QBTC, QETH, Bitcoin, and How to Invest

by JDH on January 2, 2021

As I write this on Saturday morning, January 2, Bitcoin has just reached yet another all-time high of just shy of $31,000 USD.  Ether, the cryptocurrency based on the Ethereum blockchain, traded over $750, so while not an all-time high, it is getting close to its all-time high achieved three years ago.

I am not here to debate whether or not cryptos are the greatest store of value ever, or if they are the greatest Ponzi scheme ever.  For today, that question is irrelevant. You could argue that the US Dollar is the greatest Ponzi scheme ever, backed by nothing.  It has value because people believe it has value. And so it is with Bitcoin, and the other cyrptos.  They have value, because people believe they have value.

As I described last week in my post on Will Bitcoin Replace Gold as a Safe Haven in 2021?, I made the point that Bitcoin adoption is growing.  You can use it on various payment platforms like Paypal and Square.  Large institutions are buying it (hedge funds, family offices, endowments, large insurance companies, Microstrategy), and the reasons are obvious: If you have a large portfolio, what’s the risk in putting a small proportion of it into the best performing asset class of 2020, and of the last decade?

No stodgy institutional investor wanted to be the first to make the leap, but once someone did it, it became more acceptable for others to jump in, and they have.  If you put 1% of your portfolio in Bitcoin and it goes to zero, you lose 1% of your portfolio.  No big deal.  But if it goes up 10 times, which is possible, even if the rest of your portfolio is flat you earn a 10% return, and that’s the kind of odds experienced speculators love.

The supply of Bitcoin is limited, so if all of the Big Boyz put a small portion of their portfolio in it, it goes to the moon.  That’s the play.

But, there is one big problem:  How do you buy it?

Let’s say I’m a big fund, or a rich guy, and I want to put $10 million into Bitcoin or Ether.

I can buy it directly on an exchange, but that’s complicated.  I would likely use a custodial service (like Etana), and then buy it on an exchange, but that’s complicated.  There are a lot of forms to fill out, and then you have to fully understand how to store your coins, because if you screw that up, you have a big problem.

Which is why ETFs are getting in the game, the biggest of which is GBTC – Grayscale Bitcoin Trust.  It’s a security, like a stock, so you buy the shares and you are done.  Great.  But there are two problems with Grayscale: it trades at a significant premium to Net Asset Value, so you are paying a lot for the privilege of someone else administering your coins for you, and it’s American, so you can’t hold it in a Canadian registered account.

So what if I’m a Canadian, and I would like some exposure to Bitcoin or Ether in my RRSP or TFSA?  What can I do?

The answer is two new funds started in 2020 by 3iQ:

  • The Bitcoin Fund, denominated in Canadian dollars as QBTC, or in US dollars trading under the symbol QBTC.U.
  • The Ether Fund, currently only available in USD, traded as QETH.U

(They also have a Global Cryptoasset Mutual Fund, but it is only available to accredited investors, so I’ll ignore it for now).

The disadvantage of these funds is that they are funds, and like all funds they charge a management fee (of 1.95%), so if you buy your Bitcoin directly you can save the fees.  They also trade at a premium to Net Asset Value, typically around 5% but that can fluctuate wildly, so again, you are paying a premium for the convenience.

The advantage is that there are two ways to invest:

You can participate in a private placement, or buy your units on the Toronto Stock Exchange.

The funds are closed-end funds with a fixed amount of units, and when they issue more units (typically done in overnight offerings) the units are sold at whatever the premium to NAV was at 4:00 pm that day.  This is a key point, because new investors are accretive to existing investors.

If I buy shares in a private placement with QBTC today, I “overpay” by, say, 5%, whatever the premium to NAV is, but that 5% premium goes into the fund, so all of the existing investors benefit.

In addition, unlike Grayscale, you can actually take your money out, by contacting the fund and saying “I want my money back”, and they’ll say “okay, we’ll sell an equivalent amount of Bitcoin and used that to redeem your shares”.  That would be an unusual circumstance because if you wanted to get your money out you could just sell your shares, but if there is a catastrophe and no-one wants to buy your shares, they can sell the underlying asset.

(If you buy in a private placement you are subject to six-month hold before you can trade.  If you buy on the open market there are no restrictions).

These funds will be great for Canadian institutional investors who are limited to buying securities traded on the TSX.  Now they can buy Bitcoin and Ether.

They are also great for the average Canadian who wants exposure to crypto in their RRSP or TFSA.  Now they can do it.

(I have a TFSA and and RRSP denominated in Canadian dollars, but also separate accounts in USD, so if you want to buy the Ether fund you’ll likely do it in your USD denominated account).

So, how am I playing it?

I am not betting the farm on cryptos.

I believe it is very likely that we will see $100,000 USD Bitcoin in 2021.

I also believe that it is very likely that we will see a 20% correction in Bitcoin in January 2021.  And likely a big correction in a few other months this year as well.

If I had to guess, I would expect a sizable correction in the next week or two, base building for a few weeks, and then massive new highs by the end of the spring.  Then, likely a crash, so it would not be surprising for Bitcoin to retrace 50% off the highs by the end of September.

My point is that cryptos are highly volatile (although with the institutional investors they will be less volatile than in the past), so govern yourself accordingly.

Don’t buy when a new top is made; buy during corrections, and only speculate with what you are willing to lose.  1% to 5% of a portfolio seems reasonable to me.

That’s the plan for 2021; enjoy the ride, and see you next week.