The Bitcoin Strategy ProFund (BTCFX), launched on Wednesday, offers exposure to the cryptocurrency through futures contracts. Its the first open-end mutual fund or exchange-traded fund aiming to track the price of Bitcoin in the U.S., coming with a minimum investment of $1,000 and an expense ratio of 1.15% (after fee waivers).
The fund plans to invest in front-month futures contracts that trade on the Chicago Mercantile Exchange. The idea is to roll over the proceeds from each expiring contract into new ones for the following month.
Heres how it works. Say the spot price of Bitcoin is $39,750. A front-month contract for Bitcoin, expiring in late August, might cost $39,850. The fund would buy the contract at that price and would turn a profit if Bitcoin prices topped $39,850 when the contract expires. If the price is lower upon expiration of the contract, the fund would lose money. As each contract expires, the fund rolls the proceeds into new ones.
One hitch with the strategy is that the spot price of Bitcoin may diverge from front-month futures. “It‘s not exactly the same thing,” says Simeon Hyman, head of investment strategy at ProShares. The correlation to Bitcoin spot prices is higher in front-month contracts than, say, six-month futures, he adds. For instance, a simulation of spot price returns indicated a nearly exact correlation to front-month futures returns from January 2019 to June 2021, according to ProFunds. However, that doesn’t account for transaction fees, taxes, or other costs.
“The front month stays pretty close to the spot, so the odds of surprises are low,” Hyman says.
Nonetheless, investors shouldn‘t expect to see gains (or losses) that correlate precisely to the price of Bitcoin, a point that the fund’s prospectus makes clear.
“The performance of the Fund should be expected to perform differently from the spot price of Bitcoin,” it says. “These differences could be significant.”
Indeed, since Bitcoin is so volatile, trading 24 hours a day, the fund could make or lose money on a futures contract based on the price action within a fleeting window, lasting a few hours or minutes. Prices for Bitcoin can, and often do, jump more than 10% in a day.
The mutual fund joins other types of investment vehicles that offer exposure to Bitcoin directly, including the Grayscale Bitcoin Trust (GBTC) and the Osprey Bitcoin Trust (OBTC). However, those vehicles each have higher initial minimum investments for direct, private-placement investments, at $50,000 for Grayscale and $25,000 for Osprey.
The trusts also trade on exchanges or over the counter, priced at a premium or discount to their underlying net asset value.
One other consideration is taxes. Investors in the mutual fund may owe capital-gains taxes on distributions. Bitcoin futures contracts have special taxation rules, generally taxed at a 60% long-term capital-gains rate and a 40% short-term rate. And the higher the funds turnover, the higher the potential tax liabilities.
One way to avoid taxation, of course, is to buy and hold Bitcoin through a digital wallet or exchange. Companies such as PayPal Holdings ( PYPL), Square (SQ), Robinhood, and Coinbase (COIN) now offer quick and easy exposure to Bitcoin and other digital currencies. Traders may owe tax if they sell their positions at a profit, but wouldnt be taxed until then.
The Bitcoin Strategy fund isnt likely to remain the only option for investors looking for exposure to crypto through a fund wrapper. More than a dozen fund companies have applied to the Securities and Exchange Commission for approval of a Bitcoin ETF. Grayscale also aims to convert its Bitcoin Trust to an ETF, signing a deal recently with Bank of New York Mellon for ETF transfer and other services.
Still, the approval of Bitcoin Strategy fund could pave the way for similar products, including ETFs. And the mutual fund may open the door for financial advisors to offer clients some exposure to Bitcoin.
“Bitcoin futures have been trading for a while, but putting them in a mutual fund changes the game for advisors,” says Matthew Hougan, chief investment officer of Bitwise Asset Management. “This is an important milestone.”
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