Bitcoin Could Be in Your Bond, Stock, and Commodity Funds. What to Know

Most investors wouldn’t be surprised to find Bitcoin in an exchange-traded fund like FOMO, 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 as ProShares Bitcoin Strategy (ticker: BITO), which launched in October and already has $1.3 billion. And there are exchange-traded products that buy Bitcoin directly through vehicles such as the $38.7 billion Grayscale Bitcoin Trust (GBTC).

Investors buying such products generally understand that they’re speculating in a volatile new asset class, though not everyone agrees it is an asset class.

But now that the global crypto market exceeds $3 trillion, Bitcoin is turning up in odd places—commodity, stock, and yes, even that traditional portfolio ballast, bond funds. The $45 billion BlackRock Strategic Income Opportunities (BASIX) recently created an allocation to Bitcoin futures—derivatives tied to the crypto’s performance—after revising its regulatory documents in January.

All this raises questions. How are fund managers focused on more traditional asset classes defining cryptocurrencies, 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, why are they investing in it?

Bitcoin is a growing presence in stock and other kinds of funds.

“Bitcoin is quickly becoming the pumpkin spice of the asset management 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 difference 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 environment?” Tuttle, of course, is referring 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 a Barron’s interview request, a BlackRock representative sent a Morningstar article on Rick Rieder, the manager of Strategic Income 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 development of its market infrastructure, large institutional investors entering 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 position is tiny, with a notional value of $21 million as of its June 30 semiannual 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 rationale WisdomTree Investments gave for announcing in October that its WisdomTree Enhanced Commodity Strategy ETF (GCC) would invest up to 5% in Bitcoin futures.

According to WisdomTree’sblog post, “Over the past three years, Bitcoin’s annualized volatility is 76.84%, while gold’s annualized volatility is 14.8%…. However, we believe gold and Bitcoin are similar in their underlying economic structure.” The ETF currently holds a 3% position 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 industrial or commercial use. “If you had a definition of commodities that excluded gold, then I think you might want to exclude Bitcoin,” Peck notes.

Adding to the confusion, Bitcoin also shows up in stock funds, particularly tech or financial-technology-oriented ones. Five of Kinetics Mutual Funds’ equity funds have sizable exposures to Bitcoin, three in double digits, the largest in the $306 million Kinetics Internet fund (WWWFX), which as of Sept. 30 had 33.6% of its portfolio 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.

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