Cryptocurrencies

Crypto Index Fund: Should You Invest in it instead of Bitcoin?

By 05/15/2021 No Comments

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Investing in cryptocurrencies such as bitcoin can be a little intimidating, especially for someone who’s just getting started. Unfortunately, many of these newbies end up falling for scams, the likes of which you’ll come across all over the internet.

Cryptocurrency investing is hard because there is a lot of speculation involved and the volatility in the market is just unreal. One Elon Musk tweet can cause your crypto to drop 50% or more. 

This makes so many investors wonder whether it’s best to invest in a crypto index fund or perhaps an ETF instead, so they don’t have to deal with all the preparations that come with smart cryptocurrency investing, like getting a crypto wallet or timing the crypto market. 

These funds and ETFs are also convenient for people who don’t know or don’t have the time to study the crypto market. They can just buy a fund, sit back and enjoy whatever growth they’re getting.

However, along with all the convenience, there are some downsides to these cryptocurrency funds too, and we’ll discuss all of that today. 

Our guest today is Kyle Woodley, the senior investing editor at Kiplinger.com and an ETF enthusiast. He will walk us through his thoughts on Crypto index funds, how they’re different than a traditional ETF, and who should consider adding them to their portfolio. 

Also Read: Cryptocurrency Investing: A low-risk Approach in 2021

What are Crypto Index Funds

“Should you invest in a crypto index fund?” is a burning question because recently, they’ve gained quite a popularity. But still, there are a lot of misconceptions around what they are, how they work, and what are the different types. So let’s kick this off by first understanding what is a crypto index fund. 

According to Kyle, the very first thing you need to know about all the Bitcoin ETFs and cryptocurrency funds out there is that they’re actually technically not ETFs. They are funds, and they work like a fund but with slight differences.

Rather than trading on an exchange like the NYSE Arca or NASDAQ, they trade over the counter. The main reason why is that they are trusts.

One important thing you need to know about these trusts is that they can actually trade at a premium or a discount on the net asset value. 

On the other hand, most ETFs are pretty faithful to their net asset value. That means if you go and buy them, the price that’s represented there is very close to the per-share price of the underlying asset. 

But these trusts can go at an extreme discount. For instance, you can actually buy, in theory, Bitcoin at a 10 to 20% discount. But also, in theory, you can buy it for a 10 to 20% premium. That means paying $1.20 for $1 worth BTC. 

The reason why these funds exist is that for years, people have been trying to file to create a Bitcoin ETF, but the SEC just hasn’t allowed that to happen. 

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Why Invest in a Cryptocurrency Fund

There are many cryptocurrency funds like the Grayscale Bitcoin Trust (GBTC), Osprey Bitcoin Trust (OBTC), Grayscale Ethereum Trust (ETHE), and many others. 

There are multiple reasons why anyone would want to go with a fund. One, for example, is that you don’t wanna go through the trouble of opening a digital wallet. A digital wallet is what you need to be able to invest in cryptocurrency, and you have to open it at a place like Coinbase or Binance. 

Many people, including Kyle, don’t want the complexity of having a bunch of different accounts. The only accounts Kyle has, for example, are his 401k and IRA, and a lot of people like it that way. If you also do, then your only option is these cryptocurrency funds, not because they’re perfect, but they’re there.

The danger, however, with these funds is the premium and discount thing. In theory, you can buy it at a premium, and then Bitcoin could go up, but you will not realize gains because this thing will start trading close to the price or even at a discount. 

The flip side of this is you can buy it at a huge discount, and thus even if Bitcoin doesn’t appreciate in price, you can still be in profit because the fund is now trading at a premium.

Another major risk with these funds is that Canada has recently approved two Bitcoin ETFs, and SEC might follow. Once we get a proper Bitcoin ETF, then that’s going to trade much more faithfully to the price of Bitcoin, and thus, it’ll become the most trustworthy instrument available to buy Bitcoin. 

If that happens, then over-the-counter trusts like GBTC and OBTC, which have been trading at a premium for much of their life, might actually start trading at a discount because of the fear that people will storm out of them if a much better product – An ETF, actually hits the market.

Should You Buy Into a Crypto Fund? 

As far as whether you should invest in these crypto index fund or not is concerned, part of the answer is just timing. 

It is like asking whether you should invest in it right now? And the answer to that is, there are so many uncertainties with what could happen to these trusts once an ETF is created. 

However, it is not true that absolutely everyone will dump these trusts and run towards an ETF once it’s available because there, of course, are reasons why you would still prefer a fund over an ETF. 

Should you invest or not in a fund also depends on how you see cryptocurrency. Do you really see it as a potential medium of exchange capable of replacing fiat money, or do you just see it as a trend that comes and go? 

If you believe it is just a temporary trend, then that it is a good reason to just go with a fund instead of doing all the hassle. 

One of the things that’s lifting bitcoin, and the reason why many people are interested in it, is there’s so much institutional money starting to pour into it.  

Not only the money is pouring into it, but there are so many other institutions that still want to get into it. If you, all of a sudden, have that much more money pouring into it, then you gotta expect pretty positive things from the price. 

But at the end of the day, you should only add any sort of assets, including Bitcoin and cryptocurrency, or even ETFs or individual stocks, that go along with your risk tolerance, financial situation, and your financial goals.

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    You should only invest the money you can afford to lose.

    Invest Diva (KPHR Capital, LLC) and Kiana Danial are NOT a financial advisor. Nothing said on investdiva.com by Kiana Danial or other contributors is meant to be a recommendation to buy or sell any financial instrument.