CAIA L2 - 1.3 - Channels For Exposure To Bitcoin Flashcards
List
Benefits and Challenges of
Physical Bitcoin with
third-party Custody
1.3 - Channels for Exposure to Bitcoin
Benefits
* Institutional Grade Trading and Custody
(regulated and licensed custodians, designed for Institutional investors)
* Low Costs
(Less than 50bps of AUC)
* Capital Efficiency Opportunities
(Bitcoin = collateral to access liquidity)
Challenges
* Technical Due Diligence
(Investors lack knowledge - outsource due diligence)
* Fragmented Liquidity
(Bitcoin trades in many exchanges)
* Traditional Asset Integration
(Bitcoin not accessible in traditional asset platforms)
1.3 - Channels for Exposure to Bitcoin
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Benefits and Challenges of
Bitcoin Passive Funds
1.3 - Channels for Exposure to Bitcoin
Benefits
* Familiarity and Convenience
* Accounting
Bitcoin = indefinite-lived intangible asset = lowest traded price in BP
Passive fund = equity investment = fair value in BP
Challenges
* Costs
50 to 200 bps + custody + trade execution + adm costs
* Redemptions
redemption mechanisms: in-kind physical Bitcoin, cash, or secondary market share redemptions
1.3 - Channels for Exposure to Bitcoin
List
Benefits and Challenges of
Bitcoin Publicly traded shares
1.3 - Channels for Exposure to Bitcoin
Benefits
* Access
(access to investments via traditional brokerage firm channels)
* Avoid Physical complexity
(avoiding the complex logistics of physical Bitcoin ownership)
Challenges
* Costs
(high management fees)
* trading premiums/discounts associated with secondary shares
1.3 - Channels for Exposure to Bitcoin
List
Benefits and Challenges of
Bitcoin Futures
(cash-settled and physical-settled)
1.3 - Channels for Exposure to Bitcoin
Cash-settled
Benefits
* regulatory environment,
* trading advantages (CME listing)
* No physical - elimination of concerns over custody upon physical delivery
Challenges
* price manipulation risk
* costs (longer futures trade at higher prices than spot = contango)
Physical-settled
Benefits
* for who wants physical delivery
* eliminates concerns about spot exchange manipulation
Challenges
* Lower liquidity
1.3 - Channels for Exposure to Bitcoin
List
Benefits and Challenges of
Bitcoin ETF
1.3 - Channels for Exposure to Bitcoin
Benefits
- product acceptance (than publicly traded trusts)
- redemption mechanism (real time + closer to NAV )
- accessibility (low cost, availale in traditional brokerage firms)
Challenges
- SEC rejection because of custody security concerns
- market size surveillance, and manipulation within Bitcoin markets (fragmented liquidity)
1.3 - Channels for Exposure to Bitcoin
List
Characteristics of Bitcoin Hedge Funds
(Fees, redemptiom period, lockup period)
1.3 - Channels for Exposure to Bitcoin
Most common form of actively managed Bitcoin vehicles.
Management fees: 1–2%
Carried interest: 10–20%.
Redemptions: ~ quarterly
Lockup periods: ~1–3 years.
1.3 - Channels for Exposure to Bitcoin
List
Cheapest way
to invest in Bitcoin
for different AUM: $5m $50m $1b
1.3 - Channels for Exposure to Bitcoin
$5m / $50m = Futures (CME Bitcoin Futures)
$1b = Spot Trading + 3rd party custody
1.3 - Channels for Exposure to Bitcoin
