What to know about investing in bitcoin trusts – CNBC

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As the Securities and Exchange Commission punts decisions on approving bitcoin exchange-traded funds, companies have created other options to meet the growing demand for cryptocurrency.

One alternative, bitcoin trusts, holds the digital currency, making it easier for investors to add cryptocurrency to their portfolios.

"You're more or less buying a basket that has bitcoin inside of it," said financial planner Zechariah Schaefer, founder of Ascent Personal Finance in Lynchburg, Virginia.

Bitcoin trusts allow investors to buy exposure to the digital currency through brokerage or retirement accounts without the wallet, key or storage concerns of cryptocurrency exchanges.

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"The trusts are just an easy way for investors to get access to the underlying bitcoin without buying it directly," said Tyrone Ross, CEO of Onramp Invest, a company providing "cryptoasset" management technology to financial planners.

While bitcoin trusts may offer a simpler way to invest in cryptocurrency, there are downsides to consider, financial advisors say.

A bitcoin trust operates differently than a mutual fund or ETF. These trusts periodically sell a limited number of private shares to so-called accredited investors, who meet strict income, net worth and experience requirements.

Later, those accredited investors may sell their shares through public markets. But the prices may not match the underlying asset, known as trading at a discount or premium.

For example, if someone buys $1 of a bitcoin trust, their share may have 70 cents of bitcoin or $1.10 of bitcoin, depending on the asset's demand.

"There's another layer of supply and demand volatility surrounding it," said Schaefer.

Currently, the most popular choice is the Grayscale Bitcoin Trust, with $21.7 billion assets under management. Osprey Bitcoin Trust released a competing option in February, managing nearly $91.2 million.

By comparison, Vanguard's 500 Index Fund, tracking 500 of the country's largest companies, has $231.84 billion in assets.

Another downside of investing in bitcoin trusts is the fees, which are typically more than the average mutual fund or ETF.

For example, the average expense ratio for ETFs dropped to 0.45% in 2019, according to Morningstar. Grayscale charges an annual fee of 2%, whereas Osprey's is 0.49%.

For most people, it may be cheaper to buy bitcoin through a cryptocurrency exchange, like Coinbase, Schaefer said.

However, someone may be willing to pay more to avoid cryptocurrency exchanges or to add bitcoin exposure in their regular individual retirement account.

"Right now, if you really want to have your crypto in a tax-advantaged retirement account, then you just have to bite the bullet and pay those high costs," Schaefer added.

Investors have been clamoring for bitcoin ETFs for years, hoping for cheaper and easier ways to add cryptocurrency to their portfolios. Experts say these funds may also offer more transparent pricing.

"You won't have these large discounts or premiums, which is huge," Ross said.

While several companies have filed to release the first U.S. bitcoin ETF, the SEC has continually put off decisions. SEC Chairman Gary Gensler expressed the need for more cryptocurrency regulation in May, seeking greater investor protections.

Both Grayscale and Osprey have committed to converting their bitcoin trusts to ETFs when regulators are ready.

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What to know about investing in bitcoin trusts - CNBC