If financial products connected to bitcoin are a measure of its legitimacy as an asset class, then this week was a milestone. On Sunday, futures contracts for bitcoin began trading on an exchange run by Cboe Global Markets and, on Tuesday, the first digital currency index fund opened to investors.
Bitwise Asset Management, whose co-founders were a former Facebook product manager and a former software security researcher in the Korean military, officially launched the Bitwise HOLD 10 Private Index Fund, on Tuesday.
The private fund holds the 10 most valuable digital currencies, also called cryptocurrencies, and selects and weights them by market capitalization. It rebalances monthly, capitalizes on hard forks and airdrops—the split of currencies into two and the delivery of free coins or tokens—and is the first step in bringing the asset class to the masses, according to co-founder and CEO Hunter Horsley.
Horsley said the current market for digital currencies excludes many investors because of its complexity, volatility and the level of risk in comparison to some securities. Retail investors lack the knowledge or time to monitor and actively trade the cryptocurrencies with success. Bitwise said the HOLD 10 Private Index Fund is a step toward bringing the asset class to them.
In November, bitcoin was up 58 percent but other coins like Monero and Dash were up more than doubled in value. As a result, the HOLD 10 Index (up 64 percent in the same period) outperformed bitcoin while exhibiting 37 percent lower volatility, Horsley said. Year-to-date, the HOLD 10 Index is up over 1800 percent.
Not all investors will have the wherewithal to invest in the private fund. Only accredited investors can participate in it and the minimum investment is $25,000. There is no performance fee, but there is a 2.5 percent management fee.
The fund’s NAV is calculated at 5 p.m. Pacific Time on business days. Redemptions for the fund are quarterly and there is a 3 percent fee on funds withdrawn in the first 12 months.
Horsley said he and Bitwise co-founder and CTO Hong Kim were trading digital currencies earlier this year when they realized the need for an asset manager in the space. Since founding the company in the summer of this year, he said they have received “thousands” of requests for the fund documents.
They also have have been fielding calls from wealth managers on behalf of clients interested in bitcoin. There are three camps of advisors when it comes to bitcoin, according to Horsley: Those who tell clients to steer clear, those who are interested in the best way to allocate about 1 or 2 percent of a client’s portfolio, and a small number with clients interested in as much as 10 or 20 percent.
“I don’t have a specific recommendation for anyone,” Horsley said. “They need to consider it for themselves.”
The fund manager said most of the advisors he talks to have the same questions for Bitwise that would as of any fund regarding the fees, liquidity, and the underlying assets. But he also walks advisors through the concept of digital currencies, the blockchain technology behind them and to help them determine if they should listen to their client’s request to include it in their portfolio.
Among other questions, advisors want to know if they should liken bitcoin to other asset classes such as gold or treat it as an angel investment—one with substantial risk but a potential big gain.
The fund manager also doesn’t have an opinion on how valuable bitcoin could be.
“We’ve definitely heard reasonable perspectives that there is room for further appreciation,” Horsley said. “But also heard reasonable perspectives that things are getting ahead of themselves.”
Some worry bitcoin’s loft price in comparison to the first years of its existence is a bubble and at least one wealth manager linked purchasing bitcoin to going to the casino.
Horsley said the asset manager plans to launch more products but declined to share explicitly what others it was considering. Many speculate the availability of bitcoin futures has paved the way for bitcoin exchange traded funds. In the coming year, Bitwise plans to establish an entity in the Cayman Islands to service international investors. The company also raised a $4 million seed round of funding this year.