between Bitcoin mutual funds and blockchain ETFs is their investment strategy. Bitcoin mutual funds invest directly in Bitcoin and other cryptocurrencies, while blockchain ETFs invest in companies that are involved in the blockchain industry. This means that Bitcoin mutual funds offer more direct exposure to the performance of Bitcoin, while blockchain ETFs provide indirect exposure through investments in blockchain-related companies.

Another difference is the level of diversification offered by each investment vehicle. Bitcoin mutual funds typically invest in a diverse range of cryptocurrencies, providing investors with exposure to multiple digital assets. In contrast, blockchain ETFs invest in a wide range of companies across various industries, including crypto exchanges, mining companies, financial services firms, and tech companies. This diversification can help reduce the overall risk of the investment.

Additionally, Bitcoin mutual funds and blockchain ETFs differ in terms of liquidity and pricing. Mutual funds are priced once per trading day, and trades are executed at the same price regardless of the time they were placed. In contrast, ETFs have share prices that fluctuate throughout the trading day, and the price paid depends on the time the trade is placed. ETFs also tend to be more liquid than mutual funds, making it easier for investors to buy and sell shares.

Both Bitcoin mutual funds and blockchain ETFs offer investors exposure to the blockchain and digital asset industry. However, they differ in terms of their investment strategy, level of diversification, liquidity, and pricing. Investors should carefully consider their investment goals, risk tolerance, and time horizon before deciding between these two investment options. Conducting thorough research and understanding the unique characteristics of each investment vehicle is crucial before making any investment decisions.

How to invest in Bitcoin mutual funds

Bitcoin mutual funds are professionally managed portfolios that pool investor money to invest in cryptocurrencies and assets tied to the crypto market. They are similar to traditional mutual funds but are designed to invest specifically in cryptocurrencies.

Each mutual fund has an expense ratio, which is the fee to invest in it. This is a percentage of the assets under management.

There is currently only one Bitcoin mutual fund available to US investors: the Bitcoin Strategy ProFund (BTCF.X). This fund was launched in July 2021 and is the first publicly available US mutual fund designed to follow the results of Bitcoin. It requires a minimum investment of $1,000 and charges an expense ratio of 1.15%.

Some advantages of Bitcoin mutual funds are that they are easy to buy, they can help build a diverse portfolio, cryptocurrency prices can rise very quickly, and they can be invested in using tax-advantaged retirement accounts.

On the other hand, there are hardly any Bitcoin mutual funds available, cryptocurrency is extremely volatile, you don't own the cryptocurrencies, and expense ratios can be high.

You can buy the Bitcoin Strategy ProFund through a brokerage account.

Given the lack of Bitcoin mutual funds, you may want to consider similar alternatives such as cryptocurrency trusts or cryptocurrency ETFs.

Cryptocurrency trusts are set up as investment funds that offer a fixed number of shares, which investors can purchase. Grayscale is one of the largest companies offering cryptocurrency trusts, including the Grayscale Bitcoin Trust (GBTC), which tracks the performance of Bitcoin.

Cryptocurrency ETFs are another type of managed fund that invests in cryptocurrency. They invest in crypto futures contracts and attempt to track the price of one or more digital assets. Some examples include the ProShare Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF).

Pros and cons of Bitcoin mutual funds

Pros:

• Accessibility and Liquidity: Bitcoin is an accessible and versatile currency, accepted by a growing number of places worldwide. It can be used to make purchases and exchanged for other currencies, without incurring foreign transaction fees.
• Decentralization: As a decentralized currency, Bitcoin is not regulated by a single government or central bank, meaning it is independent of conventional banking structures. This gives individuals more control over their assets, especially in countries with weak property rights.
• Security: Bitcoin's public key cryptography ensures transaction authenticity, and its irreversibility prevents data from being changed. Its decentralized nature also makes it almost impossible for any organization or government to manipulate the network.
• 24/7 Trading: Unlike traditional financial markets, Bitcoin can be traded any time of day, any day of the year. Transactions are also faster than bank transfers, taking between 10 minutes to an hour.
• Scarcity: There will only ever be 21 million bitcoins, and each bitcoin is divisible into 100,000,000 satoshis, making it useful for small purchases.
• Inflation Hedge: Many sophisticated investors view Bitcoin as a hedge against inflation, given its decentralized nature and limited supply.
• Performance: Bitcoin has been the best-performing asset class of the last decade, outperforming other assets like the NASDAQ 100.
• Self-Custody: Individuals can take complete ownership of their Bitcoin assets without relying on a bank or legal documents.
• Network Accessibility: Anyone can access the Bitcoin network, regardless of their location or financial status.
• Efficiency: Bitcoin transactions are more efficient than credit card transactions, which can take days to officially settle. Third-party solutions like the Lightning Network can process Bitcoin payments in milliseconds.

Cons:

• Volatility: Bitcoin experiences drastic price fluctuations, which can be challenging for long-term investors.
• Limited Acceptance: Bitcoin is not yet widely accepted as a means of payment, and it is banned in some jurisdictions.
• Energy Consumption: Bitcoin's mining process requires a significant amount of energy, leading to environmental concerns.
• Security Risks: The decentralized nature of Bitcoin makes it susceptible to hacking incidents and security breaches.
• Regulatory Landscape: The regulatory landscape for crypto is constantly evolving, and changes in regulations will impact the performance and availability of Bitcoin mutual funds.
• Fees: The fees associated with Bitcoin mutual funds, such as management and operational costs, can reduce investment returns.
• Tax Inefficiency: Bitcoin mutual funds may be subject to taxes on capital gains distributions and dividends, making them less tax-efficient.
• Complexity: There is a steep learning curve associated with fully understanding Bitcoin, which can be daunting for beginner investors.
• Competition: Other cryptocurrencies, like Ethereum, are emerging as competitors to Bitcoin, designing their monetary policies to be more competitive.
• Transactions Per Second: Other blockchain networks operate with higher transactions per second (TPS) than Bitcoin, making them more suitable for high-throughput applications.
• Age: While Bitcoin has been around for over a decade, it is still relatively new compared to traditional assets like gold.
• Criminal Activity: Critics argue that Bitcoin enables illegal activity, such as dark web purchases and money laundering.
• Lack of Central Development Team: Bitcoin does not have a central development team to improve and innovate the cryptocurrency, which may make it less adaptable than its competitors.
• Market Risk: As with any investment, there is a risk of losing the original amount invested due to market downturns or fluctuations.

Bitcoin mutual funds vs. Bitcoin ETFs

Bitcoin mutual funds and Bitcoin ETFs are two different investment vehicles that offer exposure to the Bitcoin market. Both have their own unique features, pros, and cons, which investors should carefully consider before making any investment decisions. Here is a detailed comparison between the two:

Bitcoin mutual funds are investment funds that pool money from multiple investors to purchase a collection of Bitcoin and other cryptocurrency assets. These funds are professionally managed and provide investors with a diverse portfolio of cryptocurrencies in a single investment. Mutual funds are priced once per trading day, and trades made throughout that day are executed at the same price. Additionally, mutual funds usually require a minimum investment amount and charge an expense ratio, which is a percentage of the assets under management. It's important to note that, currently, there are very few Bitcoin mutual funds available, and they primarily invest in Bitcoin futures contracts rather than directly purchasing Bitcoin.

Bitcoin Exchange-Traded Funds (ETFs) are similar to mutual funds but trade on a stock exchange like a publicly traded company. ETFs can hold Bitcoin directly or gain exposure to Bitcoin through futures contracts or by investing in companies related to the Bitcoin industry. ETFs have share prices that fluctuate throughout the trading day, and the price you pay depends on the time you place your trade. They also typically charge an annual expense ratio fee. Bitcoin ETFs have become more accessible to investors since the Securities and Exchange Commission (SEC) approved spot Bitcoin ETFs in January 2024.

Key Differences:

• Pricing: Mutual funds are priced once per day, while ETF prices fluctuate throughout the trading day.
• Trading: With mutual funds, you buy and sell specific dollar amounts, whereas with ETFs, you buy and sell shares.
• Investment Options: There is a limited number of Bitcoin mutual funds available, while there is a growing number of Bitcoin ETFs to choose from.
• Direct Exposure: ETFs can provide direct exposure to Bitcoin by holding it, while mutual funds typically invest in Bitcoin futures contracts.
• Fees: Both mutual funds and ETFs charge expense ratios, but the fees for ETFs are generally considered lower.
• Diversification: Mutual funds offer built-in diversification by investing in a variety of assets, while ETFs may require additional investments to achieve a diverse portfolio.

In summary, both Bitcoin mutual funds and Bitcoin ETFs offer investors a way to gain exposure to the Bitcoin market. Mutual funds provide a simpler way to invest in a diverse portfolio of cryptocurrencies but have limited options and may have higher expense ratios. ETFs offer more investment choices and direct exposure to Bitcoin but come with the added complexity of fluctuating share prices and the need for careful selection to match your investment goals.

How to buy Bitcoin directly

There are several ways to buy Bitcoin directly. Here is a step-by-step guide:

Step 1: Choose a platform

You can purchase Bitcoin from cryptocurrency exchanges, traditional stockbrokers, peer-to-peer money transfer apps, or Bitcoin ATMs. Some popular cryptocurrency exchanges include Gemini, Kraken, Coinbase, and Crypto.com. Traditional stockbrokers that offer Bitcoin trading include Robinhood, Webull, TradeStation, and Fidelity. Cash transfer services like PayPal, Venmo, and Cash App also allow users to buy, store, and sell Bitcoin.

Step 2: Set up an account

To buy Bitcoin, you will need to create an account on your chosen platform. This typically involves providing personal information, such as your name, email address, and sometimes a picture of your ID. Some platforms may also require you to set up a payment method, such as connecting your bank account or debit/credit card.

Step 3: Place a Bitcoin order

Once your account is set up, you can place an order for Bitcoin. The process will vary depending on the platform, but usually, you can search for Bitcoin by its ticker symbol, enter the amount you want to purchase, and place your order.

Step 4: Store your Bitcoin securely

After purchasing Bitcoin, you will need to store it in a digital wallet. There are two main types of wallets: hot wallets and cold wallets. Hot wallets are online wallets that are connected to the internet and are suitable for small amounts of Bitcoin or active trading. Cold wallets, on the other hand, are offline wallets that are more secure but require technical knowledge to set up. Examples of cold wallets include hardware wallets and paper wallets.

Additional considerations

When buying Bitcoin, it is important to consider the fees charged by the platform, the volatility of the cryptocurrency market, and any regulatory or tax implications in your jurisdiction. It is also crucial to prioritize the security of your Bitcoin by enabling two-factor authentication, using strong passwords, and keeping your private keys secure.

Frequently asked questions