This might seem like a challenging time to own a piece of the cryptocurrency market. Bitcoin (CRYPTO:BTC) and many of its peers have come under fire for their toll on resources in the mining process. Regulators worldwide are starting to clamp down on digital currencies. Speculators are bailing on crypto.
Prices have been tumbling over the past month for Bitcoin and Ethereum (CRYPTO:ETH), but I continue to dedicate a small portion of my overall portfolio to crypto. I own a little Ethereum directly with smaller positions in a couple of other crypto denominations, but my exposure to cryptocurrency stems largely from my ownership of Grayscale Bitcoin Trust (OTC:GBTC) and Grayscale Ethereum Trust (OTC:ETHE). Let me go over some of the reasons I have gone this route.
1. They are trading at big discounts
Cryptocurrency might be the riskiest asset class you can own these days, but it helps that the two largest Grayscale trusts are currently fetching historically wide discounts to the crypto they're holding. Every share of Grayscale Bitcoin Trust was backed by $36.03 in cold-stored Bitcoin tokens as of Tuesday's close. The trust closed at $31.05, a 14% discount to its net asset value.
Grayscale Ethereum Trust has a smaller markdown, but it's still a discount. The single-asset trust closed at $25.21 on Tuesday, 4% less than the $26.35 a share in Ethereum that it currently owns.
Both trusts traded at premiums -- sometimes significant markups -- until just a couple of months ago. There is no guarantee that either trust will return to trading at a premium. Buying Bitcoin for $0.86 on the dollar doesn't mean you can swap it out for a buck on the way out. But it definitely makes the decision that much easier to justify.
2. High management fees aren't a deal breaker
The loudest knocks on the two trusts are the high fees associated with ownership. Grayscale Bitcoin Trust charges a 2% annual management fee. Grayscale Ethereum Trust will set you back 2.5% a year. Like mutual funds and ETFs, these fees are nibbled away over the course of the year, in this case coming at the expense of how much crypto is backed by each share.
The average equity mutual fund and ETF charge 1.42% and 0.53%, respectively, in annual expenses. The expense ratios are much lower for index funds in those categories. I'll admit that I also flinched when I initially started buying Grayscale Bitcoin Trust in the fall of last year, and that was at a slight premium to its net asset value. However, it was an easier decision to make when I considered trading costs.
If you're going to buy and hold crypto for a long time, it's certainly reasonable to buy directly. There are a growing number of trading platforms that make the process seamless. However, unlike exchange-traded investments (including Grayscale Bitcoin Trust and Grayscale Ethereum Trust) that can be freely bought and sold through brokers charging zero commissions, the same doesn't hold true for crypto itself.
It can cost as much as 1.49% of your investment to buy or sell Bitcoin and Ethereum directly through leading cryptocurrency marketplace Coinbase (NASDAQ:COIN). A 2% annual fee is still higher if you plan to own your stake for a little more than a year, but there are a lot of itchy trigger fingers when it comes to crypto. The typical time that Coinbase investors hold Bitcoin is just 53 days. The average holding period on Coinbase for Ethereum is just 42 days. Suddenly commission-free trading of the trusts doesn't seem that expensive.
3. I'm not alone
Grayscale might not be a household name outside of the cryptocurrency universe, but both of these trusts are huge. Grayscale Ethereum Trust has $8.2 billion in assets under management. The much larger Grayscale Bitcoin Trust weighs in at nearly $25 billion in assets.
The convenience of exchange-traded access to a pure crypto play is significant. It's easy to buy crypto directly these days, but your options are limited if you want the appreciation to take place in a tax-deferred retirement account. Going this route would also make sense if you want to keep your crypto in the same mainstream brokerage portfolio as the rest of your investments.
Cathie Wood is also an investor here. Grayscale Bitcoin Trust is one of the largest holdings of ARK Next Generation Internet ETF (NYSEMKT:ARKW), accounting for more than 4% of the future-looking fund.