A Bitcoin Mutual Fund Is Being Launched as Cryptocurrency Makes Its Way Into the Fund World
Investors who are not interested in owning Bitcoin directly through
a digital wallet or exchange now have another option: a traditional mutual fund.
The Bitcoin Strategy ProFund (BTCFX), which began trading on Wednesday,
provides exposure to bitcoin via futures contracts. It is the first open-end mutual
fund or exchange-traded fund in the United States to follow the price of Bitcoin,
with a $1,000 minimum commitment and a 1.15 percent cost ratio (after fee waivers).
The fund intends to invest in Chicago Mercantile Exchange front-month futures contracts.
The concept is to roll over the proceeds from each
contract that expires into new ones for the next month.
How it works is as follows. Assume the Bitcoin spot price is $39,750.
A front-month Bitcoin contract that expires in late August may cost $39,850.
The fund would purchase the contract at that price and profit if Bitcoin prices exceeded $39,850 by
the contract's expiration date. If the contract's price is lower at the time of expiration,
the fund will lose money. The fund reinvests the proceeds from each contract's expiration date.
One disadvantage of the method is that Bitcoin's spot price may deviate from front-month futures.
“It is not identical” Simeon Hyman, head of investment strategy at ProShares,
explains. Front-month contracts have a stronger link to Bitcoin spot prices than,
say, six-month futures, he says. For example, according to ProFunds, a simulation of spot price
returns demonstrated a virtually perfect link with front-month futures returns from January
2019 to June 2021. This figure does not include transaction fees, taxes, or other expenditures.
“Because the front month is quite near to the spot,
the likelihood of surprises is low”, Hyman adds.
“The Fund's performance could be expected to diverge from the spot price of Bitcoin”,
it states. “These distinctions may be significant”.
Indeed, because Bitcoin is so volatile and trades 24 hours a day, the fund could profit or
lose on a futures contract based on price activity within a little window of a few hours or minutes.
Bitcoin prices can, and frequently do, increase by more than 10% in a single day.
The mutual fund joins a growing number of other financial entities that actively invest in
Bitcoin, including the Grayscale Bitcoin Trust (GBTC) and the Osprey Bitcoin Trust (OBTC).
However, Grayscale requires a $50,000 initial investment while Osprey requires a $25,000
initial investment for direct, private-placement investments.
Additionally, the trusts trade on exchanges or over the counter,
with prices that are either higher or lower than their underlying nett asset value.
Taxes are another factor to consider. On dividends, investors in the mutual fund may be
subject to capital gains taxes. Bitcoin futures contracts are subject to specific taxation,
with long-term capital gains being taxed at 60% and short-term capital gains at 40%.
Additionally, the bigger the turnover of the fund, the greater the possible tax liabilities.
Of course, one way to avoid taxation is to purchase and hold Bitcoin via a digital
wallet or exchange. PayPal Holdings, Square, Robinhood, and Coinbase now provide a simple
and convenient way to invest in Bitcoin and other digital currencies. Traders may owe
tax if they profitably sell their positions, but they would not be taxed until that point.
The Bitcoin Strategy fund is unlikely to remain the sole fund wrapper choice for investors seeking
exposure to cryptocurrency. Over a dozen fund companies have submitted applications to the
Securities and Exchange Commission seeking approval of a Bitcoin exchange-traded fund.
Grayscale also intends to convert its Bitcoin Trust to an ETF, having just
signed an agreement with Bank of New York Mellon to facilitate ETF transfers and other services.
Nonetheless, approval of the Bitcoin Strategy fund may open the way for similar products,
including exchange-traded funds. Additionally,
the mutual fund may allow financial advisors to offer customers exposure to Bitcoin.
“While bitcoin futures have been trading for some time,
their inclusion in a mutual fund alters the game for advisors”, says Matthew Hougan,
chief investment officer of Bitwise Asset Management. “This is a critical juncture”.
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