An ETF-type investment, full of risks, is struggling for acceptance

If you have an online brokerage account, you can now buy shares in a fund that aims to track the price of the digital currency called bitcoin. Just don’t expect a smooth ride.

Bitcoin is a highly speculative investment—the kind most financial advisers say investors should only buy into with money they can afford to lose. But some analysts think the new fund could bring the digital currency a step closer to broader acceptance by investors. For that to happen, the fund will have to overcome some early difficulties.

Bitcoin Investment Trust started trading on the OTCQX market on May 4 under the ticker symbol GBTC. It isn’t technically an exchange-traded fund, but it’s designed to work like one. (The Securities and Exchange Commission is reviewing an application for what would be the first official bitcoin ETF, the Winklevoss Bitcoin Trust.)

Bitcoin Investment Trust is small, with a net asset value of only $35.6 million at the end of June and only 1.4 million shares outstanding. Its tracking of bitcoin’s price has been inconsistent, and there is a wide spread between the share price and the value of the underlying assets. Oh, and by the end of last month the share price had fallen 28% from its $42 close on the first day of trading, to $30.12.

Sparking interest?

Still, some analysts think the fund could prompt some speculative interest in bitcoin, like the launch of gold ETFs did in precious metals a decade ago.

Gil Luria, an analyst with brokerage firm Wedbush Securities who has followed the bitcoin market since its infancy, sees Bitcoin Investment Trust as part of bitcoin’s move toward the mainstream of finance. Other recent signs of acceptance on Wall Street include the decision of the New York State Department of Financial Services to regulate itBit Trust Co., a small bitcoin exchange, and research from Goldman Sachs Group Inc. claiming a place for bitcoin in “the future of finance.”

“The OTCQX listing is also a very big step forward,” says Mr. Luria. “It has made at least a proxy ownership stake in bitcoin available to practically every institutional and retail investor.” Anyone can buy bitcoin directly, but it involves headaches including the need for specialized software for secure transactions.

When the SPDR Gold Shares ETF launched in November 2004, gold futures were trading at about $400 an ounce. The popularity of the fund was part of a gold craze that saw prices quintuple over the next seven years. “Investors historically have chosen to offload the friction of buying and securing gold directly for a reasonable fee,” says Cameron Winklevoss, one of the founders of Winklevoss Bitcoin Trust. “We believe some investors will behave the same with regards to bitcoin and a bitcoin [exchange-traded product].”

Bitcoin is even more volatile than gold in its speculative heyday, and even trickier to buy and sell directly. And the bitcoin market is far smaller and younger than the gold market was in 2004. But there are reasons to believe bitcoin usage could increase. In a recent Goldman Sachs survey of 752 millennials, 44% said they have used, do use or will use bitcoin. And well over 100,000 merchants world-wide, from individuals to corporations, accept bitcoin for at least some payments, the firm says.

Share shortage

In addition to investors’ attitudes about the digital currency, Bitcoin Investment Trust is wrestling with some practical issues. For one, the fund’s shares trade at a sizable premium to the underlying assets—19% on July 1. That’s because of the fund’s origins as a private trust.

Investors in the private trust could sell their shares on the public market after a 12-month lockup. Those sales began May 4, but shares have only become available gradually as the private investors liquidate their holdings. The shortage of shares has boosted their market value.

The bitcoin fund has high fees by ETF standards, at 2%.
The bitcoin fund has high fees by ETF standards, at 2%. PHOTO: ISTOCKPHOTO/GETTY IMAGES

But Mr. Luria expects nearly all of the original trust investors to sell their shares publicly by September, creating what he calls a “critical mass” of shares on the market—or enough to bring the price of the fund’s shares more into line with prices on the bitcoin market.

The fund also has high fees by ETF standards, at 2%. And it may soon have competition from the proposed Winklevoss fund. Already, Nasdaq has launched an exchange-traded note that tracks the price of bitcoin on its Stockholm exchange.

However investors come to view the fund, some veteran money managers see it as the latest in a long line of tenuous and risky investment products.

“I think a bitcoin ETF says as much about the popularity of ETFs as it does about the popularity of bitcoin,” says Eric Marshall, a portfolio manager for mutual-fund firm Hodges Capital Management in Dallas. “Now there’s an ETF for everything.”