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Fidelity Research: Six ways institutional investors can get exposure to Bitcoin

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Much of Bitcoin's early infrastructure was built to meet the needs of trivial transactions, with few options for robust, secure institutional hosting solutions.

原文标题：《 CHANNELS FOR EXPOSURE TO BITCOIN 》

原文来源：富达数字资产

The chain catcher

So far, much of the discussion in the institutional investor community has focused on "Why Bitcoin?" If someone does conclude that bitcoin is a good fit for their portfolio, the next logical question is often "how" to invest in bitcoin.

In this article, we discuss the benefits of different investment channels, including escrow, passive single asset funds, futures contracts, and actively managed funds.

A central feature of Bitcoin (and digital assets more broadly) is the ability of the holder to keep the assets in their own custody and to have real ownership, without the need to trust the intermediary that controls them. However, many institutions with fiduciary obligations face regulatory and operational constraints that prevent them from holding these assets directly. Moreover, as things stand, self-regulation requires strong security and risk management processes that some agencies may not be willing to undertake or may not have the time and resources to refine.

To accommodate this reality, the channels for investing in Bitcoin have increased significantly as institutional interest in bitcoin assets has increased. In this article, we focus on the benefits and challenges of multi-channel investing that institutional investors may consider when deciding on an asset class allocation.

Spot trading and custody & NBSP;

Much of Bitcoin's early infrastructure was built to meet the needs of trivial transactions, with few options for robust, secure institutional hosting solutions. Historically, the lack of institutional solutions has been a barrier to institutional investors investing in Bitcoin. In recent years, this challenge has been addressed head-on,A number of digital asset native service providers have launched agency-focused custodians to protect client assets from loss and theft and to help them meet regulatory and fiduciary obligations.

The benefits of gaining bitcoin exposure through partnering with escrow today include the maturity of escrow solutions, the relatively low cost of maintaining spot exposure through escrow homes, and the benefits of the potential capital efficiency of holding the underlying bitcoin. Therefore, spot trading and custody are the most common channels of exposure. In our 2019-2020 Institutional Investor survey, we found that approximately 60% of respondents exposed to digital assets hold the underlying assets. Below we outline the benefits and considerations investors need to be aware of when considering exposure to physical bitcoin.

1. Potential benefits.

1) Institutional trading and custody

Bitcoin's prospects have matured significantly in recent years with the launch of integrated trade execution and custody solutions specifically built for institutional clients to facilitate the acquisition, long-term storage and protection of bitcoin by large, regulated investors. Today, digital asset custody operates under a robust operational and regulatory framework. Many custodians perform regular operations and security (such as SOC) audits, following the standards of any traditional service provider. They may also hold a state trust license or a national banking license.

The fulfilment of these standards, along with other requirements set forth in the Investment Advisers Act of 1940, has led some regulated entities to interpret certain Bitcoin custodians as qualified custodians. This is important for investors, such as registered funds, who must hold investment securities from companies that are qualified custodians. Please note that Bitcoin is not classified as a security, but it is still important to properly match the characteristics of qualified escrow status.

2) Low cost.

Another advantage of physical bitcoin exposure is that it is one of the less cost efficient ways to acquire assets compared to most of the other approaches we discussed, due to the relatively low total fees (transaction execution and custody costs). Annual custody fees and fee schedules vary from one provider to another, but most providers have less than 50 basis points of total custody assets. Depending on the provider, the hosting rate may also increase as the total assets of the platform grow. Trade execution costs include transaction fees and the downside that investors can experience, especially when taking large positions.

In a hypothetical test, assuming a price of $50,000 per bitcoin, Coin Metrics estimated that the total transaction cost (transaction fees plus slippage) of a $5 million order executed in a single day was 0.175%(higher transaction costs but lower slippage). The cost of executing a $1 billion order in about two weeks is 0.225%(higher latency, but lower transaction costs).

3) Opportunities to improve capital efficiency.

Aside from self-custody, depositing physical Bitcoin on the custodian's side is the most direct way to build exposure to the asset class. One of the key advantages of having access to physical Bitcoin is capital efficiency. As bitcoin becomes more widely accepted as an investable asset, borrowers are likely to increasingly use bitcoin as collateral to obtain liquidity while maintaining their positions. Lenders may see value in bitcoin as collateral because it has some attractive features, which are liquid, borderless, convenient for quick final settlement and real-time dynamic prices.

2. Matters needing attention & NBSP;

1) Technical due diligence

Given the relatively more technical nature of digital asset custody, investors may feel unable to properly communicate with due diligence service providers. For example, they may have difficulty understanding the differences between the hardware security module (HSM) and the multi-party computing (MPC) model used to protect assets, or the advantages and disadvantages of integrated versus isolated hosting, among other issues. Therefore, due to gaps in technical knowledge and experience, some organizations may prefer to choose tools that allow them to outsource service provider evaluations.

2) Dispersed liquidity.

Liquidity in digital asset markets is fragmented. Digital assets like Bitcoin are traded on multiple exchanges around the world, with varying amounts, transparency, security and regulatory profiles. This is in stark contrast to traditional capital markets, where trading takes place on a single exchange and is required by law to provide customers with the national best bid and bid (NBBO), or the best available buy (lowest) and sell (highest) prices. Bitcoin exchanges are not subject to such requirements, and given the degree of fragmentation, it is unlikely to guarantee "best execution" across all platforms.

However, an increasing number of institutional service providers are rolling out integrated execution services and smart order routing solutions, which will allow customers to fund a single account and access multiple liquidity providers to try better price execution and improve capital efficiency.

3) Lack of integration with traditional assets.

For the most part, institutional investors are unable to acquire Bitcoin through the same accounts or platforms they used to acquire traditional asset classes, creating a fragmented experience in managing exposure to different asset classes and creating operational challenges (such as tax and reporting). For investors, being able to integrate bitcoin assets into a traditional portfolio and view them in a single interface would be a win. This may be less of a concern if traditional banks and custodians start offering digital assets alongside traditional assets by setting up, buying or working with sub-custodians. This trend is supported by interest from institutional clients and prospects, regulatory support from key institutions such as the OCC, and competitive pressures.

Private placement of passive funds.

Private placement of passive funds provides qualified institutional investors with another avenue to gain long-only exposure to Bitcoin. Passive funds are popular because they abstract the complexities of bitcoin trading and custody and present the assets to investors in a familiar structure. The cost of convenience is that funds charge investors management fees, in addition to trading and custody fees. This fee covers not only the fund manager and the business, but also the costs incurred by the fund through its elected custodians.

1. Potential benefits.

1) Convenience and readability

Passive Bitcoin funds used by accredited institutional investors provide a convenient fund structure. Generally, fund alalisers can provide physical assets or legal assets and allow the fund to execute trades on their behalf. Fund managers who may be better able to analyse the prospects of service providers are also responsible for due diligence and the selection of custodian and trading partners. Thus, allocators must have a high degree of trust in fund managers to make appropriate decisions related to security, counterparty risk, etc. Passive funds can also offer simplified and readable tax and reporting benefits.

2) Fair value accounting.

More and more corporate finance teams are allocating their balance sheets to bitcoin. One challenge businesses face when investing directly in Bitcoin is the accounting treatment of allocations. On the financial statements of public companies, a direct investment in Bitcoin is considered an intangible asset with an indefinite period. As a result, the investment was written down to the minimum trading price of Bitcoin for each accounting period, which has a potentially adverse impact on THE GAAP results -- the current market value for each accounting period is not reflected in the financial statements. By establishing exposure to Bitcoin through passive funds, companies can achieve preferential accounting treatment as bitcoin may be classified as an "equity investment," marked to market in each fiscal period, and other potential tax and accounting benefits.

2. Matters needing attention & NBSP;

Passive funds typically charge an annual management fee of 50 to 200 basis points, in addition to costs associated with trade execution, custody and/or fund management. So private placement is a relatively costlier way to invest, given that fund managers offer no significant advantage in buying and holding bitcoin. However, the entry of several new players into the passive fund space is creating healthy competition and putting downward pressure on fees.

Investors should also assess the differences in redemption frequency and redemption mechanisms for passive bitcoin funds. Investors should determine whether the fund allows redemptions on a daily, weekly or other frequency. In addition, they should know whether they can redeem physical bitcoin, cash, or shares on the secondary market, which we discuss below.

3. Publicly traded stocks.

Investors can also gain exposure to potential price changes in Bitcoin through publicly traded shares. For example, the Grayscale Bitcoin Investment Trust (GBTC) offers investors an opportunity to gain bitcoin exposure through an open private trust. A trust issues shares that are traded as securities on the open market. The shares represent ownership in the trust, whose sole purpose is to hold bitcoin and track its basic price movements.

While secondary market shares are open to retail and institutional investors, accredited investors can also participate in daily placements at net asset value (NAV) and sell shares in the secondary market after a six-month lock-up period.

The main benefit of having exposure to Bitcoin through publicly traded stocks is that investors don't have to deal with the logistics associated with keeping, transferring, and accepting bitcoins. They can access risk as easily and easily as any other publicly traded security.

Unlike private passive funds, publicly traded bitcoin exposure not only requires a relatively high 2% management fee, but the secondary market can also trade at a premium or discount due to the lack of redemption mechanisms, unsynchronized trading times and poor liquidity between the secondary market and traditional bitcoin exchanges. In the past, GBTC's closing price was twice the base price of Bitcoin. Since hitting a high of 137% at the end of 2017, GBTC's premium has recently traded at a discount to net asset value. As competition heats up for products with similar structures, it may find it difficult for products like GBTC to command the same premium as before.

4. Bitcoin Futures

Investors can also use bitcoin futures to build long exposures, hedge physical exposures, or build risk-neutral bitcoin exposures. Bitcoin futures come in all shapes and sizes, from highly regulated products offered on familiar platforms to less regulated products offered on overseas platforms with significant leverage.

1. Regulated cash-settled futures;

1) Potential benefits.

Cash-settled bitcoin futures, offered by CFTC regulated platforms such as CME, have become one of the most important products to serve institutional interests. CME's cash-settled futures are attractive to financial institutions because they are traded on the same platform as futures contracts for other assets. They are overseen by the same agency that regulates traditional commodity contracts, creating a familiar playing field.

Another advantage of trading on the CME is that the exchange already has links with futures commission dealers (FCMS), which institutions use to obtain and clear other futures contracts. More than two dozen FCMS support bitcoin futures settlement, including E*Trade, Macquarie, TD Ameritrade, and Wedbush. Since FCMS has been integrated, it is easy for them to trade the new cash settlement products offered on the platform. The fact that futures are settled in cash adds another convenience factor, since exchanges, FCMS and customers do not have to worry about escrow for physical delivery.

2) Matters needing attention & NBSP;

The settlement price of spot futures depends on the spot price index. Platforms that offer cash-settled futures must look to a group of strong, regulated exchanges that are free of price manipulation.

In addition, cash-settled Bitcoin futures are typically in contango compared to spot, meaning that futures trade at a premium to backwardation, while futures with longer maturities trade at a higher premium than futures with shorter maturities. So holding bitcoin for the long term via futures could be a relatively expensive option, depending on the level of contango. Maintaining long-term exposure to bitcoin through cash-settled futures also requires rolling over the contract before maturity, adding transaction costs to the premium.

Typically, futures contracts trade at a premium to account for the storage cost of holding the underlying asset, such as a physical commodity such as gold or oil. As a result, bitcoin futures may trade at a premium to offset custody costs. A more likely explanation is that institutions facing regulatory or operational restrictions on access to physical bitcoin are willing to pay a premium for access to bitcoin futures.

While this premium may be detrimental to participants taking long positions, it may also be a feature of traders locking in risk-neutral rolling returns by going long physical bitcoin (or shorter-term futures) and shorting longer-term futures.

2. Regulated physically settled futures.

1) Potential benefits.

Physically-settled futures deliver bitcoins to the buyer of the contract at maturity (if the contract is not rolled over), making them attractive to institutions that ultimately want to invest in the underlying asset, especially if the contract is offered by a regulated institution. In addition, stakeholders do not have to worry about potential manipulation of the spot exchange at settlement, just as they may manipulate the cash-settled futures.

2) Matters needing attention & NBSP;

Regulated physically settled futures (volume and open interest) have not yet gained the same adoption as regulated cash-settled futures. This may be because the FCM is reluctant to back these contracts to avoid clearing and settling physical bitcoin transactions. This is an obstacle for institutions whose counterparties may not support these contracts.

Five, actively traded funds & NBSP;

Investors may also find value in gaining exposure to bitcoin through actively managed vehicles. As a transparent, liquid, volatile, 24-hour trading asset, Bitcoin offers an attractive opportunity for active managers to generate "alpha" on top of conventional price behavior. While bitcoin's inability to adapt to traditional active management has led institutional investors to abandon active management strategies, bitcoin offers a unique set of tools that investors can use to evaluate its fundamentals.

Specifically, market participants have access to data that can analyze bitcoin in more depth than any other traditional asset. Just as a government statistics agency publishes a country's population and economic data, or a publicly traded company publishes quarterly financial statements that reveal growth rates and earnings, bitcoin provides a real-time global ledger, publishing data about online activity and the internal economy.

Actively managed Bitcoin instruments are typically structured in the form of hedge funds. Fees usually include management fees (1-2%) and carried interest (10-20%). Lock-in periods are longer than other venture capital vehicles, typically one to three years, with redemptions quarterly. Strategies vary, including neutral/hedging and arbitrage strategies. For investors looking for a quality Bitcoin investment, an actively managed strategy may be the optimal path.

Exchange Traded Funds (ETFs)

To date, several bitcoin ETF applications have been approved internationally, including in Canada and Brazil. However, the US Securities and Exchange Commission has yet to approve an APPLICATION for a Bitcoin ETF. While the SEC had previously raised a number of issues when it rejected bitcoin applications, the maturity and institutionalization of bitcoin custody and trading has led to a new wave of BITCOIN ETF applications in the United States.

1. Potential earnings of ETFs

1) Redemption mechanism

Publicly traded trusts are securities that typically trade at a premium or discount because private placements have a maturity period of six to 12 months during which they must be locked in, creating a disconnect between supply and demand in the secondary market. Bitcoin ETFs, on the other hand, can be redeemed and created in real time by authorized participants whose role is to arbitrage ETF shares when the value of shares in the secondary market diverges in real time from the net asset value (NAV) held by the fund.

2) Approved products

Some fiduciaries, such as registered investment advisers, want regulated products that address the operational restrictions they may face (for example, products that simplify reporting and trading on behalf of many clients). As we have discussed, one of the best options at the moment is over-the-counter publicly traded trusts that typically deviate from net asset value. However, some companies may only be authorized or prefer to trade securities on national exchanges with strict reporting requirements, thereby providing more visibility and transparency. A Bitcoin ETF, approved by the SECURITIES and Exchange Commission and traded on national exchanges, would provide greater protection and transparency than the instruments currently available.

3) Usability & NBSP;

In addition, the Bitcoin ETF will allow retail and institutional investors to acquire bitcoin in a low-cost secure package that, for the above reasons, may have a share price close to net asset value, accessible through traditional brokerage platforms and financial institutions, without having to deal with digital asset exchanges and wallets. Greater transparency and ease of use could attract more investment from retail and institutional investors.

Etfs will provide a vehicle for more conservative retail investors who are uncomfortable or concerned about appropriately recently vetted digital asset service providers, while institutional investors may have similar concerns or be limited in the options available to access bitcoin through the current process.

2. Potential challenges to ETF approval.

The SEC raised a number of questions about the previous BITCOIN ETF filing, including concerns about bitcoin custody, manipulation and regulation of the bitcoin market, and whether there is a sizeable bitcoin market regulated by the United States. Progress in digital assets is fast, so these questions are worth reassessing.

1) Bitcoin trusteeship

The safe custody and trading of bitcoin has been a key concern for regulators. Recent years have provided the necessary time to establish quality, robust and secure digital asset custody suitable for institutional participation. Organizations now have a variety of reputable custodians to choose from, and these custodians demonstrate, iterate, and improve their security and robustness every day.

2) Manipulation, monitoring and size of the Bitcoin market.

Bitcoin trading is extremely fragmented, as exchanges trade all the time around the world, but lack the connectivity experienced by traditional markets. The development of mature trading venues in the spot and derivatives markets has helped create a reliable, regulated and sizeable market. As the sector continues to grow, we are seeing increased pricing efficiency as large traditional market makers start to see the sector as worth their while.

The SEC has not commented on the growing number of ETF filings. When the time is right, the decisions will help provide a clearer picture of whether regulators believe these previously flagged concerns have been properly addressed.

Vii. Conclusion & NBSP;

As a truly anonymous asset, bitcoin's custodian structure presents unique challenges for entrusted asset managers. This provides a variety of investment vehicles for allocators to consider to gain exposure to bitcoin. Each option has its own unique tradeoffs in terms of hosting, cost, and operational burden, as well as other features that need to be considered.

Over time, these products have become cheaper, easier to use, and more efficient. If regulators ultimately approve a more traditional investment product, such as an exchange traded fund, it could lead to a more competitive situation that could greatly benefit the ultimate investor.

A lack of regulatory transparency and the undesirable nature of some existing investment vehicles constitute barriers to investment, preventing some potential investors from owning these assets.For those able to analyse the trade-offs associated with the currently available channels of exposure and possibly allocate, the current situation gives them an opportunity to stay one step ahead of their peers.