Schwab's Crypto Conundrum: Why You Can't Invest

Cryptocurrency is a hot topic, and interest in investing in it has soared in recent years. While you can't directly buy or sell Bitcoin or any other cryptocurrency at Schwab, there are several ways to get indirect exposure to cryptocurrencies. These include cryptocurrency coin trusts, Bitcoin futures, exchange-traded funds (ETFs), and mutual funds, and cryptocurrency stocks. However, these methods come with their own set of risks and considerations.

Cryptocurrency coin trusts like GBTC are available, but they can be volatile and have high fees

Cryptocurrency coin trusts like GBTC, BCHG, ETHE, OBTC, and LTCN are available at Schwab, but they can be volatile and have high fees. These products can be traded over the counter and behave like closed-end funds. They are not appropriate for all investors.

Over-the-counter cryptocurrency trusts allow investors to trade shares in trusts holding large pools of a cryptocurrency. However, these products can involve high volatility, hefty fees, commissions, and other risks. Cryptocurrency coin trusts have tended to trade at large premiums or discounts to the value of their underlying assets due to their limited ability to match the demand for shares with the available supply.

GBTC, for example, can trade at a significant premium and has a high annual fee of 2%. It is recommended to use GBTC only if you want to get crypto exposure in a tax-advantaged account and try to buy when the premium is low.

Overall, while cryptocurrency coin trusts are an option for investors at Schwab, they come with certain risks and fees that should be carefully considered before investing.

Bitcoin futures are an option, but they are settled in cash, not crypto

While you cannot directly buy or sell Bitcoin or any other cryptocurrency at Schwab, there are several ways to gain indirect exposure to the cryptocurrency markets through the platform. One such way is by investing in Bitcoin futures.

Bitcoin futures are contracts that allow you to agree to buy or sell a specific quantity of Bitcoin at a specified price on a particular future date. These contracts are traded on futures exchanges, and they can be a way for investors to gain exposure to the price movements of Bitcoin without actually owning the cryptocurrency. Schwab clients with a futures account can trade Bitcoin futures contracts directly.

However, it is important to note that these futures contracts are settled in cash, not in cryptocurrency. This means that when the contract expires, you will receive or pay the cash equivalent of the Bitcoin price change, rather than receiving or delivering the actual Bitcoin. This is a key distinction between Bitcoin futures and other types of cryptocurrency investments.

Investing in Bitcoin futures can provide a way to speculate on the price movements of Bitcoin without needing to hold the underlying asset. Additionally, futures contracts can be used to hedge against price movements, allowing investors to manage their risk exposure. However, it's important to remember that trading in futures contracts comes with its own set of risks, including the potential for high volatility and significant losses.

Another option for gaining exposure to the cryptocurrency markets through Schwab is by investing in cryptocurrency-related exchange-traded funds (ETFs). These ETFs do not invest directly in cryptocurrencies but may invest in companies that operate in the digital asset and cryptocurrency ecosystem. For example, they may include companies that offer cryptocurrency trading, custody, or mining services. More recently, the SEC has also approved ETFs that hold spot Bitcoin, which seek to track the price of Bitcoin more closely. These ETFs provide another way to gain exposure to the cryptocurrency markets without directly investing in them.

Exchange-traded funds (ETFs) and mutual funds provide indirect exposure to crypto through futures contracts

Exchange-traded funds (ETFs) and mutual funds are investment vehicles that pool a group of securities into a fund. They can be traded like individual stocks on an exchange. ETFs and mutual funds provide indirect exposure to crypto assets through futures contracts.

ETFs and mutual funds trade on regular stock exchanges, and investors can hold them in their standard brokerage accounts. These funds allow retail traders to gain exposure to crypto prices without owning the assets directly. This makes it possible to speculate on cryptocurrency prices without doing business on a crypto exchange or dealing with the costs and complexities of directly owning digital assets.

Cryptocurrency-related ETFs do not invest directly in cryptocurrencies such as Bitcoin. Instead, they may invest in companies that operate in the digital asset and cryptocurrency ecosystem, such as companies offering trading, custody, or mining of cryptocurrencies. They may also invest in derivatives such as cryptocurrency futures, which are agreements to buy or sell a specific quantity of Bitcoin or other cryptocurrencies at a specified price on a particular future date.

ETFs that provide exposure to crypto assets carry a substantial level of risk and are not suitable for all investors. Investments in cryptocurrencies are relatively new, highly speculative, and may be subject to extreme price volatility, illiquidity, and increased risk of loss. The crypto markets are relatively new and largely unregulated, making them more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments.

Mutual funds are pooled investments into bonds, securities, and other instruments. They are run by professional fund managers who try to outperform the market. Mutual funds can be a good alternative for investors who prefer the hands-on approach of active fund management, although they generally come with higher fees than ETFs.

Equity-based ETFs offer exposure to the blockchain and digital economy

Cryptocurrency has become a prominent feature of the mainstream investing landscape, with more advisors and their clients expressing interest in this asset class. While Schwab does not currently offer spot trading of cryptocurrency, there are several choices for gaining exposure to the cryptocurrency markets. One way is through cryptocurrency-related ETFs, which invest in companies that operate in the digital asset and cryptocurrency ecosystem, such as those offering trading, custody, or mining of cryptocurrencies. These ETFs carry a substantial level of risk and are not suitable for all investors.

Another way to gain exposure to the blockchain and digital economy through equity-based ETFs is by investing in companies that provide technology or tools related to digital assets, as well as companies that could benefit directly or indirectly from blockchain or the shift to decentralized finance. Decentralized finance, or DeFi, is a system in which financial transactions are made directly between buyers and sellers without the need for banks or other centralized financial institutions. Equity-based ETFs that focus on blockchain and the digital economy can provide investors with exposure to a diverse range of companies across different sectors, such as crypto exchanges, crypto miners, financial services firms, and tech companies.

• Amplify Transformational Data Sharing ETF (BLOK): This ETF aims to invest in companies developing or using blockchain technologies, including crypto exchanges, cryptocurrency mining companies, and developers of new blockchain applications.
• Global X Blockchain ETF (BKCH): This passively managed ETF invests in companies positioned to benefit from the adoption of blockchain technology, including crypto mining companies, crypto exchanges, and developers of new blockchain applications.
• Bitwise Crypto Industry Innovators ETF (BITQ): This ETF tracks the performance of the Bitwise Crypto Innovators 30 Index, which includes companies deeply involved in cryptocurrency markets, such as crypto mining, mining equipment suppliers, and financial services companies.
• VanEck Digital Transformation ETF (DAPP): This ETF tracks the performance of the MVIS Global Digital Assets Equity Index, holding stocks of companies active in cryptocurrency and blockchain, with good exposure to international stocks.
• Fidelity Crypto Industry and Digital Payments ETF (FDIG): Benchmarked to the Fidelity Crypto Industry and Digital Payment Index, this ETF invests in global cryptocurrency, blockchain, and digital payment companies, with a focus on financial services and tech industries.
• Siren Nasdaq NexGen Economy ETF (BLCN): This ETF tracks the Nasdaq Blockchain Economy Index, investing in stocks of companies that develop blockchain technology or use it for their businesses, offering a well-diversified portfolio.
• First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT): This actively managed ETF aims to invest at least 80% of its net assets in companies active in the cryptocurrency economy.

These equity-based ETFs provide investors with exposure to the blockchain and digital economy, allowing them to benefit from the increased adoption and utilization of blockchain technology. By investing in a diverse range of companies across different sectors, these ETFs offer a less risky way to gain exposure to the industry compared to investing in individual stocks.

Cryptocurrency stocks allow for indirect exposure to crypto due to the company's relationship with digital assets

Cryptocurrency stocks allow investors to gain indirect exposure to crypto assets due to the company's relationship with digital assets. These stocks are ideal for investors who are hesitant to directly invest in cryptocurrencies but still want to benefit from their performance.

Cryptocurrency stocks are tied to companies that are plugged into the blockchain economy or have significant involvement in blockchain-related activities. Blockchain technology is the special technology that underpins cryptocurrencies, providing a secure, decentralised, and unregulated form of cash. Blockchain technology has applications beyond cryptocurrency, including identity verification and contract settlements.

Some examples of companies that offer cryptocurrency stocks include PayPal (PYPL), MercadoLibre (MELI), Broadcom (AVGO), and SBI Holdings Inc (SBHGF). PayPal, for instance, started allowing customers to buy, sell, and hold crypto on its platform in 2020. More recently, the company has allowed users to transfer crypto holdings outside of its platform. MercadoLibre, an Argentinian e-commerce giant, has introduced its own cryptocurrency, the Mercado coin, and also provides a digital wallet that enables crypto trading across multiple assets, including Bitcoin. Broadcom, a tech stock, assists business owners in incorporating blockchain technology into their operations, focusing on the essential infrastructure and security aspects of blockchain integration. Finally, SBI Holdings Inc is a Japanese conglomerate that operates across various sectors, including financial services, asset management, healthcare data, and biotechnology. The company's indirect crypto exposure potential stems from its "crypto-asset business," which integrates a variety of crypto-related and blockchain initiatives to enhance its financial ecosystem.

In summary, cryptocurrency stocks provide investors with indirect exposure to the crypto asset class due to the companies' utilisation of blockchain technology and their focus on digital assets.

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