Mutual Funds: Investing In Cryptocurrency

Cryptocurrency mutual funds pool investor money to invest in various crypto assets. They are professionally managed portfolios that include stocks, bonds, and other securities. Each mutual fund has an expense ratio, which is the fee to invest in it. The expense ratio is a percentage of the assets under management. The U.S. has only one such fund, Bitcoin Strategy ProFund, investing in Bitcoin futures. These funds offer convenience and potential tax advantages for retirement accounts.

Characteristics of Mutual Funds Investing in Cryptocurrency

Crypto ETFs vs Crypto Mutual Funds

Crypto ETFs and Crypto Mutual Funds are similar in many ways. Both pool investor funds, invest in a collection of crypto assets, and charge an expense ratio. However, there are some key differences between the two.

Pricing

Crypto ETFs have share prices that fluctuate throughout the trading day. This means that the time you place a trade will affect the price you pay for an ETF. On the other hand, mutual funds are priced once per trading day. All trades that are processed in a trading day have the same price, regardless of the exact time they were placed.

Trading

Trading also works differently for ETFs and mutual funds. With ETFs, you buy and sell shares, similar to stocks. Mutual funds, on the other hand, deal in specific dollar amounts.

Availability

There are currently very few crypto mutual funds available. In the US, for example, there is only one such fund, the Bitcoin Strategy ProFund, which invests in Bitcoin futures. Crypto ETFs, on the other hand, are more widely available, with several options on the market, including:

• ProShares Bitcoin Strategy ETF
• Valkyrie Bitcoin Miners ETF
• VanEck Bitcoin Strategy ETF
• Amplify Transformational Data Sharing ETF
• First Trust Indxx Innovative Transaction & Process ETF
• Fidelity Crypto Industry and Digital Payments ETF
• VanEck Digital Transformation ETF
• Schwab Crypto Thematic ETF
• Bitwise 10 Crypto Index Fund

Regulation

Crypto mutual funds also face more regulatory hurdles than crypto ETFs. In the US, for example, mutual funds need to be registered with the SEC and are subject to its regulations, which have rejected many crypto funds over the years due to concerns about fraud, volatility, and a lack of investor protections.

Overall, while both crypto ETFs and crypto mutual funds offer a convenient way to invest in cryptocurrencies, crypto ETFs are generally more widely available, more flexible in terms of pricing and trading, and face fewer regulatory hurdles. However, it's important to carefully consider the risks and potential drawbacks of any investment, including high fees and the volatile nature of the crypto market.

Pros and cons of investing in crypto mutual funds

Mutual funds are professionally managed portfolios that include stocks, bonds, and other securities. Investors pool their money to invest in mutual funds, which contain a variety of assets, giving investors a diverse portfolio in a single investment.

Crypto mutual funds are a collection of cryptocurrency assets packaged together as one investment. They are designed to invest specifically in cryptocurrencies and assets tied to the crypto market.

Pros:

• Easy to buy: Crypto mutual funds can be bought with a brokerage account, making them a convenient way to invest in crypto.
• Diversification: Mutual funds are a good way to diversify and reduce risk by investing in a variety of assets. While there are currently limited options for crypto mutual funds, this could change if more funds are approved.
• Potential for high returns: 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 crypto mutual funds using tax-advantaged retirement accounts.

Cons:

• Limited availability: There are very few crypto mutual funds available, with only one option currently available to U.S. investors: the Bitcoin Strategy ProFund.
• Volatility: Cryptocurrency is extremely volatile, and prices can plummet. While crypto mutual funds are typically used to reduce risk through diversification, investing in this asset class still carries significant risk.
• Lack of direct ownership: Crypto mutual funds invest in futures contracts, so their price may not entirely follow the price of the underlying cryptocurrencies.
• High expense ratios: The expense ratios for crypto mutual funds can be high, with the Bitcoin Strategy ProFund charging 1.15%, which is considered on the high side.

Overall, investing in crypto mutual funds has its benefits, but it is important to carefully consider the risks and limitations before making any investment decisions.

Examples of crypto-adjacent funds

Crypto-adjacent funds are mutual funds and ETFs that invest in companies working with cryptocurrency in some way. They are an indirect method of investing in crypto and give some exposure to the crypto market. Here are some examples of crypto-adjacent funds:

Amplify Transformational Data Sharing ETF (BLOK)

With an expense ratio of 0.71%, BLOK invests in businesses involved in blockchain technology, which powers cryptocurrencies. It has assets under management (AUM) worth $1.1 billion and is an actively managed fund that aims to invest at least 80% of its assets in blockchain technology companies. Its top holdings include MicroStrategy (MSTR), Marathon Digital Holdings (MARA), and Coinbase Global (COIN).

Reality Shares Nasdaq NexGen Economy ETF (BLCN)

The Reality Shares Nasdaq NexGen Economy ETF has an expense ratio of 0.68%. It aims to invest in companies that develop, research, or utilize blockchain technology.

Fidelity Crypto Industry and Digital Payments ETF (FDIG)

The Fidelity Crypto Industry and Digital Payments ETF, launched in April 2022, has assets under management of $78.8 million. It tracks the performance of the Fidelity Crypto Industry and Digital Payments Index, which includes businesses engaged in cryptocurrency, blockchain technology, and digital payments processing. Its top holdings include Coinbase Global, Marathon Digital Holdings, and Riot Platforms (RIOT).

VanEck Digital Transformation ETF (DAPP)

The VanEck Digital Transformation ETF is a passively managed fund with assets under management of $88.1 million. It tracks the performance of the MVIS Global Digital Assets Equity Index, which includes companies that participate in the digital assets economy. Its top holdings include Marathon Digital, Coinbase Global, MicroStrategy, and CleanSpark (CLSK).

Schwab Crypto Thematic ETF (STCE)

The Schwab Crypto Thematic ETF is a passively managed crypto ETF with assets under management of $21.2 million. It tracks the performance of the Schwab Crypto Thematic Index, which includes companies that benefit from cryptocurrency and blockchain-related activities. Its top holdings include Coinbase Global, PayPal Holdings (PYPL), and CleanSpark.

Examples of crypto mutual funds

Grayscale Bitcoin Trust (GBTC)

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

Valkyrie Bitcoin Miners ETF (WGMI)

WGMI is an actively traded fund on the Nasdaq exchange, which debuted in February 2022. As of October 17, 2023, the fund has an AUM of $13.59 million and an expense ratio of 0.75%. The fund invests in companies involved in the Bitcoin ecosystem, such as mining on the Bitcoin blockchain.

VanEck Bitcoin Strategy ETF (XBTF)

XBTF is a fund that invests in Bitcoin futures and U.S. Treasuries. The fund trades on Cboe BZX and debuted in November 2021. As of October 17, 2023, the fund had $46.97 million in net assets and operating expenses of 0.66%. It aims to provide investors with exposure to Bitcoin prices while reducing the risk and expenses associated with 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 involved in developing and using blockchain technologies. It has 50 holdings, including MicroStrategy (MSTR), Marathon Digital Holdings (MARA), and Coinbase Global (COIN). BLOK has an expense ratio of 0.71%.

First Trust Indxx Innovative Transaction & Process ETF (LEGR)

Launched in January 2018, this ETF tracks the performance of the Indxx Blockchain Index, which follows companies with connections to blockchain technology. The ETF has an expense ratio of 0.65% and had $102.7 million in assets under management as of January 10, 2024.

Fidelity Crypto Industry and Digital Payments ETF (FDIG)

The Fidelity Crypto Industry and Digital Payments ETF is one of the newer crypto ETFs, having launched in April 2022. It seeks to track the performance of the Fidelity Crypto Industry and Digital Payments Index, which includes businesses engaged in cryptocurrency, blockchain technology, and digital payments processing. FDIG has an expense ratio of 0.40% and had $78.8 million in assets under management as of January 10, 2024.

How to invest in cryptocurrency mutual funds

Cryptocurrency index funds are a developing area of investment, which could allow investors to build a diverse crypto portfolio in a single investment. An index fund is a type of mutual fund, which pools investor funds that a fund manager invests in securities. A cryptocurrency index fund is a financial vehicle that invests in a group of cryptocurrencies.

There are a few ways to invest in cryptocurrency mutual funds. The first is to buy into a cryptocurrency index fund, such as the Bitwise 10 Crypto Index Fund. This fund is publicly traded and attempts to follow the 10 largest cryptocurrencies by market cap, excluding stablecoins. However, it has a high expense ratio of 2.5%.

Another way to invest in cryptocurrency mutual funds is through index fund tokens. These are cryptocurrencies that act as index funds by tracking a group of cryptocurrencies. Examples include CRYPTO20, which tracks the top 20 cryptocurrencies by market capitalization, and the NFT Index, which tracks digital assets in the non-fungible token industry.

For more advanced crypto traders, it is possible to buy into a mutual fund indirectly. The Bitcoin Investment Trust is currently the only fund that invests exclusively in cryptocurrency, with 43% owned by two mutual fund companies.

Finally, investors can also create their own DIY crypto index fund by signing up for an account with a cryptocurrency exchange and selecting the types of cryptocurrency they want to include in their fund. This option provides more control and avoids expense ratios, but it is also more time-consuming, especially when rebalancing the portfolio.

It is important to note that investing in cryptocurrencies is much more volatile than investing in stocks or bonds, and there is a higher level of risk involved.

Frequently asked questions