Buying bitcoin funds requires weighing some questions

NEW YORK — Now that bitcoin funds are trading, which is the best to own?

The answer is not necessarily the one that rises the most. The job of the funds is to track the price of bitcoin, whatever that is, in what can be a more convenient thing to own for many investors.

So if bitcoin is falling, a bitcoin fund that is rising in price might not be doing what an investor is looking for.

The first question investors need to ask before buying one of the bitcoin funds is if they actually want to own bitcoin. The cryptocurrency has been around a decade and a half, but much of professional Wall Street still sees it as too risky and speculative to own.

It has a history of drastic swings in price, which can come suddenly and happen over the weekend or overnight in its 24/7 trading.

Its daily average volatility is roughly three and a half times that of the global stock market, according to John Laforge, head of real asset strategy at Wells Fargo Investment Institute.

“Highlighted a different way, bitcoin’s price return in 2022 was -64 percent,” he said, “while its 2023 return was 157 percent.”

But bitcoin also holds the allure of possibly moving in ways that other investments aren’t. Investors are always looking for what’s called an “uncorrelated asset” whose price might zig when everything else they own is zagging. Such independent movements can make an overall portfolio less volatile.

Another question investors must answer is how they want to buy bitcoin. The main way until now has been to buy it directly and then to either hold it in what’s called a wallet or leave it on an exchange.

Now, after the approval this month by U.S. regulators, investors can buy several exchange-traded funds that will take responsibility for holding actual bitcoin and protecting it. Earlier, bitcoin-related ETFS invested in contracts related to bets on prices for bitcoin in the future, but not on the cryptocurrency itself.

Already, there has been some separation in performance among the bitcoin ETFS that have begun trading. Between Jan. 11 and Tuesday, the Grayscale Bitcoin Trust (GBTC) sank 14.3 percent. That’s milder than the 16.3 percent drop for the Valkyrie Bitcoin fund (BRRR) over the same time.

Fees

When many ETFS are trying to do the same thing, such as follow the market price of bitcoin, one of the easiest ways they can distinguish themselves is by charging lower fees.

Expenses are a drag on any investment, and higher fees take more of an investor’s returns away from them. In traditional stock ETFS, fees have plummeted all the way to zero in some cases as expense-conscious investors steer their dollars toward the lowest-cost options.

ETFS will advertise their “expense ratios,” which show how much of a fund’s assets goes toward covering its expenses. Tiny differences in fees might not add up to all that much, even over the course of years, but why pay for something if you don’t have to?

Keep in mind, ETF companies can change their expense ratios, up or down. Fidelity is one of the providers offering a temporary expense ratio of zero on its bitcoin ETF. It will rise to 0.25 percent in August.

Trading volumes and assets

ETFS that attract lots of investment and that trade often can make it easier for investors.

Funds that trade more actively can mean a narrower gap between what’s called the “bid” price, or what investors are trying to buy a share of the ETF at, and the “ask” price, which is what prospective sellers are hoping to get. A slimmer gap can lower the costs of a transaction when buying or selling the ETF.