Investors looking for exposure to cryptocurrencies, but who want to avoid the hassles associated with holding the actual digital coins themselves, have a few options—the Ethereum Classic Investment Trust (ETCG) and the Bitcoin Investment Trust (GBTC). Created by digital-currency specialist Grayscale Investments, both trusts were designed to trade like stocks while tracking an underlying cryptocurrency, thus “taking something that has a lot of frictions behind buying, holding, storing, and safekeeping, and making it familiar and transparent,” in the words of Grayscale’s managing director Michael Sonnenshein. While familiarity and transparency are definite benefits, there are still risks that investors should beware of, according to Barron’s.
The Ethereum Classic Investment Trust, which, as its name suggests, tracks the price of ethereum classic tokens, has risen 36% since first becoming available on over-the-counter markets in early May. The Bitcoin Investment Trust, which tracks the price of bitcoins and first became available as a publicly traded instrument in 2015, is up 137% over the past year. By comparison to the traditional stock market, the S&P 500 is up just under 13% over the past year.
Along with having netted investors who bought in early big gains in the range of tens of millions of dollars, these publicly traded crypto securities provide investors with a number of other advantages.
Familiarity is one such advantage. The need to set up a digital wallet and protected hard drive in order to begin safely investing in cryptocurrencies may seem like traversing too far into unchartered territory for many investors. Grayscale’s investment trusts provide these uninitiated investors an entryway into the Wild West that is the crypto market without forcing them to navigate around it all by themselves.
These trusts may also offer a tad bit more transparency in a new marketplace, which regulators are still trying to figure out. Grayscale at least, must abide by SEC rules regardless of what happens to the underlying cryptocurrencies. (See also: Bitcoin Investment Trust Launches 91-For-1 Stock Split.)
However, these advantages come at a significant premium, as the Grayscale trusts trade at prices in excess of their underlying net asset values. Late last week, the bitcoin trust was trading at a 64% premium to the actual value of the amount of bitcoin held in the fund, while the ethereum classic trust was trading at a 194% premium to ethereum classic, according to Barron’s.
In addition to those huge premiums, as securities that track the underlying cryptocurrency prices, they are also exposed to the volatility of the crypto market. Following China’s ban on initial coin offerings (ICO) and bomb testing by North Korea last September, the bitcoin trust slumped by as much as 12%, while SPDR Gold Shares moved up slightly and other broad market indicators remained basically flat. The bitcoin trust also followed the huge rise of bitcoin through to the middle of last December before crashing hard and has yet to regain those losses. (See also: Gold Gained as Bitcoin Trust Faltered.)
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrency.