The Quest For Crypto Funds: Exploring Investment Opportunities

Cryptocurrency funds have been available to investors since the first bitcoin fund was launched in 2013. Currently, over 840 cryptocurrency funds have been established, and there are a variety of ways to invest in them.

Cryptocurrency funds are a new investment vehicle similar to mutual funds/ETFs, containing a portfolio of digital tokens and cryptos instead of stocks, indices, or commodities.

There are several types of cryptocurrency funds, including crypto ETFs, crypto mutual funds, and crypto index funds. Crypto ETFs and mutual funds are similar in that they pool investor funds and invest in a collection of crypto assets. The main difference is in how they are priced: ETFs have share prices that fluctuate throughout the trading day, while mutual funds are priced once per trading day.

Crypto index funds are a type of mutual fund that invests in a specific index of cryptocurrencies. These funds are still in the early stages and mostly theoretical, with only a few successful attempts to build traditional investment vehicles that track multiple types of cryptocurrency.

Some popular cryptocurrency funds include the Bitwise 10 Crypto Index Fund, Grayscale Bitcoin Trust, and Valkyrie Bitcoin Miners ETF. It's important to note that investing in cryptocurrency is risky due to the volatility of the market, and it's essential to do your research before investing.

Pros and cons of investing in crypto mutual funds

Crypto mutual funds are a relatively new investment vehicle, and as such, there is only one such fund available to US investors: the Bitcoin Strategy ProFund. This fund invests in Bitcoin futures contracts and requires a minimum investment of $1,000 with an expense ratio of 1.15%.

Pros

• Easy to buy: Crypto mutual funds can be purchased with a brokerage account, making them a convenient way to invest in cryptocurrencies.
• Potential for high returns: The crypto market is known for its large price movements, and a crypto mutual fund could be one of your most profitable investments if the market performs well.
• Diversification: Crypto mutual funds invest in a variety of crypto assets, which can help reduce the risk of investing in a single cryptocurrency.
• Tax advantages: Crypto mutual funds may offer potential tax advantages for retirement accounts. For example, you can't buy Bitcoin directly with an IRA or a 401(k), but you could invest in a Bitcoin mutual fund.

Cons

• Limited availability: Currently, there is only one crypto mutual fund available, which invests in Bitcoin. If you're looking for a fund with a mix of different cryptocurrencies, you don't have any options.
• Extreme volatility: Cryptocurrencies are extremely volatile, and prices can plummet as quickly as they rise. While you could make a lot of money, you're also taking on significant risk.
• You don't own the underlying cryptocurrencies: Crypto mutual funds invest in futures contracts, so the fund's price may not always follow the price of the cryptocurrencies it's based on.
• High expense ratios: The Bitcoin Strategy ProFund, for example, charges an expense ratio of 1.15%, which is considered high.

Crypto ETFs vs Crypto Mutual Funds

Crypto ETFs and Crypto Mutual Funds are two ways to gain exposure to the cryptocurrency market without directly owning any digital assets. Here is a detailed comparison between the two:

Crypto ETFs (Exchange-Traded Funds)

Crypto ETFs are investment funds that can be bought and sold on stock exchanges, just like stocks. They are designed to track the price performance of cryptocurrencies, such as Bitcoin and Ethereum, by investing in a portfolio linked to these instruments. Crypto ETFs can hold spot Bitcoin, Ethereum futures, or shares of blockchain companies and crypto exchanges.

The main advantages of crypto ETFs are that they provide exposure to crypto without the additional costs and risks associated with direct ownership. They also have lower learning curves, as investors do not need to understand the intricacies of crypto self-custody. Additionally, crypto ETFs offer more security, as individual investors may find it challenging to secure their cryptocurrencies.

However, crypto ETFs generally have higher fees than other types of ETFs. They are also subject to the volatility of the crypto markets and do not offer direct ownership or control over the underlying cryptocurrencies.

Crypto Mutual Funds

Crypto Mutual Funds, such as the Schwab Crypto Thematic Mutual Fund, are another way to gain exposure to the cryptocurrency market. These funds invest in cryptocurrencies, cryptocurrency futures contracts, or equities related to cryptocurrencies.

Crypto Mutual Funds offer a more regulated and consumer-protected investment option compared to direct crypto trading. They are suitable for investors who want to add cryptocurrencies to their portfolios without the complexities of direct ownership.

However, crypto mutual funds can involve high expenses, with fees potentially exceeding 2% or more of the investment. Additionally, investors do not have direct ownership or control over the underlying cryptocurrencies in these funds.

Key Differences:

• Crypto ETFs are traded on stock exchanges, while mutual funds are typically bought and sold directly from the fund company.
• Crypto ETFs generally have higher fees than crypto mutual funds.
• Crypto ETFs provide exposure to a range of cryptocurrencies and related companies, while mutual funds may have a more focused investment strategy.
• Crypto ETFs offer more liquidity, as they can be bought and sold during market hours.
• Crypto Mutual Funds may have higher minimum investment requirements.

In summary, both crypto ETFs and crypto mutual funds offer investors a way to gain exposure to the cryptocurrency market without directly owning digital assets. The choice between the two depends on the investor's preferences regarding fees, liquidity, investment strategy, and level of direct ownership desired.

Crypto-adjacent funds

• Amplify Transformational Data Sharing ETF (BLOK) invests in businesses involved in the blockchain technology that powers cryptocurrencies. It has an expense ratio of 0.71%.
• Reality Shares Nasdaq NexGen Economy ETF (BLCN) aims to invest in companies that develop, research, or utilise blockchain technology. It has an expense ratio of 0.68%.
• First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT) invests 80% of its assets in companies active in the crypto economy. The companies it invests in have at least 50% of exposure to crypto.
• Simplify US Equity Plus GBTC ETF (SPBC) invests in US stocks and also in Grayscale Bitcoin Trust to provide a 10% exposure to BTC.
• Global X Blockchain ETF (BKCH) invests in companies that deal in blockchains and digital asset transactions, integration applications and services, integration hardware, dApps, and hardware.

Crypto index funds

One example of a crypto index fund is the Bitwise 10 Crypto Index Fund (BITW), which tracks the 10 largest cryptocurrencies by market capitalization, excluding stablecoins. The fund provides a secure and simple way to invest in bitcoin and leading cryptocurrencies, with shares tradable in brokerage accounts. Another option is the Nasdaq Crypto Index (NCI), which is designed to be dynamic, broadly representative of the market, and easily trackable by investors. The NCI tracks the performance of a diverse basket of USD-traded digital assets and is rebalanced quarterly.

Overall, crypto index funds offer a potential opportunity for investors to gain exposure to a range of cryptocurrencies in a single investment. By tracking a specific index and providing diversification, these funds can help mitigate risk and simplify the process of investing in the digital asset market.

Bitcoin investment trusts

The Bitcoin Investment Trust (BIT) is an open-ended private trust that was launched in 2013 by Barry Silbert from Digital Currency Group. It is currently sponsored by Grayscale Investments LLC, a subsidiary of SecondMarket Holdings, Inc. The trust enables investors to profit from Bitcoin price changes without needing to buy and store the cryptocurrency. BIT's shares were the first securities pegged to Bitcoin and traded publicly. Each share of BIT is worth about one-tenth of the price of BTC minus operational costs.

The Grayscale Bitcoin Trust (GBTC) is a digital currency investment product that makes bitcoins available to individual and institutional investors. It was launched in 2013 and was originally only available to institutional and accredited investors. In 2015, it received approval from the Financial Industry Regulatory Authority (FINRA) to sell shares publicly on the secondary market to retail investors. The trust is solely and passively invested in BTC, allowing investors to gain exposure to BTC as a security while avoiding the challenges of buying, storing, and securing bitcoins directly.

Grayscale's investment trusts provide an entryway for investors who are unfamiliar with the intricacies of the crypto market. They offer familiarity and transparency, which are definite benefits for those who are hesitant to traverse into the uncharted territory of cryptocurrencies. However, these trusts come with significant premiums and are exposed to the volatility of the crypto market.

The Grayscale Bitcoin Trust is the world's largest bitcoin fund and the first investment vehicle of its kind to report financials regularly to the U.S. Securities and Exchange Commission (SEC). The fund tracks the price of bitcoin, and accredited investors can buy shares directly at the net asset value (NAV). These shares can then be sold on the secondary market to retail investors after a 6-month lockup period. The minimum buy-in for accredited investors is $50,000, and Grayscale charges a 2.0% annual account fee.

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