Trading and Investing

Should You Invest in Cryptocurrency or Crypto Funds?

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October 5, 2020
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    Most people invest their retirement savings in an index or mutual funds. While many funds charge asset management fees, these costs pale in comparison to the time and effort required for stock picking, allocating assets, placing trades, periodically rebalancing, and everything else required to build and maintain a portfolio of individual stocks.

    Let’s take a look at the differences between investing in cryptocurrency and crypto funds, and how to decide on the best option for your portfolio.

    Why Invest In Crypto Funds?

    Crypto funds are an easy way to gain exposure to crypto-assets. Rather than buying cryptocurrency on an exchange, investors can purchase a security in their existing brokerage account and own crypto alongside their other investments. You also don’t have to worry about the complex taxes associated with buying and selling individual cryptocurrencies.

    There are two types of crypto funds:

    Single Asset Funds

    Single asset funds hold a single cryptocurrency. For example, a fund may hold an amount of cryptocurrency (or crypto futures contracts) that is equal to the total market capitalization of the fund in order to provide investors with exposure.

    Diversified Funds

    Diversified funds hold a basket of cryptocurrencies weighted by market capitalization. For example, a crypto fund may hold 80% Bitcoin since Bitcoin far outweighs other cryptocurrencies in terms of market capitalization. These allocations are typically rebalanced regularly to account for differing levels of performance.

    Crypto funds charge an annual fee, or expense ratio, in exchange for managing the crypto fund. For instance, the Grayscale Bitcoin Trust (GBTC) charges a fee equal to 2% of the assets under management. An investor that holds $1,000 worth of GBTC would pay $20 per year in fees to cover the fund’s expenses in building and maintaining the portfolio.

    In addition to expense ratios, an investor should be aware that the price of a crypto fund may differ from its net asset value. Most exchange-traded funds have a net asset value that closely mirrors the value of funds’ underlying assets, but some crypto funds have market prices above net asset values due to the limited liquidity and other factors.

    Investors should carefully consider the expense ratios and structures of crypto funds before investing in them since they can have a material impact on returns over time. For instance, if you max out your IRA every year and realize an 8% return over 30 years, a 1% expense ratio could end up costing upwards of $230,000 in opportunity cost over time.

    Where To Invest Crypto Funds

    The crypto market has experienced many regulatory challenges when bringing crypto funds to market. While the SEC has thus far prevented most crypto exchange-traded funds and mutual funds, several companies have offered exposure to cryptocurrencies or blockchain-friendly companies through other methods.

    Grayscale is the largest crypto fund provider with six publicly traded offerings that trade on the OTC Markets in the United States. Most of these funds aren’t registered with the SEC or any other regulatory agency, don’t use a redemption program, and are not subject to the same regulatory requirements as SEC-registered exchange-traded funds or mutual funds.

    Crypto Fund

    Grayscale Digital Large Cap Fund Price vs. NAV - Source: Grayscale

    Grayscale’s six publicly traded funds include:

    • Grayscale Bitcoin Trust (GBTC)
    • Grayscale Bitcoin Cash Trust (BCHG)
    • Grayscale Ethereum Trust (ETHE)
    • Grayscale Ethereum Classic Trust (ETCG)
    • Grayscale Litecoin Trust (LTCN)
    • Grayscale Digital Large Cap Fund (GDLC)

    In addition to these publicly traded options, the Bitwise 10 Private Index Fund provides exposure to the top ten cryptocurrencies by market capitalization with a $25,000 minimum investment and weekly liquidity. The expense ratio is around 2.5% with no performance fees.

    A handful of other funds track public companies that operate in the crypto space, which provides investors with indirect exposure to the market. For example, the Amplify Transformational Data Sharing ETF (BLOK) provides exposure to companies that are planning on adopting blockchain technologies in their businesses.

    Building A Crypto Fund Portfolio

    The high expense ratio associated with a lot of crypto funds—relative to conventional funds—has led some investors to build their own crypto portfolios. While these assets cannot typically be held in conventional brokerage accounts, investors may hold them in offline cold storage in the same way that they might store physical gold or other investments.

    There are several steps to build a cryptocurrency portfolio:

    Determine Allocation

    You must determine how much cryptocurrency to purchase based on your investment thesis, risk tolerance, and other factors.

    Select Cryptocurrencies

    You must determine what cryptocurrency or currencies to invest in based on fundamentals, market capitalization, or other factors.

    Set-up A Wallet

    You must set up a wallet to hold the cryptocurrencies. Typically, offline cold storage is best to maximize security.

    Make The Investments

    You must make the investment into the wallet, and optionally, create a schedule for regular investment.

    Adjust Allocations

    You must regularly determine if there’s a need to adjust the investment amounts or cryptocurrency allocations.

    In addition to these processes, an investor must ensure that they properly pay taxes on any cryptocurrency sales. Investors must record every transaction, determine the cost basis, compute the capital gain and pay the appropriate tax on the total capital gain—or deduct any capital loss from your other capital gains or up to $3,000 of ordinary income.

    ZenLedger’s Crypto Tax Platform - Source: ZenLedger

    ZenLedger simplifies the process by aggregating transactions across wallets and exchanges, computing the capital gain or loss, and auto-populating popular IRS tax forms. In addition, the platform makes it easy to identify tax-loss harvesting opportunities to help reduce your overall tax burden for the year.

    The Bottom Line

    Most people invest their retirement savings in funds rather than building and maintaining a portfolio of individual stocks. When building crypto exposure into a portfolio, an investor can choose from holding individual cryptocurrencies and investing in a growing number of crypto funds—but there are pros and cons to consider for each approach.

    Crypto Funds FAQs

    1. What is a crypto fund?

    A crypto fund is an easy way to gain exposure to crypto-assets. Rather than buying cryptocurrency on an exchange, investors can purchase a security in their existing brokerage account and own crypto alongside their other investments. You also don’t have to worry about the complex taxes associated with buying and selling individual cryptocurrencies.

    2. How do I avoid capital gains tax on Crypto?

    The simplest way to defer or eliminate tax on your cryptocurrency investments is to buy inside of an IRA, 401-k, defined benefit, or other retirement plans. When you buy cryptocurrency inside of a traditional IRA, you will defer tax on the gains until you begin to take distributions.

    3. How many cryptocurrencies should I invest in?

    If you are new to bitcoin, it can be a great idea to buy just a small amount initially. Your potential profits will be lower in this case, but it allows you to learn about Bitcoin and use it without worrying about making mistakes and losing a bunch of money.

    4. Should I invest in cryptocurrency?

    Owning or investing in some cryptocurrency can increase your portfolio's diversification. Being a digital currency, it is used for transactions all around the world without having to pay a large amount of money or fees. Along with this, it could potentially revolutionize the banking and financial services industries.


    ZenLedger easily calculates your crypto taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!

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