Time to Sell our Bitcoin Fund (But Not For the Reason You Think)

by JDH on February 20, 2021

Time to sell QBTC and QETH.

I believe that Bitcoin, and Ethereum, and probably many other cryptocurrencies, will be great speculations in 2021.  I refer to them as speculations, not investments, because they are very volatile.  20% swings in 24 hours are not uncommon.  However, massive stimulus spending will lead to the continued devaluation of the dollar.

Want proof?  Check out the DXY, The U.S. Dollar Currency Index, which has called from around 103 to 90 since the start of the pandemic.  That’s a 13% devaluation of the dollar in less than a year.  Is it any wonder that investors want a “store of value”?

Is there any reason to believe this trend won’t continue?

In contrast, Bitcoin bottomed at under $4,000 at the start of the pandemic, and as I write this early on Saturday morning, February 20, is trading at over $55,000 USD.  The evidence speaks for itself.

The problem, of course, is the Bitcoin is not easy to purchase.  It’s not as easy as buying a stock.  If you want to put a million dollars into Bitcoin, you have to verify yourself with an exchange, which is a lot more complicated than verifying yourself with a broker.  You may also want to verify yourself with a custody agent, and then you have to set up wallets and other security measures.  It’s complicated.

That’s why, on January 2, 2021, I was pleased to report that it was possible to buy a security on the Toronto stock exchange to invest in cyrpto.  In my post on QBTC, QETH, Bitcoin, and How to Invest I said:

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 most salient point was the point I made in the last sentence: they don’t trade close to their NAV; they can be higher or lower.  Back in January, QBTC and QETH were trading at a significant premium to NAV.  That’s understandable, because if I want to invest some of my RRSP or TFSA in Bitcoin or Ether, QBTC and QETH were the only way to do it.  There was no other option, so I was willing to pay a premium for the ability to invest, and for the convenience of not having to set it all up myself.

But, the world changed this week.

Enter the ETF.

QBTC and QETH are closed end funds.  The number of units only increases when they raise money through a private placement.  As a result, the funds can trade at a premium or discount to Net Asset Value.

In contrast, an Exchange Traded Fund, and ETF, can issue new units any time.  There is an unlimited supply, so the units always trade very close to NAV.  Makes sense.  Why would I pay a premium for a unit if the fund can just issue more units?

The world’s first Bitcoin ETF started trading this week, the Purpose Bitcoin ETF, trading as BTCC.B.TO in Canadian dollars, or BTCC.U.TO trading in USD.

The second Bitcoin ETF also started trading this week, the Evolve Bitcoin ETF, trading as EBIT.TO in Canadian dollars, or EBIT-U.TO in USD.

Both funds have a management fee of 1%, so if you can invest in Bitcoin yourself with no management fee, but if you want them in your RRSP or TFSA, this is now the preferred option, for now.  So, on Friday I liquidated my position in QBTC (at a substantial profit), and I will sit in cash temporarily because it appears to me that there is significant resistance for Bitcoin at these levels, and a pullback is likely.  I still hold my QETH position.

Here’s the kicker:

Despite Bitcoin making a new high on Friday, QBTC traded down almost 1% on Friday, to $69.86.  It’s NAV is $78.72, so it is now trading at an 11% discount to NAV.  Ouch.  Obviously a lot of other investors arrived at the same conclusion I did: there is no point paying a premium to invest in QBTC while there are now other alternatives, so I suspect the days of it trading at a premium are gone forever.

Interestingly, QETH.UN (the Canadian dollar version) closed Friday at $42.50, and has a NAV of $43.57, so it’s only trading at a discount to NAV of 2.5%, presumably because, at this time, there are no Ethereum ETFs, so this is your only choice.  As soon as an Ethereum ETF is announced the discount to NAV will increase as well.

So, my reluctant recommendation is to sell QBTC and QETH, and either hold cash or redeploy it into one of the above noted ETFs.

I can’t predict the future, and this is not financial advice, but if you want a guess, here it is: Bitcoin will run into some resistance around these levels, so we won’t see $60,000 quickly.  Ethereum should now go on a run, as it finally exceeded $2,000 overnight, so a run to $2,500 is likely in the short term.  So, rotate out of Bitcoin and into Ether.

Or pocket the cash and stay on the sidelines.  That’s what a sensible person would do.

Enjoy the run!  More next week.