Here is a dashboard on eight ways to own crypto. Most intriguing: a low-cost coin trust available at a bargain price.
Are you interested in virtual currency, which is now trading at half the price it was last fall? Compare the prices. Among the many ways to get a piece of the action, there are big differences in the costs of ownership. My favorite: a somewhat obscure bitcoin trust located in Fairfield, Connecticut.
There are pros and cons to every means of gaining cryptocurrency exposure, including Fairfield’s undress. This survey covers eight bitcoin bets in descending order of my view on their desirability. You may have a different ranking, especially if you are speculating on a fast turnaround.
#1. Osprey Bitcoin Trust
This quasi-fund (ticker: OBTC), created just over a year ago, is a knockoff of the much better known Grayscale Bitcoin Trust. Both trusts are closed-end, in the sense that investors do not have the right to redeem shares in exchange for cash or underlying assets.
Osprey is much more profitable, with an annual expense ratio of 0.8% compared to 2% for Grayscale. These expense figures include both portfolio management fees and custody fees.
Trusts are trading at discounted prices relative to the value of the bitcoins they hold: recently 26% at Osprey, 28% at Grayscale. With either, you are betting on both the crypto and that rebate. If the discount widens, you are worse off than you would have been with a coin purchase. If it shrinks, you have a bargain.
What could widen the discounts: a continued decline in crypto prices. Bear markets have a way of doing double damage to closed stocks, causing the price of their stocks to fall even faster than prices fall on the assets they hold. This has been the case with equity funds since the Great Depression and it is probably the case with crypto-trusts.
It’s happening right now. A 12% drop in bitcoin between Friday afternoon of May 6 and Monday afternoon precipitated a 16% drop in Grayscale’s price.
But the reductions could disappear. This would happen if the Securities & Exchange Commission allowed exchange-traded funds to hold virtual currencies. Grayscale and Osprey have committed to converting their closed-end trusts into ETFs as soon as such things are permitted.
The ETF structure allows market makers to cash in unwanted fund shares (or buy new shares when shares are sought) through an exchange of underlying assets. This sets up an arbitrage that keeps the price of an ETF close to the net asset value of the fund.
The agency has so far rejected all applications for coin ETFs, although last year it gave the green light to an ETF that holds bitcoin futures. Why the distinction? Futures contracts trade on the heavily regulated Chicago Mercantile Exchange, while coins trade in somewhat more obscure venues.
A bearish view on currency trusts comes from Tyler Odean, publisher of Something interesting, an insightful crypto Substack newsletter. “The time horizon [for an SEC approval] it’s long,” he said. “By then, the discount is likely to deepen as the number of competitive ways to hold bitcoin also deepens.”
Still, I think the bet in favor of an eventual favorable decision from the regulators is reasonable. Risky, yes, but not as risky as the underlying asset. Bitcoin is much more likely to crash another 50% than the rebate drops from 26% to 63% (meaning: your confidence plummets from 74 cents on the dollar to 37 cents).
Another concern: liquidity. Osprey only has $100 million worth of coins in its vault, and its average daily stock volume over the past year would be worth $400,000 at the current share price. Big bettors should tread with caution.
#2. your wallet
You can buy bitcoins on an exchange and then export them to your cold storage wallet. Market analyst Odean used it for its long-term bets.
Advantages: no counterparty risk. No management fees. If you do it correctly, no risk of hacking.
Disadvantage: you may not do it right.
Self-storage involves a fairly elaborate procedure to protect your private key against loss or theft. Next week you might enter an open elevator shaft, so you need a mechanism for survivors to collect this key. The computer you use to generate the private and public keys for your coin repository should be permanently isolated from the internet. The medium on which the secret is stored must be secure; Odean mentions an optional etched piece of metal.
There are services (Casa, Ledger and others) that make this process less of a pain, but with ease of use comes increased risk.
#3. Exchange storage
You can leave your coins in a safe place in a coin exchange. If you want this asset to be segregated, and therefore safe from stock market creditors, you will have to pay custody fees.
At Coinbase Global, where the minimum account size for this service is $500,000, the fee is 0.5% per year. Some customers get a better deal. Osprey, which recently transferred its custody from Fidelity Investments to Coinbase, appears to be paying 0.25% or less (its financial statements do not reveal an exact amount).
If you can afford some counterparty risk, or just want assets available for trading, you can leave your coins in a deposit account free of charge. It’s the crypto equivalent of keeping your Tesla shares in a margin account. But, unlike shares in a brokerage, coins left with an exchange do not have a Securities Investor Protection Corporation to back them up if the broker runs into financial trouble.
#4. Foreign ETFs
As our SEC bides its time, the Canadian regulator has cleared exchange-traded funds that hold cryptocurrencies. One of them is the Purpose Bitcoin ETF, which now holds coins worth just over $1 billion.
Pros: The fund trades very close to net asset value. Stocks that are listed (in Toronto) in US dollars see $4 million in average daily volume.
Cons: The annual expense ratio of 1.5% is much higher than Osprey. It is not easy to get your hands on these stocks in the United States, as most brokers will refuse the buy order. On the Fidelity platform, you can find Purpose under the BTCC_U:CA ticker, but you have to dig a little deeper.
#5. Grayscale Bitcoin Trust
This entity (GBTC) is Osprey’s older cousin.
Pros: Liquidity. This trust owns $20 billion worth of coins and sees an average daily volume of shares worth $140 million.
Disadvantages: high fees, 2% per year.
#6. Futures contracts
CME Group’s Chicago Mercantile Exchange lists bitcoin futures, each for five coins. Trading volume, almost all within the nearest month, typically amounts to $1 billion per day. Payment is in dollars; no wallet is involved.
Advantages: good liquidity, minimal counterparty risk and leverage potential. You can control $2 of crypto by depositing $1 in cash.
Cons: Taxes, transaction fees, and contango. Bitcoin futures share these three afflictions with many commodity futures.
At tax time, you must report paper gains and losses on futures, with 40% treated as short-term (at high tax rates).
Rolling your futures position monthly, which you would likely do to stay in the most actively traded contract, will cost you 12 commissions and bid/ask spreads per year.
Contango is a big deal. This means that the futures price at which you are buying is higher than the spot price. On bitcoins, contango is a volatile number typically between 3% and 6% annualized. The contango reflects both the cost of financing a stock of a product and the cost of securing it. In the case of crypto, securing the asset against hackers is not straightforward (see #2 above).
Futures contracts are not bad for overnight trading. They are a poor choice for someone hoping to make a long-term gain.
#7. Futures ETFs
The ProShares Bitcoin Strategy ETF (BITO) holds long positions in bitcoin futures. Here, atop the steep contango of Chicago’s trading pits, you have the option of shelling out an extra fee: the 0.95% per annum assessed by the fund.
ProShares attracted $900 million for this product. Naive people.
Chairman Michael Saylor has turned this trade analytics firm into a crypto betting parlor. The company used mostly borrowed money to acquire 129,200 bitcoins.
The stock had an interesting day on May 9th. With bitcoin down 14% from Friday afternoon, shares of MicroStrategy fell 26%.
Tyler Odean sees these actions as a simultaneous bet on three things: crypto, a mediocre software company, and Saylor’s ability to withstand margin calls. He likes the first bet but not the other two.