Buy $100 worth of bitcoin. Assuming the price doesn’t change, and ignoring expenses, how much bitcoin do you own?
It’s not a trick question, but yeah, it’s a trick. You might be surprised to discover that you could own more or less than $100 worth of bitcoin. This article explains how this can happen.
If you mine bitcoin, or buy it directly from an exchange, the value of your bitcoin will always equal the price of bitcoin (ignoring expenses). But a different answer applies when you buy bitcoin via bitcoin OTC securities, often referred to as “bitcoin trusts.” (This conversation actually applies to all OTC trusts of digital assets; we’re using the term bitcoin as a catch-all phrase.)
These trusts look a lot like mutual funds, so don’t confuse them with the kind of trusts that are associated with estate planning. Why, then, are they called trusts instead of funds? That question is not relevant to this conversation. Work with me here, people.
Although I’m not going to tell you why they are called trusts, I will tell you why the digital asset community has created them. There’s just one reason, and it’s the SEC’s fault. To date, the SEC in its wisdom has refused to approve the creation of bitcoin ETFs. With that door closed, the digital asset community has used a window. And that window can be a trap door for the unwary or a launch pad for knowledgeable investors.
More on that in a moment. First, there’s that ETF issue. There’s an obvious need for a bitcoin ETF. Without one, buying bitcoin is a challenge. You could mine for bitcoin, but that’s like trapsing into the woods to find some blueberries. People would rather just go to the grocer. So, forget mining. And going to the grocer – called an exchange in bitcoin parlance is also a hassle. Exchanges aren’t familiar names, can be of questionable financial solvency, are cumbersome to establish, require connections to your bank account, are exposed to hacker risk, and force you to obtain and safeguard passwords or private keys which, if lost, could mean your bitcoin are lost forever. For most Americans, all this is rather scary.
But investors love mutual funds and ETFs; these securities have been around for decades and are offered by some of best-known companies in the world, including BlackRock, Fidelity and Vanguard, and thus hold tens of trillions of dollars for tens of millions of investors.