30 BARRON’S November 22, 2021
FUNDS
“Bitcoin is quickly becomingthe pumpkin spice
of the asset management industry,” says
Morningstar’s director of global ETF research.
What’s That Bitcoin
Doing in Your Bond—
Or Stock—Fund?
M
ost investors
wouldn’t be
surprised to
find Bitcoin in
an exchange-
traded fund
likeFOMO,
which, as its name and ticker suggest,
stands for “fear of missing out.”
FOMO’s manager, Matthew Tuttle,
analyzes Twitter influencers’ remarks
to see what’s popular, and Bitcoin,
which has gone up 226% in the past 12
months (though it has sagged lately),
definitely fits that bill.
Much has been written about new
ETFs that buy Bitcoin futures, such
asProShares Bitcoin Strategy
(ticker: BITO), which launched in Octo-
ber and already has $1.3 billion. And
there are exchange-traded products
that buy Bitcoin directly through vehi-
cles such as the $38.7 billionGrayscale
Bitcoin Trust(GBTC). Investors buy-
ing such products generally under-
stand that they’re speculating in a vola-
tile new asset class, though not
everyone agrees it is an asset class.
But now that the global crypto mar-
ket exceeds $3 trillion, Bitcoin is turn-
ing up in odd places—commodity,
stock, and yes, even that traditional
portfolio ballast, bond funds. The $45
billionBlackRock Strategic Income
Opportunities(BASIX) recently cre-
ated an allocation to Bitcoin futures—
derivatives tied to the crypto’s perfor-
mance—after revising its regulatory
documentsinJanuary.
All this raises questions. How are
fund managers focused on more tradi-
tional asset classes defining cryptocur-
rencies, which don’t provide ownership
of a business like a stock, pay no fixed
income like a bond, and can’t power
your car or feed you like a commodity?
And if Bitcoin doesn’t do those things,
whyaretheyinvestinginit?
“Bitcoin is quickly becoming the
pumpkin spice of the asset manage-
ment industry,” says Ben Johnson,
Morningstar’s director of global ETF
research. “Pumpkin spice used to be
the sole domain of pumpkin pie, and
then it moved into candles and lattes.
And now you can get pumpkin spice
Cheerios if you want. I think what
[Bitcoin] is for many funds, especially
funds just dabbling in it, is a way of
trying to differentiate themselves from
competitors.”
Differentiation is one thing; juicing
returns with a volatile asset class is
another. “There is a heck of a differ-
ence between buying a bond that I
know in three years I’m going to get
$100 back, guaranteed basically, and
buying something that you cannot
completely convince me is not going
to go to zero,” says Tuttle, whose
FOMO ETF (FOMO) has a 1.9%
weighting in the Grayscale Bitcoin
Trust. “I think the bond guys, for lack
of a better word, have FOMO. How do
you be a bond manager in this envi-
ronment?” Tuttle, of course, is refer-
ring to the fact that bonds currently
pay hardly any interest. “I think [bond
managers] are trying to juice returns
any way they can,” he adds.
In response to aBarron’sinterview
request, a BlackRock representative
sent a Morningstar article on Rick
Rieder, the manager of Strategic In-
come Opportunities, and his take on
Bitcoin. Rieder, Morningstar said, is
skeptical of Bitcoin’s similarities to
gold, and as an asset class: “Rather, he
views Bitcoin futures as a call option
on strong features, including the de-
velopment of its market infrastruc-
ture, large institutional investors en-
tering the market, and the resulting
increase in liquidity.”
Of course, none of that Bitcoin-as-
a-call-option qualifies the crypto as
an income investment. Admittedly, the
BlackRock fund’s Bitcoin futures posi-
tion is tiny, with a notional value of
$21 million as of its June 30 semian-
nual report, its latest.
The case that Bitcoin is like gold,
which Rieder apparently dismisses, is
based on the idea that there is a limited
supply of the crypto. Thus, Bitcoin acts
like an inflation-resistant currency that
can’t be debased like fiat money such as
the U.S. dollar, the supply of which has
exploded in recent years.
This is the rationaleWisdomTree
Investmentsgave for announcing in
October that itsWisdomTree En-
hanced Commodity StrategyETF
(GCC) would invest up to 5% in Bit-
coin futures. According to Wis-
domTree’s blog post, “Over the past
three years, Bitcoin’s annualized vola-
tility is 76.84%, while gold’s annual-
ized volatility is 14.8%.... However, we
believe gold and Bitcoin are similar in
their underlying economic structure.”
The ETF currently holds a 3% posi-
tion in Bitcoin.
“Some people would make the case
[that Bitcoin is] like venture capital”
because of its high-tech features, says
Will Peck, WisdomTree’s head of
digital assets. “I think the argument
for it to be a commodity, or more like
a hard asset, relates to the supply-and-
demand dynamics that Bitcoin has,
which are similar to gold.”
Yet as a virtual construct, Bitcoin
lacks the physicality of a hard asset.
Moreover, many investors don’t think
of gold as a commodity but instead as
a currency because it has little indus-
trial or commercial use. “If you had
a definition of commodities that ex-
cluded gold, then I think you might
want to exclude Bitcoin,” Peck notes.
Adding to the confusion, Bitcoin
also shows up in stock funds, particu-
larly tech or financial-technology-
oriented ones. Five of Kinetics Mutual
Funds’ equity funds have sizable ex-
posures to Bitcoin, three in double
digits, the largest in the $306 million
Kinetics Internet(WWWFX), which
as of Sept. 30 had 33.6% of its port-
folio in Grayscale Bitcoin Trust. “It’s
clearly not a stock,” admits Peter
Doyle, Kinetics’ president. “You could
see how it could become deemed the
money of the internet.” Initially, the
funds’ positions were all less than 2%,
he says, but they’ve clearly grown.
The problem with crypto appearing
in traditional funds is that it makes it
increasingly difficult for investors to
understand precisely what they own—
and the unique risks of owning it.B
By Lewis Braham
Funds Bet on Grayscale Bitcoin Trust
Bitcoin is a growing presence in stock and other kinds of funds.
Portfolio Portfolio
Fund / Ticker Morningstar Category Date WeightingKinetics Internet / WWWFX Miscellaneous Sector 9/30/2021 33.6%Kinetics Global / WWWEX World Small/Mid Stock 9/30/2021 20.2Kinetics Market Opportunities / KMKNX Mid-Cap Growth 9/30/2021 16.3RG Aurum+ / GLDPX Commodities Focused 7/31/2021 15.1Kinetics Paradigm / WWNPX Mid-Cap Growth 9/30/2021 7.9ARK Next Generation Internet / ARKW Technology 11/17/2021 6.8Kinetics Small Cap Opportunities / KSCOX Small Growth 9/30/2021 4.0FOMO / FOMO World Large-Stock Blend 11/16/2021 1.9Emerald Finance & Banking Innovation / HSSAX Financial 9/30/2021 1.2Appleseed / APPLX World Allocation 9/30/2021 1.0Sources: Morningstar; FOMO; ARK; Kinetics Funds