Osprey's OBTC: A New, Low-Cost Bitcoin Fund

The number of ways investors have to invest in Bitcoin has just grown by one.

The Osprey Bitcoin Trust (OBTC), which hit public markets this week, is the latest in a small group of funds that provide exposure to cryptocurrencies through their brokerage accounts. Specifically, OBTC allows investors to share in the ebbs and flows of Bitcoin.

That's fortunate, because the digital currency is swelling in popularity. On Friday, Feb. 19, assets invested in Bitcoin hit $1 trillion for the first time. If it were a publicly traded company, Bitcoin would be worth more than the likes of Facebook (FB) and Tesla (TSLA) by a couple hundred billion dollars.

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The launch of OBTC is a welcome addition to the small existing stable of crypto-connected plays. But it also comes just a step short of the much-anticipated "holy grail" of Bitcoin investments.

Big Money Wants Bitcoin Now

Over the past year, Bitcoin prices have soared from below $4,000 in March 2000 to $53,000 more recently. And as we discussed in our 2021 outlook for Bitcoin, one of the driving forces behind this most recent rise in Bitcoin has been institutional interest.

And that remains the case.

Bank of New York Mellon (BK) and Mastercard (MA) are among the latest companies to join the fray, with the former starting a crypto unit to hold cryptocurrencies on behalf of clients, and the latter bringing digital currencies onto its payment network.

To remain competitive, it's likely that most major banks and credit card processors will be forced to provide similar offerings within the next couple years.

Additionally, companies are now purchasing and holding Bitcoin on their balance sheets in lieu of fiat currencies such as dollars and euros. Business intelligence firm MicroStrategy (MSTR) recently announced a $600 million convertible debt offering to continue buying Bitcoin – and within days upped that debt offering to $900 million, with the potential for another $150 million should additional investor interest exist.

The flashiest such move, however, was a Feb. 8 announcement by Tesla. The electric-vehicle company said it had bought $1.5 billion in Bitcoin, and Elon Musk said his firm was also considering allowing customers to purchase vehicles with the digital coins.

"Player 3 has entered the race," tweeted Barry Silbert, founder and former CEO of Grayscale Investments, which offers the Grayscale Bitcoin Trust (GBTC) Bitcoin fund. "Good luck, @ElonMusk."

Enter the Osprey Bitcoin Trust (OBTC)

Investors have myriad options for investing in Bitcoin and other cryptocurrencies. For instance, if the stock market is your comfort zone, you can buy several publicly traded companies for the potential upside of their various crypto-related initiatives.

Your options for investing in cryptocurrencies are limited if you're only comfortable investing through a traditional brokerage account, however. Bitcoin and other digital coins can only be directly accessed via cryptocurrency exchanges, and it's typically recommended that you have your own personal digital wallet for holding those digital coins.

You can, however, buy Bitcoin and a couple other digital currencies through funds, similar to how you might buy commodities such as gold and silver through exchange-traded funds (ETFs).

The Osprey Bitcoin Trust buys and holds Bitcoin on behalf of its investors, using Fidelity as a custodian. This fund has been around since 2019, but until this week, it had only been available privately to accredited investors.

Much like owning a gold fund, investors in OBTC can't redeem their shares for actual Bitcoin – but they still enjoy exposure to the price movements of the cryptocurrency.

Most importantly, OBTC charges just 0.49% in management fees, and other expenses (custody, legal, etc.) are expected to bring the total fee to no more than 0.79%. While that's much higher than your average index ETF, that's far smaller than its primary competitor, the Grayscale Bitcoin Trust, charges a 2.0% holding fee but has nonetheless amassed $34 billion in assets.

Designed to grab cost-conscious investors, OBTC might spur Grayscale to lower its fees. It's a trend we've seen time and time again across exchange-traded funds, as well as with stock brokerage firms that stampeded to zero fees in 2019.

"We're simply trying to give investors exposure to Bitcoin, so there's no active management other than converting new investment dollars into Bitcoin," says Greg King, CEO of Osprey Funds. "The price point reflects a more ETF-like structure rather than hedge fund fees. We think it's more appropriate for this kind of product."

The Potential Danger: A Bitcoin ETF

OBTC is not an exchange-traded fund. It's similar, but the difference is a doozy.

OBTC (and GBTC, for that matter) is a trust that trades "over the counter." And one of the biggest differences between OGBTC/GBTC and, say, a theoretical Bitcoin ETF that would work similarly to a commodity ETF, is that they can trade at a significant premium or discount to their net asset value.

Let's say that the net asset value of OBTC's Bitcoin holdings is $10 per share. Well, the fund itself could still trade at $12 per share or $8 per share, depending on how much demand there is for the fund itself. For instance, within the span of about a month, GBTC went from trading at a 40% premium to NAV to a mere 5% premium. People simply became less willing to pay as much for the assets GBTC held.

The SEC thus far has refused to green-light a Bitcoin ETF, though its time could be soon. Canada recently approved its first crypto ETF, and days later approved its second. They could act as something of a test case, and possibly pave the way to eventual SEC approval of U.S. products.

"Because of the change in administration, there's more interest in Bitcoin as an ETF," King says. "If things start to look more favorable at the SEC, we're very likely to see that space grow as well."

Approval of a Bitcoin ETF does threaten funds like GBTC and OBTC, however. If money rushes from those funds into a new Bitcoin ETF, the price of those over-the-counter funds could deflate – even if Bitcoin prices remain high.

"We would look at our options of converting to an ETF when the time comes and depending on the regulatory environment," King adds.

However, investors who wait for an ETF before jumping in could miss out on part of the current bull market in cryptocurrencies. Again, while prior bull markets in crypto were marked by retail investors, this new uptrend is clearly being driven by institutional interest. It also helps that it's a limited asset in a world beset by global money printing.

"Part of the attraction of Bitcoin is that it's ultimately a finite supply," King says. "Ultimately, all interest has to fit into 21 million BTC, so the price will have to accommodate."