While the ability to buy cryptocurrency directly already exists, the availability of cryptocurrency funds is beginning to emerge, providing investors access to the asset class without the hurdles typically associated with direct crypto investments.
In 2013, Grayscale, an asset manager focused on digital currency, launched a private fund that buys Bitcoin. Relatively unknown previously, as an early market entrant, the firm has enjoyed significant growth. Despite structural limitations due to their closed-end trust, the Grayscale Bitcoin Trust had $40B of assets as of November 2, 2021, up from $17.5B at the end of 2020 and $1.9B at the end of 2019.1
Cryptocurrency funds are gaining interest outside of the US, as Bitcoin ETFs launched in Canada earlier in 2021, followed shortly thereafter by Ethereum ETFs as well.
The first US Bitcoin futures ETF launched in October 2021. This fund invests in Bitcoin futures contracts, or agreements to buy or sell the asset later at an agreed-upon price, rather than purchasing Bitcoin directly. Bringing in $550 million, this ETF saw one of the biggest first days on record among ETFs.2 Since that time, other similar ETFs have also launched.
Several asset managers have filed with the SEC (and await approval) with requests to launch spot Bitcoin ETFs, not futures-based, which would provide better tracking to actual Bitcoin pricing. Like Bitcoin futures ETFs, these vehicles would be more broadly available beyond just accredited investors. It’s thought the current regulatory environment, with Gary Gensler heading the SEC, might be more favorable to Bitcoin than in the past, given Gensler’s familiarity with Bitcoin and his experience teaching about cryptocurrency at the university level.
While the future may be bright, investors should proceed with caution
Because cryptocurrencies are relatively new and have neither cash flow, earnings, nor a governing body, potential investors should exercise caution. First and foremost, they should ensure their portfolios are well diversified and able to weather all market conditions. They should carefully gauge their risk tolerance, ensure they are comfortable purchasing a volatile asset, and once ready, wade into the cryptocurrency waters slowly.
“Before investing in any cryptocurrencies, investors should have a high comfort level with volatility and know that they can handle the emotional rollercoaster ride that inevitably goes along with this unpredictable asset,” says Jack Janasiewicz, Portfolio Manager and Lead Portfolio Strategist for Natixis Investment Managers Solutions. “It’s important to remember that hype and speculation run rampant in the cryptocurrency world and caution is key.”
Professional active management – a better way to invest in cryptocurrency?
With the great variety of cryptocurrency coins in the marketplace and their significant volatility, active management by professional asset management companies may be a wise approach for investors. Professionally managed funds are apt to benefit from superior coin selection and portfolio construction, compared with portfolios that investors attempt to build on their own. We expect to see actively managed cryptocurrency funds begin to launch.
Cryptocurrency as the newest liquid alternative
Just as investors complement stock and bond sleeves with real assets, hedge funds, private equity, and other investments, we expect to see cryptocurrency make up part of portfolios’ alternative sleeve. Asset allocators are working hard to gain an understanding of the drivers of cryptocurrency movements, the diversification they offer relative to other investments, and their long-term volatility. Thus, in time, we certainly expect to see cryptocurrencies used more frequently as a component of sophisticated and aggressive diversified portfolios.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Cryptocurrencies are subject to numerous market risks; they are speculative and volatile, can become illiquid at any time, and are for investors who can tolerate the full loss of their investment.
Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.
Diversification does not guarantee a profit or protect against a loss.
Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Unlike typical exchange-traded funds, there are no indexes that an active ETF attempts to track or replicate. Thus, the ability of an active ETF to achieve its objectives will depend on the effectiveness of the portfolio manager.
The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
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