By Nathan Frankovitz
Gone are the days when Bitcoin was only for basement-dwelling tech geeks. Though the cryptocurrency frontier was pioneered by such computer science enthusiasts, the new wave of digital asset investors represent a much broader cohort. Massive institutions and working-class professionals alike are demonstrating unprecedented demand for digital assets. For many, the question is how, not if, to invest in Bitcoin and other cryptocurrencies. Accordingly, new investment products are quickly emerging. From self-custodied wallets to actively-managed portfolios like those at Sarson Funds, we will explore the spectrum of products offering digital asset exposure to help you determine which are best for your investing needs.
Brokerage-Custodied Direct Exposure
Commission-free brokers like Robinhood and Etoro have surged in popularity in recent years due to their accessibility and ease of use. Popular amongst millennials, they offer a low barrier to entry for new crypto investors to gain direct exposure to select digital assets like Bitcoin. However, Robinhood doesn’t support crypto withdraws, while Etoro’s crypto wallets only support certain tokens. Customers purchasing crypto assets without withdrawal capabilities give up the ability to move their cryptocurrency freely. This is a major disadvantage long-term. Customers unable to withdraw their crypto give up yield earning, collateral staking, and value transferring opportunities while still relying on a third party to securely store their digital assets. For these reasons, more sophisticated crypto investors often employ methods such as self-custody, trusts, and actively managed crypto funds to gain digital asset exposure.
Self-custody: An ideal for some, a nightmare for others.
Customers can achieve a hands-on relationship with their crypto assets by getting started at centralized exchanges like Coinbase. Coinbase offers a user-friendly interface for buying and selling popular cryptocurrencies like Bitcoin, Ethereum, and Chainlink. While users can employ Coinbase’s digital wallets and vaults, they are also free to send their crypto externally. By moving their crypto to institutions like BlockFi or Nexo, investors can make use of lending and borrowing services to make more from their crypto portfolios. Or, in alignment with the old-school crypto adage, “not your keys, not your coins”, users can send funds to an address they control themselves to eliminate custodial counterparty risk. However, self-management of cryptocurrency funds can be time-consuming, stressful, and vulnerable to human error.
If stories of early investors losing millions of dollars of Bitcoin have made you wary of self-custody, you’re not alone. Unfortunately, human error is the usual cause for these funds being lost. You must understand a few Bitcoin basics to appreciate this: Because the Bitcoin blockchain is a public digital ledger, the public addresses of all Bitcoin are visible to anyone. When Bitcoin is transacted, it simply moves from one public address to another. Think of this public address as a username. For every public address, there is a corresponding private key, much like a password. Ownership of Bitcoin, therefore, lies in having the private key which corresponds to your public address.
Naturally, your private keys need to be stored securely to keep your Bitcoin safe. At the same time, your private keys must be accessible if you ever want to transact your Bitcoin. There are numerous methods to private key self-custody, but each carries a considerable risk of a total loss due to user error, computer viruses, theft, destruction, etc. Since many people find these details too technical to self-custody their own cryptocurrencies, companies like Grayscale Bitcoin Trust and investment funds like Sarson Funds have emerged. With operational security measures, diversified asset storage, and insurance protection, these institutions offer products that give crypto-asset exposure without many of the drawbacks of self-custody.
If you’re looking to trade cryptocurrency exposure just like stocks, Grayscale Bitcoin Trust (GBTC) could be for you. According to Barron’s, Grayscale’s own Managing Director Michael Sonnenshein explained, “We’re taking something that has a lot of frictions behind buying, holding, storing, and safekeeping, and making it familiar and transparent.” With over $27 billion in assets, Grayscale’s GBTC commands significant premiums for its accessible and trusted bitcoin-backed shares. In fact, demand is so great for this simplified method of exposure that investors have bought GBTC shares priced 40% over their underlying Bitcoin value. GBTC and other trusts may continue to trade at such premiums until cheaper alternatives, such as U.S. based Bitcoin ETFs, become available. However, investment vehicles like GBTC still lack a major feature seen in investment fund products: active management.
Crypto funds combine strengths seen in other financial products to deliver what we believe is an ideal solution for many investors. At Sarson Funds, we leverage institutional-grade security to reduce risk while taking advantage of market movements via actively-traded funds. With this combined approach, our fund values are guarded while remaining liquid enough to take advantage of emerging opportunities. Because the technologies and use cases surrounding cryptocurrencies are growing rapidly, there is a robust market for quality research and risk-adjusted fund allocation. We exploit this opportunity-rich environment by monitoring the market, developing strategies, and executing trades on a routine basis. This dynamic approach enables investment funds like ours to outperform trusts which are more vulnerable to volatility. Our Crypto & Income Strategy became the top-performing crypto hedge fund in Q4 2020, testifying to active management’s ability to harness volatility to investors’ advantage.
No matter how you choose to invest in cryptocurrency, Sarson Funds is committed to providing transparent education as we report from the market forefront. We are thankful for you, our readers, and look forward to your continued engagement.