Recent bitcoin volatility exposes variations in crypto funds' risks

Differences in behaviour of bitcoin ETFs and bitcoin closed-end funds show different considerations for investors

Recent bitcoin volatility exposes variations in crypto funds' risks

For many observers, the turbulence in bitcoin prices in recent weeks – which could be traced back to critical tweets from Elon Musk – illustrates why the crypto asset is still too risky to use either as a mode of payment or store of wealth. But those who watch the crypto fund space had another takeaway altogether.

The lesson, according to a recent article on Barron’s, concerns the different risks investors may take on from investing in a bitcoin ETF vs. putting their money in a bitcoin closed-end fund.

An open-end, exchange-traded fund that’s backed directly by bitcoin holdings in secure custody, the piece said, would be ideal as it can create and redeem shares freely based on investor demand. With that ability, supply and demand for the fund has less of a bearing on the fund’s price, allowing the bitcoin ETF to more accurately track the price of its underlying assets.

“Investors won’t have to bid up the share prices when there is strong buying, or see shares plunge below the Bitcoin price when more people are selling,” said Barron’s columnist Evie Liu. “A Bitcoin ETF would also be very liquid, with shares traded on primary exchanges free most of the time.”

During the downswing in bitcoin, the Purpose Bitcoin ETF moved practically in tandem. Considering the plunge in the price of bitcoin, Liu said outflows from the ETF have also been very minor – from bitcoin’s May 8 peak up to May 26, it shed $27 million, compared to its AUM of nearly $1 billion – reflecting a buy-and-hold mindset held by its investors at large.

In contrast, closed-end bitcoin funds are publicly traded on exchanges, but can’t freely create or redeem share. That means depending on investor demand for the fund, the fund’s price might stand at a significant premium or discount relative to bitcoin’s price as it has a fixed number of shares.

Liu pointed to the Grayscale Bitcoin Trust, the largest bitcoin fund in the U.S. with around US$25.5 billion in AUM. For the majority of its history, it had traded at a substantial premium to bitcoin as the price of the cryptocurrency surged and investors, lacking other options, accepted the fund’s 2% to get a piece of the action.

“The trend has reversed over the past few months, however, as anticipation for lower-cost Bitcoin ETFs and increasing volatility of the cryptocurrency made Grayscale shares less desirable,” she said.

It has been a painful turnaround for many investors in the Grayscale Trust. After buying the fund’s shares on premium – occasionally with borrowed funds – some were forced to liquidate in the face of falling prices.

Since February, the fund’s discount relative to its bitcoin holdings has only widened. Over the past month, its share price has declined by 6% more than its underlying assets, and at one point was at a discount of 20% relative to the cryptocurrency.


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