While the digital asset landscape is evolving at lightning speed and propelling financial services into the future, the ability for financial advisors to offer clients cost-effective exposure to bitcoin is still stuck in the dark ages. Consider the current most popular option for FAs, the Grayscale Bitcoin Trust (GBTC). This privately placed fund comes with a hefty price tag of 2% annually and trades over-the-counter at meaningful premiums and discounts. In fact, a look across publicly-traded bitcoin funds globally shows an average fee of 1.83%! Portly fees like that harken back to mutual funds in the 1980s.
Of course, mutual fund fees ultimately faced stiffer competition and finally grinded lower over time. The same will happen with bitcoin funds. For example, the recently launched Osprey Bitcoin Trust sports a much more attractive 0.49% annual fee. If – and when – the SEC approves a bitcoin ETF, fees will likely drop even further. However, FAs must always consider total costs when recommending investments to clients to include bid-ask spreads, premiums and discounts, and other trading fees. Consider that while bitcoin is currently up 86% in 2021, the Grayscale Bitcoin Trust is only up 54% because of an evaporating premium.
A recent Risk Alert disseminated by the SEC on “activities related to the offer, sale, and trading of digital assets that are securities” emphasized the need for FAs to ensure “fulfillment of their fiduciary duty with respect to investment advice”. This includes proper due diligence on digital assets offered as part of portfolio management. While the lowest cost option isn’t always best, FAs should be prepared to justify utilizing products with higher fees – especially products offering exposure to a fungible asset such as bitcoin. If one bitcoin fund charges 2% and another 0.49%, what is the rationale for utilizing the higher cost option? Perhaps the answer is higher liquidity or lower fund closure risk, but FAs should be prepared to exercise and document proper due diligence.
Of course, there is a way to avoid premiums/discounts and management fees altogether: invest directly in bitcoin. Unfortunately, while the digital asset space is evolving at lightning speed, offering direct bitcoin exposure currently presents significant challenges to FAs – one that Onramp is in the process of solving (which is why I recently partnered with the firm to serve as a Strategic Advisor)! In addition to avoiding management fees and potentially paying substantial premiums, investing directly in digital assets provides the opportunity to lend them on platforms such as BlockFi, generating additional income for investors.
For additional research on this topic, the Onramp Research team produced a more in-depth report on the current Exchange Traded Bitcoin Product landscape. To receive a copy of this research, sign up for the waitlist at www.onrampinvest.com or email firstname.lastname@example.org with the subject “BTC Exchange Traded Product Research” in the subject line.