LONDON, ENGLAND – DECEMBER 07: A visual representation of the digital Cryptocurrency, Bitcoin on … [+]
There are now various ways to add Bitcoin to your portfolio, with accompanying pros and cons. The large up and down swings in Bitcoin often make headlines. Still, Bitcoin remains one of the strongest performing assets over recent years. There are an increasing range of options to gain exposure to Bitcoin. Here are the details of some of the popular choices.
Bitcoin ETFs
Late 2021 saw the launch of several Bitcoin Exchange Traded Funds (ETFs). These are simple to own as they can be bought and sold like stocks. Annual fees currently range from 0.65%-0.95% depending on the ETF.
Tracking Futures
Importantly, though these funds track Bitcoin futures rather then the spot Bitcoin price. That’s not necessarily a bad thing and gets around various risks of holding Bitcoin directly. This does mean that the performance of the ETF may differ from the performance of Bitcoin itself.
The Grayscale Bitcoin Trust
the Greyscale Bitcoin Trust (GBTC) does own Bitcoin directly, holding it in cold storage. It currently charges a 2% annual fee, so a little higher than the more recent ETFs tracking Bitcoin futures. However, it does own Bitcoin directly, rather than tracking futures.
Premiums and Discounts to NAV
However, the nuance with this investment is it has over time traded at discounts and premiums to the value of its holdings. You can see that data here. For much of its life the Grayscale Bitcoin Trust traded at a premium to the value of its Bitcoin holdings, but it currently trades at a discount of around 15% to the value of its Bitcoin.
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That discount started in 2021, perhaps as new ETFs were seen entering the market as a lower fee way to own Bitcoin. Of course, should the discount increase it will be a drag on returns, but should it narrow, it may cause the Trust to outperform spot Bitcoin.
Direct Ownership
You can, of course, own Bitcoin directly. This is perhaps a more complex option, but eliminates the fees associated with the options above. Doing this means that you own Bitcoin at spot. However, you also assume all risks associated with Bitcoin ownership yourself. The option may also add complexity for a lot of investment managers or private investors without deeper expertise compared to owning a more traditional ETF or trust structure.
Which To Own?
2021 has seen the launch of various U.S. Bitcoin ETFs tracking the futures markets. It’s unclear if 2022 will see further innovation such as direct ownership in an ETF vehicle or perhaps other structures.
For now, the investment you pick depends on a range of factors. The Grayscale Bitcoin Trust charges a higher fee, but should the discount to NAV narrow it may outperform other options. Of course, should the discount widen, it may be the worst performer of the group.
Bitcoin ETFs are a relatively low-fee option and price competition may increase, but tracking futures may introduce some uncertainty in their ability to closely track spot Bitcoin prices. Direct ownership eliminates fees almost entirely depending on the route you take, but potentially exposes you to the more technical aspects of Bitcoin ownership and may not be suitable for all investors.
