When bitcoin burst on the scene in 2009, very few people could wrap their minds around the idea of money that exists purely in cyberspace. However, people who have grown wary of the central banks’ control over and manipulation of currencies latched on to it quickly, as did investors looking for ways to diversify their portfolios. As its popularity has grown, bitcoin, which has no central authority, has been used increasingly for international money transfers as well as for everyday commerce. More than 100,000 merchants now accept bitcoin for transactions.
Because it has a finite and known cap on its supply, the value of bitcoin increases as demand increases. Since March 20111, its value has increased by 41,693%, making it an attractive vehicle for investors. It is also very volatile, having lost more than 70% of its value since its peak price of $1,240 in December 2013. As of March 30, 2016, the price of bitcoin traded at $413 after bouncing up from the $200 level in January. The value of bitcoin is measured against the U.S. dollar.
Bitcoin’s volatility can be attributed to a number of factors, including the fact that it is not yet well understood as a store of value or a method of transfer. Investors can become very skittish about bitcoin when it makes the headlines over security vulnerabilities or its use in drug trafficking. In addition, investing directly in bitcoin can be a bit complex, requiring the ability to store and protect them. However, investors who are intrigued by bitcoin, either as speculative play or as a way to diversify a portfolio, now have an easier, less risky way to participate in the growing market of bitcoin.
As of March 2016, there is only one publicly traded exchange-traded fund investing in bitcoin, the Bitcoin Investment Trust (OTC: GBTC). However, investors can invest indirectly in bitcoin through two funds offered by ARK Investment Management, which has added the Bitcoin Investment Trust to its portfolio.
The Bitcoin Investment Trust
The Bitcoin Investment Trust was established as an open-ended private trust by Alternative Currency Asset Management and is now sponsored by Grayscale Investments LLC. It was launched as a publicly traded ETF in 2015. The fund’s objective is to track the underlying value of bitcoin much like the SPDR Shares ETF (NYSEARCA: GLD) tracks the underlying value of gold. As of March 30, 2016, the fund had $80.5 million in assets under management (AUM), and it is thinly traded with just 6,529 shares in average daily trading volume. The fund’s assets are stored with Xapo, Inc. and they are protected with extreme cryptographic security. As of April. the fund is down 11.11% year to date YTD. The fund has a very high expense ratio of 2%, partly to cover the extra cost of safekeeping.
The Bitcoin Investment Trust is open only to accredited investors who have earned income over $200,000 ($300,000 jointly) or have a net worth over $1 million. The minimum investment is $25,000.
ARK Investment Management
New York-based ARK Investment Management manages four ETFs with more than $240 million in AUM. In 2015, two of its funds, ARK Web x.0 ETF (NYSEARCA: ARKW) and ARK Innovation ETF (NYSEARCA: ARKK), invested in the bitcoin revolution by purchasing stakes in the Bitcoin Investment Trust. Both are actively-managed ETFs. ARK Web x.0, with $12.31 million in AUM, invests primarily in cloud-based companies with leading next generation technologies, such as Amazon.com, Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ: NFLX) and Facebook, Inc. (NYSE: FB). ARK Innovation, with $7.53 million in AUM) seeks out investments in what it views as disruptive technologies with companies such as Tesla Motors, (NASDAQ: TSLA), Illumina, Inc. (NASDAQ: ILMN), Amazon and Facebook. Both funds own less than 0.3% of shares in Bitcoin Investment Trust. The expense ratio for both funds is 0.95%.