The world’s first regulated Bitcoin fund, Global Advisors Bitcoin Investment Fund (GABI), is commencing operations today. The fund has been certified by the Jersey Financial Services Commission earlier last month, and is part of a campaign that was launched to make Jersey a world leader in digital currencies. The fund will allow institutional clients to expose themselves to Bitcoin price fluctuations, without actually having to hold the digital currency. This could, for example, attract pension funds that are currently restricted from investing in cryptocurrencies. These institutions are, however, allowed to invest in private investment funds. The fund itself will hold Bitcoins, and has been certified to do so. With a minimum investment of $100,000 the exchange is not open to the general public.
Exchange Traded Funds
Still, it does marks another step towards creating such a public fund. The Winklevoss twins are still hoping to get their Winklevoss Bitcoin Trust to pass federal scrutiny before the end of the year. The fund could become the first digital currency-based exchange traded fund (ETF). An ETF is likely to appeal to investors that want to avoid the trouble of actually holding Bitcoins. The latter is subject to various risks and (potential) regulations. GABI does not compare to such an ETF, as a Bitcoin ETF would track Bitcoin price movements and would be traded like any stock on an exchange.
As mentioned, a Bitcoin ETF can hold several advantages over actually owning Bitcoin. The first one being that ETFs cannot just be bought, but they can also be bought on margin or sold short. Margin is collateral that only covers part of the security’s value. If the margin requirement would be 50 percent, and the ETF would have a value of $600 then only $300 has to be covered. With $600, it would thus be possible to hold double the investment as would be the case without margin. This way an investment is leveraged, as an upward or downward moves in the ETFs value are also doubled.
On the other hand, speculators could also sell an ETF that is not owned. This is the essence of short selling, and comes down to borrowing money with the hope to having to repay the loan at a lower rate. As the size of the loan is linked to the ETFs value, the short seller benefits from a fall in the price of Bitcoin.
Lastly, there is no need to actually hold Bitcoins hence it the inherent security risks are avoided. Tax regulations specific to Bitcoin do not have to be considered either, although tax rules for a currency or commodity ETF will apply. The Internal Revenue Service has classified Bitcoin as a commodity, but it is still uncertain whether the Securities and Exchange Commission will follow this definition. This is also one of the reasons why it may still take a while before a Bitcoin ETF becomes reality.