The rapid development of the crypto ecosystem is attracting more and more traditional investors, especially institutional ones. The official approval and listing of the U.S. Bitcoin Spot ETF at the beginning of 2024 marked a key milestone in the transformation of crypto assets into mainstream assets. Besides ETFs, digital currency trust funds are also providing investors with a new way to participate in the cryptocurrency market without the need to directly hold or manage digital currencies.

This article will start by explaining the definition, characteristics, and advantages of cryptocurrency trust funds. It will then review the current global distribution of well-known cryptocurrency trust funds, including Grayscale, BlackRock, Bitwise, and others, and summarize potential development trends for the reference of users.

Overview of Cryptocurrency Trust Funds

Cryptocurrency trust funds are managed by professional investment institutions. They generate returns by purchasing and holding one or more cryptocurrencies, such as Bitcoin (BTC) or Ethereum (ETH). As an investment tool, investors can indirectly invest in cryptocurrencies by purchasing shares of these trust funds, without the need to directly hold or manage the digital assets themselves. Typically, these trust funds must comply with strict financial regulatory requirements, charge management fees, and regularly disclose their holdings.

Cryptocurrency trust funds are primarily aimed at:

• Traditional institutional investors
• Investors who are unfamiliar with cryptocurrency technologies
• Individuals or institutions seeking to invest in cryptocurrencies through a regulated and compliant channel.

Compared to directly purchasing cryptocurrencies, cryptocurrency trust funds offer the following advantages:

1. Convenience: Investors do not need to directly manage crypto wallets or deal with complex technical issues.
2. Professionalism: The secure storage, management, and investment of crypto assets are handled by professional institutions.
3. Diversity: Some trust funds offer a diversified portfolio of various crypto assets, helping to spread risk.
4. Compliance: Many cryptocurrency trust funds are subject to traditional financial regulations, which better protect investors’ interests.

However, cryptocurrency trust funds are not without their drawbacks. Some of the challenges they face at present include:

1. High Fees: Trust funds typically charge management fees, which, over the long term, can reduce their appeal to investors.
2. Market Volatility: Given the significant volatility in the cryptocurrency market, managing risk becomes more challenging, which can also affect investor confidence.
3. Liquidity Risk: Some trust funds may have lower liquidity, meaning investors might face delays or other risks when redeeming their investments.
4. Regulatory Uncertainty: As different countries and regions have varying regulatory approaches to cryptocurrencies, these regulations can impact the operation and management of trust funds at any time.

Trust Funds vs. ETFs

Both trust funds and ETFs serve as investment tools to help investors participate in the market. While they share some similarities, there are significant differences in their structure, management, and trading methods.

An ETF (Exchange-Traded Fund) is an investment fund traded on a stock exchange like a stock, typically tracking the performance of a market index, sector, or specific asset. On the other hand, a trust fund can be either a closed-end or open-end fund, typically managed by professionals. The main differences between the two are:

1. Structure: ETFs are generally open-ended, meaning the number of fund shares can be created or redeemed based on market demand. Most traditional trust funds, however, are closed-end, with a fixed number of shares.
2. Trading Method: ETFs can be bought and sold throughout the trading day on the stock exchange, just like stocks. In contrast, traditional trust funds typically trade over-the-counter (OTC), though some listed closed-end trust funds can also be traded on exchanges.
3. Cost Structure: ETFs typically have lower costs, especially passive ETFs. Trust funds, on the other hand, may charge higher management fees and other related costs.
4. Transparency: ETFs generally disclose their holdings on a daily basis, offering higher transparency. Traditional trust funds, however, may have lower frequencies of information disclosure.

It is worth noting that in the current cryptocurrency market, the boundaries between crypto ETFs and crypto trust fund products may not be so clear-cut. Some products labeled as “trusts” may function more like ETFs in practice. Therefore, investors should carefully research the specific structure and characteristics of each product before making an investment decision.

Overview of Cryptocurrency Trust Funds

According to incomplete statistics, several asset management companies currently offer cryptocurrency trust fund products, including Grayscale, BlackRock, Osprey Funds, Bitwise, and others. Among them, Grayscale offers the widest range of products, while BlackRock has shown significant growth in recent years, with its BTC assets surpassing those of Grayscale. Below is a brief introduction to some of these companies.

Grayscale

Grayscale Investments is a U.S.-based digital currency asset management company, founded in 2013, and became a subsidiary of Digital Currency Group in 2015. Grayscale’s digital asset investment products are divided into two categories: single-asset trusts (which offer exposure to a single cryptocurrency) and diversified funds (which offer exposure to a basket of cryptocurrencies). The diversified funds track thematic indices and are rebalanced quarterly.

In 2013, Grayscale launched its first product, the Bitcoin Investment Trust. In 2015, the product was approved by the Financial Industry Regulatory Authority (FINRA) to be publicly listed on the OTC market and was officially renamed the Grayscale Bitcoin Trust (GBTC), which began to attract institutional investors. As the cryptocurrency market rapidly developed, Grayscale’s product line continued to expand. In recent years, the company has launched trust funds for other cryptocurrencies, such as ETH, XRP, SOL, AAVE, MANA, LINK, and more.

Source: grayscale.com

According to Grayscale’s product lifecycle theory, the ultimate goal is to upgrade the product to an ETF, which would be regulated by the U.S. Securities and Exchange Commission (SEC). As a result, in recent years, Grayscale has been attempting to convert its trust funds into spot ETFs, but its requests were rejected by the SEC multiple times. Finally, in January 2024, Grayscale’s GBTC was approved by the SEC, becoming the first spot Bitcoin ETF to begin trading in the U.S. It is reported that GBTC’s institutional holders include Goldman Sachs, Multicoin Capital, LPL Financial, Greenwich Wealth Management, Colony Group, and HighTower Advisors, among others.

It is important to note that Grayscale’s single-asset trust products differ in terms of their stages of development. As a result, investors may access these products either through private placements or public offerings, and the investment thresholds and holding period restrictions may vary depending on the form of access.

Source: etfs.grayscale.com

As of now, Grayscale manages 22 single-asset cryptocurrency trust funds, with a total asset management scale exceeding $1.06 billion; 4 diversified funds, such as the Decentralized AI Fund and Digital Large Cap Fund, with a total asset management scale of approximately $840 million; and 4 ETFs, with a total asset management scale of approximately $31.1 billion.

Currently, for single-asset cryptocurrency trust funds, Grayscale charges an annual management fee of 2.5%, with no performance fees. As for the ETFs, the fees vary by product. For example, the annual management fee for GBTC is 1.50%, while ETHE charges a fee of 2.5%, with no additional fees.

BlackRock

BlackRock is the largest asset management group in the world, founded in 1988 and headquartered in New York, USA. The company employs over 19,000 people. In January and June of 2024, BlackRock launched its Bitcoin trust fund IBIT (iShares Bitcoin Trust) and Ethereum trust fund ETHA (iShares Ethereum Trust ETF), respectively.

Source: blackrock.com

The latest data shows that IBIT has a net asset value of approximately $59.9 billion, while ETHA has around $3.9 billion. Both charge a 0.25% management fee. It is reported that institutional holders of IBIT include Millennium Management, Goldman Sachs, IMC, Aristeia, Capula Management, Schonfeld, and Morgan Stanley, among others.

Osprey Funds

Osprey Funds is a U.S.-based digital asset investment management company, founded in 2018. Its team members come from institutions such as Credit Suisse, Barclays, JPMorgan, and PIMCO.

Source: ospreyfunds.io

Osprey Funds has launched five cryptocurrency asset trust funds, namely for BTC, BNB, DOT, SOL, and BONK. The first four are available for OTC and private market transactions, while BONK is only available through private placements. Each product charges an annual management fee ranging from 0.49% to 2.5%. For investors participating in private placements, Osprey Funds has varying minimum investment amounts and holding period restrictions for different trust products.

According to the latest data from the platform, Osprey Funds currently manages approximately $380 million in assets across its five cryptocurrency trust funds. It is reported that Osprey Funds is seeking to convert its BTC trust into an ETF.

Bitwise

Bitwise is the largest crypto index fund management company in the U.S., founded in 2017 in San Francisco. Bitwise’s team members come from institutions such as BlackRock, ETF.com, Meta, Google, and the U.S. Attorney’s Office. Currently, Bitwise offers more than 20 different products for both retail and institutional investors, including publicly traded trusts, ETFs, and private funds.

Source: bitwiseinvestments.com

Taking BITW as an example, this is a publicly traded trust that is not yet an ETF. BITW is the Bitwise 10 Crypto Index Fund, designed to track an index of the top 10 cryptocurrencies by market capitalization, weighted by market value, and rebalanced monthly. Currently, BITW has an asset management scale of $1.556 billion and charges users an annual management fee of 2.5%. In addition, Bitwise has also launched single cryptocurrency trust funds based on BTC and ETH, with funds for other cryptocurrencies like XRP and DOGE currently under application.

3iQ

3iQ (3iQ Digital Holdings) is a digital asset investment company based in Canada, founded in 2012. In 2024, the Japanese financial services provider Monex Group completed the acquisition of a majority stake in 3iQ.

Source: 3iq.io

3iQ’s cryptocurrency solutions are divided into: single-asset funds and multi-asset funds, with the single-asset funds including BTC and ETH. Taking the 3iQ Bitcoin Fund as an example, this was Canada’s first compliant Bitcoin fund. In USD, it is listed as BTCQ.U, and in CAD, it is listed as BTCQ. The latest data shows that BTCQ.U has an asset size of $558 million, and BTCQ has $802 million, both charging a 1.95% management fee.

Wisdom Tree

Wisdom Tree is a global asset management company, founded in 2006 and headquartered in New York, USA. The latest data shows that WisdomTree’s global asset management scale is approximately $114 billion, and it employs over 200 people.

Source: Wisdom Tree

Since 2019, WisdomTree has launched a series of cryptocurrency ETPs (Exchange-Traded Products) for the U.S. and European markets. WisdomTree now offers various cryptocurrency ETP products, including BTC, ETH, SOL, DOT, XRP, and others. These products are available for purchase in countries such as Austria, Belgium, Denmark, Finland, France, Germany, and more. Taking the newly launched XRP ETP (XRPW) as an example, this product is 100% backed by spot XRP and charges an annual management fee of 0.50%.

Huaxia / Jiashi / Boshi Funds

On April 23, 2024, Huaxia Fund, Jiashi Fund, and Boshi Fund, three asset management companies, successfully received approval in Hong Kong to launch Bitcoin and Ethereum spot ETF products. This marks the first such product in the Asian market.

Source: Huaxia Fund, Bitcoin ETF

These ETF products were officially listed on the Hong Kong Stock Exchange (HKEX) on April 30 of last year. Investors can use either cash or physical assets to create or redeem ETF shares, with a minimum subscription threshold set. The management fees differ among the three, with Huaxia Fund charging 0.99% annually, Jiashi Fund charging 0.3%, and Boshi Fund charging 0.6%. It is important to note that these ETF products cannot be offered to retail investors in regions such as mainland China, where the sale of virtual asset products is restricted.

El Salvador

El Salvador is located in the northern part of Central America and has a strong passion for and admiration for Bitcoin. In June 2021, the Salvadoran Congress passed a bill that made it the first country in the world to adopt Bitcoin as legal tender. The government subsequently established a $150 million Bitcoin trust fund to ensure the convertibility between Bitcoin and the U.S. dollar. To further promote Bitcoin, El Salvador also plans to build a Bitcoin City and issue Bitcoin bonds, among other initiatives.

However, it is important to note that under continued pressure from the International Monetary Fund (IMF), El Salvador has recently passed a quiet amendment to its Bitcoin Law, removing Bitcoin’s status as the official currency.

Source: bitcoin.gob.sv

As of now, El Salvador holds a total of 6,047 BTC, with an asset value of approximately $644 million.

Potential Development Trends

From the current development status of cryptocurrency trust funds, several potential trends can be observed:

• Geographic Concentration: The majority of cryptocurrency trust funds are currently concentrated in the U.S. market, with major players being BlackRock and Grayscale.
• Limited Number of Pure Cryptocurrency Trust Funds: Compared to ETFs and ETPs, the number of purely digital currency trust funds remains small, with many funds seeking to transition into ETFs. However, as market demand grows, this will drive more financial institutions and companies to develop such products.
• Diversification of Assets: Currently, cryptocurrency trust funds are mainly focused on BTC and ETH, but there is a gradual shift towards asset diversification, and more innovative products are emerging in the market.
• Regulatory Compliance: Regulatory compliance has been a major concern for traditional investors and asset management companies. In the future, more specific regulations for cryptocurrency trust funds are expected to be introduced.

Conclusion

In conclusion, with the development of the cryptocurrency market and the increasing demand from traditional institutional investors, vertical sectors such as cryptocurrency trust funds are advancing toward greater diversification, compliance, and maturity. On one hand, asset management companies are accelerating product innovation and ensuring regulatory compliance, while on the other hand, regulatory bodies are keeping pace by adjusting and formulating regulations for cryptocurrencies.

As investors, before participating in any investment, it is essential to fully understand the characteristics and operational mechanisms of different products, as well as to correctly recognize the hidden risks, such as liquidity risk and market volatility risk, before making informed investment decisions.