2021's Crypto Interval Funds: Winners, Losers, and Newcomers

CRYPTO FUNDS FACE CHALLENGES

It’s no secret that crypto is having a moment. The market capitalization of the world’s cryptocurrencies has more than doubled since the beginning of 2021, sitting at over $2.3 trillion at the start of May.

But the frenzy isn’t just limited to those who directly invest in digital tokens. As is the case with essentially everything under the sun, cryptocurrency has spawned a booming derivatives market. And, although most fund involvement in cryptocurrencies is limited to private offerings, over-the-counter offerings have begun to spring up in recent years in the form of traditional closed-end funds (CEFs) and interval funds.

So far, most of these are CEFs that form cryptocurrency trusts: pools of digital currency whose value is divided into purchasable shares. The largest of these, the Grayscale Bitcoin Trust, holds over $32 billion worth of the coin. However, as of early May the fund was trading at over a 20% discount to the value of the bitcoin it holds – underlining one of the key disadvantages of traditional closed-end funds.

Open-end funds like ETFs and mutual funds aren’t yet able to invest in cryptocurrencies due to SEC concerns over valuation, liquidity, and potential for manipulation. The lack of viable open-end options isn’t for lack of trying. Nine applications to form bitcoin ETFs are pending with the SEC, which has postponed its decision until later in the summer.

Photo by Ewan Kennedy

INTERVAL FUNDS EXCEL IN CRYPTO MARKETS

The issues that plague open-end cryptocurrency funds don’t hinder the interval fund ecosystem. In the same May 11th statement in which the SEC justifies its caution around open-end funds’ ability to balance cryptocurrency futures investments and liquidity requirements, the agency acknowledges that closed-end funds like interval funds have good footing in the space. Because interval funds “do not present the same types of liquidity challenges as open-end funds,” they provide a better structure for handling cryptocurrency’s inherent volatility. There’s currently only one operational cryptocurrency interval fund – and several have been rejected in the past – but the pace of registrations is picking up.

CRYPTOCURRENCY INTERVAL FUNDS

Stone Ridge Trust VI (NYDIG Bitcoin Strategy Fund)

Ticker: BTCNX

Filed: December 2019

Stone Ridge Asset Management’s bitcoin futures fund is the only currently effective interval fund giving investors a high degree of exposure to cryptocurrency price movements. The fund invests all of its assets in cash-settled bitcoin futures, and its strategy is overseen by NYDIG, the bitcoin subsidiary of Stone Ridge Asset Management. The fund’s shares are currently only available to institutional investors or those directly connected with Stone Ridge. The value of its pool of futures contracts has closely tracked that of bitcoin in the past, making it a serviceable proxy for direct investment in the cryptocurrency itself.

Entoro Gray Swan Fund

Ticker: EGSFX

Filed: May 2020

Entoro’s Gray Swan Fund, which is currently in the late stages of review with the SEC, seeks to invest about a quarter of its assets in bitcoin futures and gold as part of its hedging strategy against market downturns. Half of the fund’s assets will be used to short the S&P 500 index, and the remaining quarter will be held in short-term treasuries. Research has shown that cryptocurrencies serve as a hedge against slides in equity prices during bull markets, aligning the Gray Swan Fund’s bitcoin holding goals with predictions of possible stock market downturns due to an unusually overpriced market.

Cipher Technologies Bitcoin Fund

Filed: May 2019

The Cipher Technologies Bitcoin Fund was filed under the audacious premises that bitcoin is a security, rather than the commodity the SEC currently considers it to be. The Investment Company Act of 1940, which governs interval funds, only permits the creation of funds that primarily invest in securities – which is the reason Stone Ridge Trust VI holds bitcoin futures instead of the token itself. The SEC rejected Cipher Technologies’ filing in October of 2019, explaining their reasoning in a correspondence.

Yleana Bitcoin Strategy Fund

Filed February 2020

Yleana Capital Advisors’ Bitcoin Strategy Fund was filed over a year ago, and it has yet to submit revisions to its original N-2. The fund is slated to be managed by Gabriel Hammond, the founder of Alerian Capital Management, which specializes in energy infrastructure investment and data indexing. The fund plans to pursue a similar strategy to the Stone Ridge Trust VI, investing as many assets as possible in futures contracts for bitcoin. The Bitcoin Strategy Fund doesn’t currently intend to list publicly, reserving its shares for institutional investors.

Basquet Global Debt Fund

Filed May 2021

Basquet LLC’s Global Debt Fund doesn’t intend to invest in any digital securities or cryptocurrencies. Its investment strategy, consisting of diversified debt securities from global corporate and sovereign issuers, is fairly mundane. However, what ties the Basquet fund to cryptocurrency is its unorthodox offering strategy. If the SEC approves its plan, the fund will allow trading of its shares on the Algorand blockchain, effectively creating a cryptocurrency. The shares would trade as a “stablecoin,” a token with a less volatile price that is collateralized by a pool of interest-generating securities. This tactic could help to funnel capital into the fund, creating a peer-to-peer secondary market for shares and revolutionizing the relationship between ’40 Act funds and cryptocurrencies.