Where to buy Bitcoin at 26% off the regular price

Here is a scorecard of eight ways to own cryptocurrency. The most interesting: Low-cost coin credit is available at a great discount.

Interested in a virtual currency that is now trading at half the price it was last fall? Shop around. Among the many ways to get a part of the action, there are huge differences in ownership costs. My favorite: a somewhat obscure bitcoin trust that can be found in Fairfield, Connecticut.

There are pros and cons to every medium of cryptocurrency exposure, including the little fairfield outfit. This survey covers eight bitcoin bets in descending order from my point of view on their desirability. You may have a different arrangement, especially if you’re speculating on a quick conversion.

#1. Osprey Bitcoin Trust

This quasi-financial fund (Trade Bar: OBTC), which was created just over a year ago, is a fatal blow to the more famous Grayscale Bitcoin Trust. Both funds are closed, as investors are not entitled to redeem shares for cash or underlying assets.

Osprey is more cost-effective, with an annual expense ratio of 0.8% versus Grayscale’s 2%. These expense figures include both portfolio management and maintenance costs.

The funds trade at discounts on the value of the bitcoins they own: recently 26% in Osprey, and 28% in Grayscale. With either of them, you bet both on the crypto and on this opponent. If the discount expands, you are in a worse position than if you were to buy a coin. If it narrows, you have unexpected gains.

What could widen the discounts: Cryptocurrency prices continue to drop. Bear markets have a way of doing double damage to closed parties, causing their stock prices to fall faster than prices on the assets they own. This has been true for equity funds since the Great Depression and is likely to be true for crypto trusts.

It is happening now. Bitcoin’s 12% drop between noon on Friday May 6 and Monday afternoon led to a 16% drop in Grayscale’s price.

But the discounts may disappear. This will happen if the Securities and Exchange Commission allows exchange-traded funds to be held in virtual currencies. Grayscale and Osprey have pledged to convert closed-end trusts into ETFs once such things are allowed.

The structure of the ETF allows market makers to profit from junk fund shares (or buy new ones when looking for shares) by swapping the underlying assets. This creates an arbitrage that keeps the price of the ETF close to the fund’s NAV.

So far, the agency has rejected every request for an ETF, even though it gave the green light last year to an ETF containing bitcoin futures. Why the distinction? Futures are traded on the heavily regulated Chicago Mercantile Exchange, while currencies are traded in somewhat more murky places.

A bearish look at Currency Funds comes from Tyler Odin, Publisher something interestingSubstack’s insightful newsletter on cryptocurrencies. Time horizon [for an SEC approval] Long,” he says. “Every now and then the discount will likely deepen as the number of competitive ways to hold bitcoin also deepens.”

However, I think betting in favor of an eventual favorable ruling from the regulators is a reasonable bet. Risky, yes, but not quite as dangerous as the underlying asset. Bitcoin is more likely to crash another 50% than the discount will trigger a similar move from 26% to 63% (meaning: your confidence collapses from 74 cents on the dollar to 37 cents).

Another concern: liquidity. Osprey only has $100 million in coins in its vault, and its average daily stake size over the past year would be $400,000 at today’s share price. Big bookies should intervene with caution.

#2. Your wallet

You can buy bitcoins from the exchange, then export them to your cold storage wallet. This Odean market analyst has used this on his long-term bets.

Pros: There are no counterparty risks. There are no administrative fees. If you do it correctly, there is no danger from hackers.

Con: You may not do it correctly.

Self-storage entails a fairly elaborate procedure to protect your private key from loss or theft. Next week you might be walking in an open elevator shaft, so you need some mechanism so that survivors can get that key back. The computer you use to generate the private and public keys for your coin deposit must be permanently isolated from the Internet. The medium on which the secret is stored must be secure; Odean mentions an engraved coin as an option.

There are services (Casa, Ledger, etc.) that make this process less painful, but ease of use comes with increased risks.

# 3. Exchange Storage

You can leave your coins for safekeeping in the currency exchange. If you want to separate this asset, and therefore safe from the exchange’s creditors, you will have to pay a guardianship fee.

At Coinbase Global, where the minimum account size for this service is $500,000, the fee is 0.5% annually. Some customers get a better deal. Osprey, which recently transferred its custody from Fidelity Investments to Coinbase, appears to be paying 0.25% or less (its financial statements do not reveal the exact amount).

If you can afford some counterparty risk, or you just want the assets available for trading, you can leave your coins in a deposit account at no cost. This is the crypto equivalent of holding your Tesla shares in a margin account. But, unlike stocks in a brokerage firm, coins left in the exchange do not have a securities investor protection firm to back it up if the broker gets into financial trouble.

#4. Foreign ETF

While the Securities and Exchange Commission (SEC) waits for its time, the Canadian regulator has allowed exchange-traded funds that hold cryptocurrency. One of them is the Purpose Bitcoin ETF, which now contains coins worth just over $1 billion.

Pro: The fund is trading close to NAV. Stocks quoted (in Toronto) in US dollars see $4 million in average daily volume.

Cons: The 1.5% annual expense ratio is much higher than the Osprey. It is not easy to get these shares in the US, as most brokers will reject the order. On the Fidelity platform, you can find the purpose under the tag BTCC_U: CA, but it takes some searching.

#5. Grayscale Bitcoin Fund

This entity (GBTC) is the older cousin of Osprey.

Pro: Liquidity. This trust has $20 billion in coins and sees the average daily share volume now at $140 million.

Cons: Exorbitant fee, 2% per year.

# 6. Futures Contracts

CME Group’s Chicago Mercantile Exchange lists bitcoin futures contracts, each with five currencies. The trading volume, which is almost all in the nearest month, is usually around $1 billion per day. Settlement in dollars. There are no wallets involved.

Pros: good liquidity, minimal counterparty risk and the possibility of leverage. You can control $2 of cryptocurrency by depositing $1 of cash.

The negatives: taxes, trading and control costs. Bitcoin futures share these three pains with many commodity futures contracts.

At tax time, you have to declare paper gains and losses in futures contracts, treating 40% as short-term (at high tax rates).

Changing your future position monthly, which you would most likely do to stay on the most traded contracts, will cost you 12 commission and spreads/ask per year.

Contango is a great deal. This means that the price of the futures contract at which you are buying is higher than the spot price. On bitcoins, the contango is a fluctuating number, usually between 3% and 6% annually. Contango reflects both the cost of financing an inventory of a commodity and the cost of insuring it. In the case of cryptography, securing the asset against hackers is not easy (see #2 above).

Futures are not bad for day trading. It’s a bad choice for someone hoping for long-term gains.

#7. ETF Futures

ProShares Bitcoin Strategy ETF (BITO) holds long positions in Bitcoin futures. Here, on top of the steep Chicago trading pit pit, you have the opportunity to pass an additional fee: 0.95% per annum assessed by the fund.

ProShares has attracted $900 million for this product. of naivety.

#8. Micro Strategy

Chairman Michael Saylor has turned this business analytics firm into a crypto betting hall. The company used mostly borrowed funds to acquire 129,200 bitcoins.

The stock had an interesting day on May 9th. With bitcoin down 14% from what it was on Friday afternoon, MicroStrategy’s shares are down 26%.

Tyler Odean sees these posts as a simultaneous bet on three things: crypto, a medium software company and Saylor’s ability to withstand margin calls. He likes the first bet but does not like the other two bets.

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