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The Difference Between Closed-End and Open-End Bitcoin Funds

We’ve talked about what Bitcoin ETFs are in a previous article. However, when investors are looking to allocate capital to a Bitcoin fund, there is a common question that arises: what is the difference between an open-ended fund like the Purpose Bitcoin ETF, and a closed-end fund like the Grayscale Bitcoin Trust?

It’s a very important question to ask. Both types of funds operate similarly, but, there are enough differences between the two types of funds to warrant a deeper look into how they operate. Doing so will lead to more educated investing decisions.

Open-end vs. closed-end Bitcoin funds at a glance

  • Shares—In an open-ended fund, shares are issued and retired by the fund operator on a regular basis based on investor demand. In a close-ended fund, a set amount of shares are created at the fund launch, and investors must buy shares from existing investors on secondary markets.
  • Price behaviour—In an open-ended fund, shares can be bought and sold during each day based on the fund’s current net asset value (NAV). Closed-end funds, however, trade based on supply and demand. Because of this, they can often trade at a premium or discount to the fund’s NAV.
Closed-end funds additional layer of price risk

What is a closed-end Bitcoin fund?

A closed-end fund is a type of mutual fund that offers a fixed amount of shares for purchase through an initial public offering. After this, no new shares are created by the fund. However, shares of the fund can be traded on the open market just like any stock or exchange-traded fund (ETF).

Like other mutual funds, these shares derive their value from the underlying asset or assets held in the fund, in this case Bitcoin and Bitcoin derivatives. These funds are almost aways actively managed, meaning that relatively high management fees will be baked into the share price.

As of the time of writing, the Grayscale Bitcoin Trust is the largest closed-end Bitcoin fund in the world.

What is an open-end Bitcoin fund?

Open-ended funds can be mutual funds, but for this purpose of this article, we’ll focus our attention on open-ended ETFs.

An open-ended Bitcoin ETF doesn’t offer a fixed amount of shares for purchase. It will create new shares to accommodate increased investor demand and use the money from share purchases to add more of the underlying asset to the fund’s holdings. When an investor sells their shares in an open-ended Bitcoin ETF, these shares are taken out of circulation, and assets held in the fund are sold off to pay an investor for their ETF share redemption.

Like closed-end funds, open-ended ETFs will charge a management fee that is factored into the share price, though it will usually be lower.

In Canada, the Purpose Bitcoin ETF is currently the largest open-end Bitcoin fund. It is also the largest spot Bitcoin ETF in the world.

Understanding NAV in open-end and closed-end Bitcoin funds

As we briefly outlined, there are structural differences between the the two types of funds. But it’s important to understand how these structural differences can actually impact a fund’s performance in an investor’s portfolio.

To do this, we’ll start with a brief refresher on net asset value (NAV). NAV is the total number of a fund’s assets minus its total liabilities. This number is used to calculate the price per share of a fund.

For example, say a fund had $100,000 in assets (Bitcoin) and $10 000 in liabilities (outstanding redemptions). It’s NAV would be $90,000.

It’s this dynamic between the NAV and a fund’s structure that ultimately dictates the price behaviour that can negatively or positively affect a portfolio. Because ETFs can create and redeem shares continuously, the value of these shares will more closely mirror the performance of the assets held in the fund.

Closed-end funds also use NAV to determine share price. The big difference is that because closed-end funds only have a set amount of shares in circulation, price of shares is determined more by supply and demand than it is by the value of assets held in the fund.

For example, if there is an extremely high demand for these shares, it could drive up their price much higher than the NAV. The opposite could be true if there is selling pressure on these shares.

Closed-end Bitcoin funds and volatility

As is probably becoming apparent, the fixed supply of closed-end funds can lead to a great degree of volatility in share prices, as their market value is mostly determined by the laws of supply and demand. When we layer this volatility on top of the notoriously turbulent world of digital assets, there is often too much upward and downward price action for the average investor to bear.

This is why closed-end funds are viewed by many investors as complex investment vehicles that are better suited for seasoned financial professionals. The greater ease of use and diminished volatility inherent in an open-end Bitcoin ETF makes them generally more accessible and suitable to the average retail investor.

Final thoughts

Depending on your risk appetite, experience in investing, and investment goals, both closed-end and open-end Bitcoin funds could find a home in your portfolio. It is important to understand, though, that these two types of funds have inherent differences that will affect how they behave as investments. Closed-end fund share prices are driven largely by supply and demand dynamics, whereas open-end fund shares will more closely reflect the NAV of the fund.

—Purpose Investments

Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.

If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

This information is provided for illustrative and discussion purposes only. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. Historical trends do not imply, forecast or guarantee future results. Information is as of the date indicated and subject to change without notice. Nothing herein constitutes a prediction or projection of future events or future market behavior.

The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Certain statements on this site may be forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose believes to be reasonable assumptions, Purpose cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.