Cryptocurrency has been the buzz in the news, financial markets, and firepit conversations lately. At the time of this post, Bitcoin (BTC) is over $69k, the highest it has ever been. With the normalization of cryptocurrency in the media, crypto ownership is not uncommon, transcending all social classes and levels of tech knowledge. However, there are different ways to participate in the crypto market or “own” the coins. Here is a breakdown of the options available to investors:
Direct Ownership – This is the least common way to own Crypto assets (coins). Direct ownership used to require a physical file drive or a memory card that would store the information of the cryptocurrency assets on itself. With brokerage houses now trying to capitalize on the attention that crypto has been getting, you can own crypto coins directly. For example, at Fidelity, you can own Bitcoin (BTC) and Ethereum (ETH) directly in a subaccount tied to your Fidelity Brokerage Account. The cost if establishing the account on your own is 1% to buy & 1% to sell, with no expense ratio. If establishing this account through LFA, that cost drops to 0.5% to buy & 0.5% to sell, still with no expense ratio. The pros are direct ownership instead of portions of a fund. The cons are the expenses that hinder any gains if the account is used for trading, as opposed to a buy & hold strategy. Another con is having to track your sales and self-report them come tax time in the year that they were sold.
Indirect Ownership – This is the most common way to own Crypto assets. Indirect ownership gives the buyer portions (shares) of a specific fund that is either a direct index, a leveraged index, or some other form of linked index to an existing crypto security. A pro of this form of ownership over direct is a wider array of coins that are attached to indices, meaning further possible diversification within the cryptocurrency realm. A con is that you only own a share class of an index, not the actual asset (same age-old dispute of owning physical gold vs. a gold index). The costs are usually on an expense ratio basis instead of to buy/sell, which are friendlier to investors who are planning on placing trades within their crypto accounts. The most popular of these indexes is the new Fidelity Bitcoin ETF (FBTC), which tracks BTC. The gross expense ratio is 0.25%, meaning it is half the cost of direct ownership within the 1st year.
Cryptocurrency as a Part of a Diversified Portfolio – This is a topic that has been around even before cryptocurrency was accepted as an alternative investment. The rule of thumb is – “it depends,” meaning that cash flow, fund location, and current allocation are all prerequisite questions that need to be addressed before the main question can be answered. Assuming all of these factors are in line with your goals and Investment Objective Letter, usually 1-3% of a client’s portfolio to be invested in cryptocurrency is not uncommon. Although we do not advise on any specific position, whether it’s a stock, an ETF, a mutual fund, or a cryptocurrency, we do take all possible positions into account regarding the client’s allocation, diversification, and goals. Please feel free to reach out to us with any questions regarding the various offerings for direct or indirect ownership of crypto. We are here to help!