First combined gold-bitcoin ETP launches in Europe

The first exchange traded product to combine gold and bitcoin in a single fund has launched on the SIX Swiss Exchange.

The fund combines a millennia-old store of value with an upstart security that some have touted as the “new digital gold” — even if bitcoin’s slide in recent months has tarnished any reputation it may have had as a haven in troubled or inflationary times.

“We are making bitcoin an acceptable asset to hold and bringing gold into the 21st century,” said Charlie Morris, chief investment officer of ByteTree Asset Management, which is behind the 21Shares ByteTree Bold Index ETP, that has listed with the ticker BOLD. A German listing is expected to follow later.

While gold ETPs and spot bitcoin ETPs are both widely available independently — in continental Europe at least — Morris claimed that ByteTree’s active rebalancing strategy had improved returns by 7-8 percentage points a year in backtesting.

The fund will rebalance monthly based on 360-day historic volatility, with the less volatile asset having a higher weighting in an attempt to maximise risk-weighted returns. In reality, this means gold tends to dominate the portfolio, with a weighting of between 70 and 90 per cent in backtesting stretching back to 2016.

“It struck me that bitcoin and gold were always counter cyclical. It’s obvious to me that bitcoin has always been correlated to the stock market, or to risk assets in general,” said Morris, until 2015 head of absolute return at HSBC, where he managed more than $3bn.

With the traditional balanced portfolio of 60 per cent equities, 40 per cent bonds struggling this year as both asset classes have sold off simultaneously, Morris said “60/40 works in a deflationary period. In an inflationary one BOLD is the 60/40, in the sense that it is balancing a risk-on asset with a risk-off asset.

Morris claimed that, in backtesting, the ETP had been less volatile than eight of the 10 largest stocks in the US over the past five years, beaten only by Berkshire Hathaway and Johnson & Johnson.

Going back to 2014, its biggest calendar-year loss would have been 12.7 per cent in 2018, a year bitcoin slumped 73.8 per cent.

It would have returned a cumulative 363 per cent over the full 2014-21 period, compared to 3,816 per cent for bitcoin, 58 per cent for gold, 134 per cent for the S&P 500 stock index and 82 per cent for US Treasury inflation-protected securities.

Annual fees will be 1.49 per cent, high for an ETP in general but not particularly so for a crypto product. Morris said costs were pushed up by the difficulty of finding a custodian able and willing to handle both physical gold and bitcoin. ByteTree ended up having to split custodianship between JPMorgan (for gold) and Copper (bitcoin).

“Never before in history has an ETP had two independent custodians,” Morris said. “No one from the old world has any clue what to do with bitcoin.”

The portfolio is reminiscent of that described by Ray Dalio, founder of hedge fund group Bridgewater Associates, when asked whether he would choose dollars, gold or bitcoin to put under his bed for a rainy day. I would take the gold . . . I would like to sprinkle a little bit of bitcoin into that mix too,” he replied.

Some think BOLD will have a broad market appeal.

“Investors often think of bitcoin as an alternative investment to gold and other commodities, so to have a fund that is going to own both is compelling,” said Todd Rosenbluth, head of research at ETF Trends.

He believed retail investors could benefit from having the respective weightings dynamically readjusted automatically, without having to do this themselves

Not everyone was convinced of the fund’s merits, however.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said the key question was what someone was investing in these assets for.

“In terms of gold, you can say it’s volatile but usually it’s volatile when you want it to be. You want it to spike in times of crisis,” Lamont said.

“But does anybody think that gold is going to go up indefinitely? Probably not. It’s an asset that you hold in your portfolio as ballast, as downside protection. It doesn’t pay any dividends, much like bitcoin. You are not holding it for its lack of volatility through time.”

As for the cryptocurrency side of the ledger, Lamont said “if you don’t want the volatility of bitcoin, then maybe you shouldn’t be involved in bitcoin. In some sense you are buying it for its volatility.

“With these asset classes, volatility is not necessarily the enemy,” he said, adding: “I’m not sure this is a sensible approach.”

Lamont also doubted the potential longevity of BOLD.

“Ultimately these very niche funds don’t tend to survive. They are perhaps overly complicated and the fees will clearly be a big part of this,” he added.