Bitcoin by Proxy? Investment Experts Debate Value of Crypto ETFs, Proxies vs. Direct Holdings

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Crypto proxy equities — investments providing exposure to crypto — were on the rise last year, with the launch of several Bitcoin-linked exchange traded funds (ETFs) for example. But going into 2022, are these investments still a good bet and what are the alternatives?

While a Bitcoin spot ETF seems a distant dream as Fidelity’s — and other — proposals were rejected by the Securities and Exchange Commission (SEC) earlier this month, investors who don’t want to trade crypto but want some exposure still have a variety of options.

A new CoinShares research report, “CoinShares 2022 Digital Asset Outlook,” argues that with the advent of U.S.-listed, SEC-approved bitcoin futures ETFs, investors now have alternative means to gain exposure to Bitcoin without these additional risks, albeit at some additional cost.

“Going into 2022, investor appetite for crypto exposure via the equity market should remain strong, but with the advent of instruments better suited for this purpose, crypto proxy companies could not see as good a performance in 2022 as they did in 2021,” the CoinShares report reads.

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Analysts Debate Effectiveness of Bitcoin ETFs vs. Direct Crypto Investment

James Butterfill, investment strategist at CoinShares, told GOBankingRates that investors might be wary of costs associated with structuring an ETF using futures.

“There is a cost rolling from one futures contract to the next — it is technically called a roll yield,” Butterfill said. “Sometimes this roll yield can be high and it eats into performance, in 2021 for example, the average futures based Bitcoin ETF would have underperformed the Bitcoin price by 25% before fees.”

Halsey Minor, co-founder and executive chairman of fintech company Public Mint, told GOBankingRates that for novice investors who think they missed the Bitcoin boat, crypto-proxy equities can be a great tool for them to gain confidence with reduced risk.

“Think of it like dipping your toes in the crypto space — for newbies who don’t know where to start, SEC-approved bitcoin future ETFs can be an easier sell than investing directly in Bitcoin. The same can be said of companies like MicroStrategy, which owns a huge number of Bitcoin and therefore offers exposure to this Bitcoin, indirectly, through its shares. Public Bitcoin mining companies are also a good option here, offering exposure to the Bitcoin they hold as well as the value of their underlying business.”

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Minor notes, however, that while these are simpler investment options, there is certainly a cost trade-off — including having to adhere to the traditional market schedule, whereas the crypto markets operate 24/7/365.

“There are also additional costs attached to crypto-proxy equities that can include broker and management fees,” he said, adding that it’s also important to note that crypto was designed to empower people by giving them the ability, essentially, to be their own bank by holding their own crypto assets like they would cash.

“Doing this requires a lot of work — you have to set up complicated wallets and remember things like seed phrases. It’s a lot of work, but there is peace of mind when doing this because you can be in full control of your assets. Most people don’t do this, however, so enabling them to get exposure indirectly to crypto-affiliated equities or shares in ETFs is a good second-best option,” he added.

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An Option: Investing in Bitcoin Mining Operations

Another strong option is investing in public mining companies, Mark Elenowitz — president of fintech company Horizon — told GOBankingRates, as you get exposure to the Bitcoin they hold.

“But once again, this comes with additional risks and rewards based on how the company performs,” Elenowitz said. “If all you are looking for is a way to be exposed to Bitcoin without actually buying it, a futures ETF will be the closest to Bitcoin, and is a safer option than crypto proxy companies, which is why investors are likely to turn to it.  Regardless of which path you choose, note all investments come with risk and the risk must be appropriate for your investment objectives with a long-term outlook,” he added.

An additional way to gain crypto exposure is via investments in companies such Coinbase or Michael Saylor’s MicroStrategy.

“MicroStrategy has put massive amounts of Bitcoin on its balance sheet, and in this sense it is a derivative of Bitcoin and, thus, many people find that buying MSTR shares is almost identical to buying Bitcoin itself,” Budd White, chief product officer and co-founder of legal-first crypto software company Tacen, told GOBankingRates. “Also, an added benefit of owning MicroStrategy is the profitability of the underlying business and the cash flows that it can offer investors.”

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White also said that with Bitcoin trusts and futures ETFs, investors are still dealing with a form of the traditional financial system. “Want to buy or sell after 4 p.m.? You can’t. Need liquidity fast so you sell some shares? It can take days before you actually have access to that money. You’re buying into the value of the crypto industry, but you miss out on many of its advantages,” he said.

“If an investor is willing to cross the barrier to entry and hold native crypto assets like Bitcoin, there is a world of  DeFi products that allow for yield to be earned. In some cases this can mean double-digit percent yield for just holding on to the asset. You do not get this benefit from merely seeking synthetic exposure to Bitcoin through ETFs.”

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