Over the last several months, it has become evident just how important crypto assets, like Bitcoin are to institutional investors and asset managers. Millions of dollars of capital have been flooding in from institutions that now understand that even if they don’t like it, their clients demand exposure to cryptocurrencies. For that reason, all the major banks are offering products to their clients, including Morgan Stanley, Goldman Sachs and Deutsche Bank.
ProShares ETF
As of August 2021, institutions held $70 billion of Bitcoin, and that number has since risen. October marked a milestone for the first ever exchange listed Bitcoin fund in the U.S., although there have been funds listed in Canada, it took 10 years to get to this point. In fact it was originally the Winkelvoss Twins who first lodged a request for a Bitcoin listing. Since that time, various bodies have tried to get an ETF listing issued and failed for a variety of reasons. This time though, the SEC did not block the listing, and within 24 hours, the ProShares Bitcoin Strategy ETF saw a turnover of almost $1 billion, equating to 24 million shares. Not a bad day’s work.
These numbers make this the 2nd most traded ETF ever, second only to the BlackRock carbon fund. The way this fund works is that it’s traded on futures rather than with spot trading. This means that ProShares, the issuer, needs to keep selling the contracts as they are due to expire and then buy back new contracts that will expire later. This is not a cheap endeavour. This ETF will cost you 1%, plus with all the extra charges, the price of the fund will not equate to the actual price of Bitcoin.
Bitcoin Trust
Prior to this, investors were gaining exposure through the Grayscale Bitcoin Trust. This fund sees Grayscale buying a set supply of Bitcoin themselves and allowing investors to buy into the fund. Clients would be charged 2% for this. The buy-in price depends on the supply of Bitcoins inside the fund and works on the available supply, rather than the actual price of Bitcoin, so as an investor you are not getting access to Bitcoin at its real price.
If you want Bitcoin at its real price, buy Bitcoin
Another way to gain exposure to Bitcoin is, of course, to buy it outright. You then have to deal with storing it, and if the price drops, your holdings lose value. On the other hand, if you trade Bitcoin as a derivative on a digital exchange or centralized exchange or through a broker, you are not buying the actual asset but speculating on its price fluctuations. This allows you to go long or short, so you can trade in bullish and bearish markets and you don’t have to worry about storing the asset.
Staking, lending, and vaults
Finally, and perhaps one of the most popular ways among the crypto savvy to put your crypto holdings to work is by staking or lending them in return for passive income, known as yield. In this way, you can literally HODL (crypto jargon for hold) and make money at the same time.
You can stake or lend a wide variety of digital assets from NFTs, to utility tokens, to security tokens:
- NFTs are unique one-of-a kind tokens, which represent ownership of art, a collectable or media like music. Even a Tweet can be an NFT once it is digitized.
- A utility token is a token that sits at the heart of a blockchain project, protocol or ecosystem.
- Anything can be tokenized nowadays. For instance a security token is simply a token or piece of code that represents ownership of s security like a stock or a commodity like gold.
One project based on the blockchain is facilitating this type of investment. It is called Drops and it specializes in providing loans, vaults, staking and yield farming for digital asset and NFT owners. You are effectively putting your tokens into a “pool”, loaning them to whoever needs them in the short term and collecting “interest” in return, until you are ready to take them out. The utility token at the heart of this ecosystem is called DOP. It’s one you can buy, hold, stake or exchange.
The Bottom Line:
No matter which way you engage with cryptocurrencies, most asset managers recommend having a reasonable allocation in your portfolio, with recommendations that range from 1-5% exposure. Apart from this, cryptocurrencies are seemingly inflation proof. Now we are seeing a 30-year record inflation level and investors are desperately looking for ways to invest and hedge against inflation. Many investors believe that cryptos are a solid hedge against inflation as they are not correlated with the traditional money markets.
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