Interested in some investment exposure to bitcoin but too impatient to wait for the Winklevoss twins to get regulatory approval for their first-of-its-kind Bitcoin Trustexchange-traded fund?
There’s at least one way for investors to get a piece of cryptocurrencies and the even newer concept of blockchain, the shared payments database underpinning digital currencies. Although no ETF or mutual fund currently offers direct exposure to bitcoin—a decentralized digital payment system whose value fluctuates, sometimes wildly, like a traded security or a conventional currency—some small firms are providing a taste of indirect exposure through the Bitcoin Investment Trust (BIT).
Two actively managed ETFs from ARK Invest include the trust as a holding: the ARK Web x.0 ETF
and the ARK Innovation ETF
Both also hold traditional equities as components and stress a focus on mobile and cloud-computing technology, according to a FactSet analysis. On the mutual-fund side, four of the eight offerings from Kinetics Mutual Funds hold shares of BIT, albeit in very small amounts.
BIT, which trades on the over-the-counter market, operates as a private, open-ended trust that invests solely in bitcoin, with the value of its shares entirely derived from price moves in bitcoin, according to filings made by the trust. Each share initially represents 1/10th of a bitcoin, but that amount diminishes over time as the trust sells and distributes bitcoin in order to pay for expenses. Stakes are sold in blocks of 100 shares.
Shares in the Bitcoin Investment Trust fell 15.3% last week but are up about 260% over the past 12 months.
Like bitcoin, the BIT—which has a 30-day average volume of less than 8,000 shares—can experience wild price swings. It fell 15.3% last week but remains up about 260% over the past 12 months.
The trust is seen as an imperfect instrument for bitcoin exposure due to its illiquidity—a factor analysts said was improving with time—and due to how it often trades at a premium to the net asset value of the underlying currency. However, many investors are prohibited from owning bitcoin directly in the accounts they manage, making the trust one of the few options available to them if they seek exposure.
“ETF infrastructure providers are in regulatory and technical unknowns with regards to bitcoin, and until it is securitized with something that fits into the checked boxes of what’s allowed, the trust is the only wrapper available to us that tracks bitcoin, at least somewhat, allowing us to get exposure,” said Chris Burniske, blockchain products lead at ARK Invest.
“People complain about the premium, but that comes because investors want access to bitcoin and can’t get it directly in their portfolios. It is useful as a disaster hedge because it has low correlation to basically everything else out there.”
The ARK ETFs that hold the trust are extremely small; the larger Web x.0 fund has less than $15 million in assets, according to data from FactSet. They’re also thinly traded, posting 30-day average volume below 1,500 shares. BIT makes up about 2% of each fund’s holdings, a smaller stake than more familiar names like Netflix Inc.
, Amazon.com Inc.
and Google parent company Alphabet
. Both funds have posted gains this year; the Web fund is up 5.1%, while the Innovation fund is up 2.1%.
The Kinetics funds have even less exposure. As of March 31, the most recent date for which data are available, the firm’s flagship Paradigm Fund
owned a mere 5,600 shares of the trust, amounting to 0.04% of its net assets, Kinetics said. The fund is up 5.7% in 2016.
The holding is “limited,” said Peter Doyle, president of Kinetic Mutual Funds and senior portfolio manager of the Paradigm Fund. “In terms of our initial investment, it will never be a big holding, but if bitcoin becomes a success—and we believe the potential upside is quite large if it gets recognized as a new asset class—we’re comfortable with it becoming a bigger part.”
Doyle compared bitcoin to cash alternatives like gold or silver, which is how many view it; in 2014, the Internal Revenue Service classified bitcoin as property rather than a currency. In September 2015, the U.S. Commodity Futures Trading Commission classified bitcoin as a commodity, providing some legitimacy to a payment system that was only launched in 2009. While a number of copycat currencies—including Ethereum and Ripple—have seen their own rises, bitcoin is by far the most popular of the group. It has a total market cap of about $9.2 billion, according to WinkDex, a bitcoin price index.
Tyler and Cameron Winklevoss, the twin brothers who run both Winklevoss Capital and WinkDex, have been among the most public advocates for an ETF tied to bitcoin, having first announced plans for one in 2013. That year they also led am early-stage funding round for BitInstant, a bitcoin payment processing startup. However, they are probably best known for suing Mark Zuckerberg, claiming the Facebook Inc.
chief executive stole their idea for a social-networking site in their days as Harvard undergrads.
The proposed Winklevoss ETF is designed to trade baskets of shares tied to the digital commodity.
“I still feel very bullish about its long-term value both as a technology and an investment,” Cameron Winklevoss wrote of bitcoin in a 2014 essay published on Winklevoss Capital’s website.
Given that the fund would mark the first time investors could get exposure to bitcoin through traditional exchanges—and given that it would mark the first time an asset class would debut in an ETF format rather than as a mutual fund—analysts have been closely monitoring the status of the application.
Winklevoss Capital applied to list the product on the Bats BZX Exchange in June. In response, the Securities and Exchange Commission opened a comment period to evaluate the filing, but it was unclear when a decision on its approval would be reached. A spokesperson for Winklevoss Capital said the company couldn’t comment on the proposed ETF while it was being reviewed.
“I respect the Winklevoss [brothers] for trying to bring a product to market, and from what I can tell they’ve built a good internal structure to support the product,” said Burniske. “But the SEC will only allow such a product to come to market when bitcoin and service providers are mature enough, and not a day sooner.”