Mutual Funds: Investing In Cryptocurrency?

Cryptocurrency mutual funds pool investor money to invest in various crypto assets. These funds offer convenience and potential tax advantages for retirement accounts. The U.S. currently has only one such fund, the Bitcoin Strategy ProFund, which invests in Bitcoin futures. Cryptocurrency ETFs, on the other hand, are priced throughout the trading day and have share prices that fluctuate. While there are several Bitcoin ETFs available, they do not invest directly in Bitcoin. Instead, they track Bitcoin futures contracts or invest in companies involved in the Bitcoin industry.

Pros and cons of investing in cryptocurrency mutual funds

Cryptocurrency mutual funds are an intriguing possibility for the future, but they are still a work in progress. Here are some pros and cons to consider before investing in them:

Pros

• Easy to buy: You can buy mutual funds with a brokerage account, so they are a convenient way to invest in crypto.
• Diversification: Mutual funds are a good way to diversify and reduce risk because they invest in a variety of assets.
• Potential for high returns: Cryptocurrency prices can go up very quickly. The crypto market is known for large price movements, so a crypto mutual fund could be one of your most profitable investments.
• Tax advantages: You can invest in mutual funds using tax-advantaged retirement accounts. You can't buy Bitcoin directly with a retirement plan such as an IRA or a 401(k), but you could invest in a Bitcoin mutual fund.

Cons

• Limited availability: There are hardly any cryptocurrency mutual funds available at the moment. If you're looking for a fund with a mix of different cryptocurrencies, you're out of luck.
• Volatility: Cryptocurrency is extremely volatile. While you could make a lot of money from crypto, prices could also plummet. Investors normally buy mutual funds to reduce risk through diversification, but you're still taking on significant risk with a crypto mutual fund.
• High expense ratios: The expense ratio is the fee to invest in a mutual fund. The only example of a crypto mutual fund available to U.S. investors, the Bitcoin Strategy ProFund, charges 1.15%. Anything above 1% is considered on the high side.
• Lack of ownership: Since crypto mutual funds invest in futures contracts, their price may not entirely follow the price of the underlying cryptocurrencies.

Examples of cryptocurrency mutual funds

Crypto mutual funds are an entirely new way to invest in cryptocurrencies. Here are some examples of cryptocurrency mutual funds:

Grayscale Bitcoin Trust (GBTC)

This fund was established as an open-ended private trust by Alternative Currency Asset Management in 2013 and is now sponsored by Grayscale Investments LLC. It began trading publicly in 2015 under the symbol GBTC and has a management fee of 2%. The fund’s objective is to track the underlying value of Bitcoin. As of Oct 17, 2023, it had $17.7 billion worth of assets under management (AUM).

Valkyrie Bitcoin Miners ETF (WGMI)

WGMI is an actively traded fund on the Nasdaq exchange, having debuted in February 2022. As of Oct 17, 2023, the fund has an AUM of $13.59 million and an expense ratio of 0.75%. The fund's strategy is to invest 80% of its assets in Bitcoin blockchain-related endeavours.

VanEck Bitcoin Strategy ETF (XBTF)

XBTF is a fund that invests in Bitcoin futures and US Treasuries. The fund trades on Cboe BZX and debuted in November 2021. As of Oct 17, 2023, the fund had $46.97 million in net assets and operating expenses of 0.66%. The fund's active management strategy is to provide investors with exposure to Bitcoin prices while reducing the risk and expenses of owning bitcoins.

Amplify Transformational Data Sharing ETF (BLOK)

This ETF is actively managed and aims to invest at least 80% of its assets in companies that are involved in developing blockchain technologies and using them for their own business. It has 50 holdings, and the top 10 account for about 40% of its assets. BLOK has a 1.83% expense ratio.

Bitcoin Strategy ProFund (BTCF.X)

The Bitcoin Strategy ProFund was the first publicly available US mutual fund designed to follow the results of Bitcoin. It invests in Bitcoin futures contracts and requires a minimum investment of $1,000. It has an expense ratio of 1.15%.

How to invest in cryptocurrency mutual funds

Cryptocurrency mutual funds pool investor money to invest in various crypto assets. They are professionally managed portfolios that include cryptocurrencies and assets tied to the cryptocurrency market.

• Check with your employer: Before buying shares, check with your employer if they offer additional mutual fund products, as these may come with matching funds or be more beneficial tax-wise.
• Ensure you have a brokerage account: You will need a brokerage account with sufficient deposits and access to buy mutual fund shares.
• Identify suitable mutual funds: Research and identify mutual funds that match your investment goals, including your risk tolerance, desired returns, fees, and minimum investment amounts. Many platforms offer fund screening and research tools to help with this process.
• Determine your investment amount: Decide how much you want to invest and submit your trade. You may also have the option to set up automatic recurring investments.
• Monitor your investment: While mutual funds are typically long-term investments, it is important to periodically check on the fund's performance and make adjustments as needed.
• Know the fees: Understand the fees associated with the mutual fund, as these will impact your overall returns. Mutual funds typically charge management fees of around 1-2% per year, but there may also be other costs such as redemption fees or account maintenance fees.
• Be aware of the limitations: Cryptocurrency mutual funds have some limitations compared to investing directly in cryptocurrencies. For example, mutual funds usually only trade once per day, and you don't directly own the underlying cryptocurrencies.
• Consider the alternatives: There are other ways to invest in cryptocurrencies, such as through cryptocurrency exchange-traded funds (ETFs) or by buying cryptocurrencies directly on a cryptocurrency exchange.

Currently, the selection of cryptocurrency mutual funds available is quite limited. The only true crypto mutual fund available in the U.S. as of early 2022 is the Bitcoin Strategy ProFund, which has a minimum investment of $1,000 and an expense ratio of 1.15%.

Therefore, if you are looking for more options or want to invest in cryptocurrencies beyond Bitcoin, you may need to consider other investment vehicles or direct purchases of cryptocurrencies.

Differences between cryptocurrency ETFs and mutual funds

There are several differences between cryptocurrency ETFs and mutual funds. Here are some of the key distinctions:

Pricing and Trading

Cryptocurrency ETFs and mutual funds differ significantly in how they are priced and traded. Cryptocurrency ETFs have share prices that fluctuate throughout the trading day, meaning the time of placing a trade affects the price paid. In contrast, mutual funds are priced once per trading day, so all trades processed on that day receive the same price. With ETFs, shares are bought and sold like stocks, while mutual funds involve buying and selling specific dollar amounts.

Management

Cryptocurrency ETFs are typically passively managed, tracking a market index or sector sub-index. In contrast, mutual funds are usually actively managed, with fund managers making decisions about asset allocation. However, this distinction is becoming blurred, as passive index funds are gaining popularity among mutual funds, and actively managed ETFs are also available.

Minimum Investment

Cryptocurrency ETFs generally have lower minimum investment requirements than mutual funds. ETFs can be purchased for the price of a single share, while mutual funds often require minimum investments of hundreds or thousands of dollars.

Tax Efficiency

Cryptocurrency ETFs may offer tax advantages over mutual funds. As passively managed portfolios, ETFs tend to realise fewer capital gains, resulting in potential tax benefits for investors.

Timing of Transactions

Cryptocurrency ETFs allow buying and selling throughout the trading day, providing more flexibility for active traders. On the other hand, mutual funds can only be purchased or sold once a day, after the market closes.

Expense Ratios

Expense ratios, or fees to invest, tend to be lower for cryptocurrency ETFs compared to mutual funds. The passive management style of ETFs contributes to lower expense ratios.

Risks of investing in cryptocurrencies

Investing in cryptocurrencies carries several risks that potential investors should be aware of. Here are some of the key risks associated with investing in cryptocurrencies:

Volatility and Price Fluctuation

The value of cryptocurrencies can fluctuate dramatically and is subject to frequent high highs and low lows. This volatility is influenced by various factors, and while trends can change, there is no guarantee that the value will rise again if it drops.

Regulatory Uncertainties

Government regulations around crypto are constantly evolving and may differ based on geographical location. These regulations can impact how investors use or access their crypto holdings, leading to uncertainty and potential market volatility.

Security and Scam Risks

The lack of centralised control in cryptocurrencies means there is no protection or insurance for lost or stolen cryptocurrencies. Additionally, some trading platforms may be more secure than others, and newer coins could pose a higher scam risk. It is crucial to thoroughly research before investing.

User Risk and Irreversible Transactions

Cryptocurrency transactions are typically irreversible. Once a payment is made, getting a refund usually depends on the sender's willingness to return the money. It is essential to research the seller's reputation before making a purchase.

Centralisation and Energy Consumption

Despite the decentralised nature of cryptocurrencies, ownership is becoming more concentrated among large companies and investment fund managers. Additionally, mining popular cryptocurrencies requires significant energy, sometimes as much as entire countries consume, leading to high costs and unpredictability in mining operations.

Regulatory and Counterparty Risks

The regulatory status of cryptocurrencies is still unclear in many areas, and a sudden regulatory crackdown could make it challenging to sell or cause a market-wide price drop. Additionally, investors who rely on exchanges or custodians to store their crypto face the risk of theft or loss by these third parties.

Management and Programming Risks

The lack of coherent regulations leaves investors vulnerable to deceptive or unethical management practices. Many investors have lost substantial sums due to management teams failing to deliver promised products. Additionally, the use of automated smart contracts to control user deposits carries the risk of bugs or exploits, potentially resulting in investment losses.

Market Manipulation

Market manipulation remains a significant issue in the cryptocurrency market, with influential people, organisations, and exchanges acting unethically.

Criminal Activities and Pseudonymity

The pseudonymity of cryptocurrency transactions allows for criminal activities such as money laundering and illicit purchases. Law enforcement agencies can still track transactions, but the digital trail provides opportunities for nefarious use.

Lack of Legal Protections

Cryptocurrency payments do not offer the same legal protections as traditional payment methods like credit or debit cards. Disputing a purchase or getting a refund can be challenging, as cryptocurrencies typically lack a centralised authority to facilitate these processes.

Government and Central Bank Influence

Unlike traditional currencies, cryptocurrencies are not backed by governments or central banks. This lack of institutional support means that the value of a cryptocurrency is not tied to promises or interventions by these entities, which can impact its stability.

Online Storage Risks

Holding cryptocurrencies in online "wallets" does not provide the same level of protection as a bank account. These holdings are not insured by governments, and technical issues like hard drive crashes or viruses can result in the loss of funds.

High Fees and Illiquidity

Cryptocurrencies are known for their high fees, and in some cases, investors may need to meet minimum investment requirements. Additionally, cryptocurrencies can become illiquid at any time, making it challenging to withdraw funds or exit investments.

Frequently asked questions