Have you ever wished that you could buy Bitcoin in the traditional investment world, i.e. the stock market? Well, now you can. On April 9th this year, a fund called, “The Bitcoin Fund” (Ticker: QBTC.U), which was created by 3iQ, listed on the Toronto Stock Exchange (TSX). Essentially the way that this fund works is that 3iQ buys Bitcoin, and then gives it to Cidel Trust Company and Gemini Trust Company for custodianship, or to hold and take care of those Bitcoins. For those of you who don’t know or haven’t heard of Gemini before, it’s a regulated and a “by the books” crypto exchange founded by the Winklevoss twins. So why should anyone buy shares in this fund when you can just buy Bitcoin itself? Here are a couple of reasons that would make this an attractive buy for someone's portfolio.
The first is that you’re someone who wants some exposure to Bitcoin in your portfolio but you’re not tech savvy enough to know how to create a wallet and to securely store them yourself. Or perhaps you’re someone who's afraid of losing the keys to those coins and don't want to be responsible for taking care of them. These can be very compelling reasons especially when you hear of those horror stories of people losing their crypto due to either some hack, or through plain carelessness. If you're going to trust anyone with your Bitcoins, it might as well be with reputable people in the space such as the Winklevoss Twins. They've gone to extreme lengths to ensure that their Bitcoins are safely secured as is talked about in the book Bitcoin Billionaires by Ben Mezrich.
The second reason is that, depending on the country you live in or the type of investment accounts offered in your country, you may not need to pay taxes on any realized capital gains. For example, in Canada specifically, we pay 50% of capital gains at our marginal tax rate. As an example, this means that if I bought $4,000 worth of shares of the fund and sold it for $10,000, I would realize a capital gain of $6,000 ($10,000 - $4,000). Of the $6,000 that I had made, I would only need to pay taxes on $3,000 (50% of $6,000). Based on my marginal tax rate for that taxation year, let's use 25% as an example, I would have to pay $750 (0.25 x 3000) in taxes, and therefore leaving me with $9,250 left.
However, in Canada, there's something called a Tax Free Savings Account (TFSA). This means that any gains that are realized in that account are tax free (hence the name). Using the same example as before, if I had bought the same $4,000 worth of shares in my TFSA, I would not need to pay the $750 in taxes and the full $6,000 gain would be mine to keep. However, the TFSA can be a double edged sword as any losses realized can not be used to offset any gains for tax purposes. Having said that though, if you believe in the long term potential of Bitcoin and that the price will increase exponentially as some models predict it will, then the fact that the losses aren't deductible for tax purposes shouldn't matter if you're holding long term. As each country is different in how capital gains on equities are treated, this point may not be applicable to you.
Let’s now take a look at why someone shouldn't buy this fund.
The first reason is that you don’t have any control over your coins. As the saying goes, “Not your keys, not your coins.” This means that if you wanted to withdraw those Bitcoins, you can't because you technically didn't buy any Bitcoins. You've actually only bought shares of a fund where a company owns and controls those Bitcoins.
The second reason is that there’s a premium on this fund. The last time I had checked, the premium was roughly 8%. From the picture however, the premium is only at 3.06% (($11.12 - $10.7895)/10.7895*100= 3.06). Something that should be noted however is that the Net Asset Value (NAV) is from the previous day and that the fund's market price is based on current real time market data. However, if you look at the NAV and issue price at inception, you can see that there was a 8.23% (($10- $9.2396)/9.2396*100 = 8.23) premium. When looking at this figure, I would say that it's safe to assume that the premium is usually roughly 8% as I can't imagine that the premium would deviate far from that.
The third reason is that you're paying a 1.95% management fee. That might not seem a lot initially but 1.95% compounded over a few decades can really add up. For simplicity, a 1.95% management fee over 20 years is about 40% (1.95%/year for 20 years). For all you finance people out there, the real rate is about 47% (1.0195^20). I'm not sure about you but I think that's quite a large sum of money. So if the value of your fund goes up 500% over the 20 years, your real return is 453% (500%-47%) before taxes, if you need to pay them.
The last reason is that the bid (the price buyers are willing to pay) and ask (the price sellers are willing to accept) spread is quite significant. If you look at the image above, the spread is 38 cents ($11.50 - $11.12) or about 3.4%. Although this is just a snapshot of the fund at a particular time, I still think that this spread is quite large. If you market executed a buy or sell order, you would be out 3.4% right there. I don't think that most equities have a spread this wide.
In addition to the wide bid and ask spread, the volume on the shares are quite low. If you look at the Level 2 order book, you can see how thin the sell orders are. For example, if you were to market execute a buy order of 2000 shares, this means that you would be buying it at an average cost of $11.61 (100 @ $11.50 + 1000 @ $11.60 + 500 @ $11.63 + 300 @ $11.64 + 100 @ $11.70) prior to trading fees. That's another premium you'll be paying to buy this fund.
If you're interested, here's a video that you can check out about The Bitcoin Fund.
So that’s how you can get some exposure to Bitcoin through the traditional markets. After taking a look at some of the reasons why one should and shouldn't buy this fund, I hope that this post has helped you decide whether or not this fund is for you. Having said that, I would love to read some of your thoughts about this fund. Would you buy some shares or would you rather just buy Bitcoin itself? Leave a comment down below if you'd like to share as I'd love to see what others think about this fund or what they're doing!
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