Preferred Asset for Cryptocurrency: GDLC

I must admit, I'm not necessarily a cryptocurrency believer, much less a proponent, but I do want to track it and do have it in one of the test portfolios (RPC Growth). This trust, which operates a bit like a closed-end fund but may soon become an ETF, is my preferred vehicle for crypto.

** I wrote this post in mid-March, 2022, when its price was around $20. Since then, it has decline 30%, and is down 57% over the past 6 months, and 70% over nine months. Relatedly, cryptocurrencies have been solidly correlated to equities over that time, perhaps suggesting some answers to questions raised below about how it might perform in a portfolio.

"The Fund’s shares are among the first securities solely invested in, and deriving value from, a basket of large cap digital assets in the form of a security while avoiding the challenges of buying, storing, and safekeeping digital currencies directly."

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GDLC - Grayscale Digital Large Cap Fund Llc Stock Price -
Grayscale Digital Large Cap Fund Llc stocks price quote with latest real-time prices, charts, financials, latest news, technical analysis and opinions.

The Basics:

When looking for a way to invest in cryptocurrencies, I wanted something similar to an indexed ETF that would try to replicate the market of digital currency investments and free me from the difficulty of picking winners and losers. I could have, of course, bought the currencies directly, but was looking for something that was convenient, didn't rely on my ability to handle the technology, and would change as particular currencies rose or fell. The Greyscale Digital Large Cap fund fits the bill, as it replicates the features of a crypto index with the convenience of an ETF (even though it isn’t - more on that in a bit). It is actually a trust that holds eight of the largest cryptocurrencies, though really, it is essentially dominated by two: BitCoin (65% of the total) and Ethereum (28%). Other currencies like Cardano and Solana are represented, as well, but in small amounts (around 2% each).

One big advantage of this fund is that it is currently trading at a discount, meaning its combined holdings, divided by the number of shares, are actually worth more than the price of a share. This can happen with closed-end funds, as can the opposite, or a “premium” when the share price is higher than the Net Asset Value (per share). To put numbers on it, one share of GDLC currently has a net asset value (NAV) of $26.34, yet it trades at $20.23, or a discount of 23%. That’s pretty great, and hasn’t always been the case - at the beginning of September, 2021, GDLC was trading at a price almost double the value of its holdings.

It's no secret that the hope for this trust is that eventually the Securities and Exchange Commission will approve the application to convert it to an exchange-traded fund. Greyscale is currently focusing on converting its BitCoin trust (GBTC) to an ETF, and since it is in the public comment period, has been encouraging investors to promote the application to the SEC. I have no idea whether the application for GBTC or GDLC will be approved, but one possible outcome of such a conversion would be an immediate leveling of its share price to match its NAV. ETFs, by definition, trade at their NAV, so any shares bought at a discount now contain that potential gain (at least in theory. Things change and other factors may be in play).

The fact that you can buy the fund at a discount helps counterbalance one of the drawbacks of this fund: its expense ratio is 2.5%, way higher than usual. On the one hand, a high expense ratio for a cryptocurrency fund is understandable. Security is important, and the fund is saving you the trouble of figuring out whether to go for cold storage vs. hot storage, which coins to buy, “gas fees”, and all the rest. On the other hand, if you’re even modestly tech savvy, you can invest in the coins directly (using GDLC's percentages, if you like), or use other trusts to buy particular coins more cheaply (see below).

Without getting too much into the hot button topic that is crypto, another drawback is that you don’t hold the coins yourself (ok for me, but if you’re an anarcho-libertarian hoping and waiting for the world to end, a method for holding crypto like this won’t cut it). You also lose out on the ability to earn interest on your coins by participating in liquidity pools and the like.

Honestly, cryptocurrencies haven’t been around long enough to provide any reasonable clue about how they are correlated with other assets. I prefer five decades worth of history and will settle for two, so cryptocurrency’s three or four years in the mainstream hardly qualify. In terms of narrative, it would seem that its future might be to be the new form of gold, and certainly, it checks many of those same boxes: people see it as an asset outside of the normal market, it pays no dividends (well, unless you lend it), and might be the kind of thing nervous people turn to in times of crisis. It's recent history, though, has been like a small cap growth fund powered by nitrogen fuel injectors. The volatility has been insane, making millionaires out of paupers and vice versa, all in the span of a few weeks.

I did run a correlation analysis anyway. To compare GDLC, I used representative funds for equities, Long-Term Treasuries, gold, and commodities, and also threw in two more: the ARK Innovation ETF and a small-cap growth ETF. Again, the history is not nearly long enough to draw any kind of conclusions, but you do see only mild positive correlation with the total stock market, and then non-correlation with bonds, gold, and commodities. Even absent its 51% annual return over the past three years, GDLC might be a good addition to a Risk Parity portfolio if it can maintain any sort of positive growth while remaining pretty much independent as an asset.

Other Options:

As far as finding an alternative to GDLC, the market for ways to invest in cryptocurrency without directly investing in them is changing rapidly. There are many different ways, with new ones coming along all the time. Here is a great article covering 17 different funds for more information, but briefly:

  • If you’re looking for something similar to GDLC in that it holds a basket of many different currencies, then BITW would also qualify. Its expense ratio was the same, and I didn’t notice any other ways it was better or worse than GDLC.
  • If you want an equity ETF that invests in the companies who stand to benefit from the growth of cryptocurrencies, decentralized finance, and blockchain technologies, then BITQ or BKCH may be good options. I consider these equities, though, so for me, I would have them in my equity allocation for a RP portfolio, not as a stand alone asset class.
  • ProShares’s Bitcoin Strategy ETF (BITO) is a way to invest in BitCoin futures meaning it resembles a commodities fund like PDBC. I don’t know if that’s a good or a bad thing, though a much smarter man than me (which one? In this case, J. David Stein) suggests it will underperform.
  • Just want to focus on individual cryptocurrencies like BitCoin and eschew the basket approach? This definitely lowers expense ratios, and since GDLC is so dominated by just two coins, it seems to make a lot of sense. For BitCoin, the Osprey BitCoin Trust (OBTC) charges just .49% and is currently trading at a discount, as well.
  • Of course, you can hold the coins directly, using either your own cold storage wallet or using CoinBase, BlockFI or whatever.

Again, this space is changing all the time. If you’re seeing this blog post a month or more after publication, this list is probably outdated.

Disclaimer: In real life, I own shares in GDLC, BITQ, and OBTC. Keep in mind that this site is intended for financial education, and this write-up is to explain how you might want to think about this particular asset. It's not necessarily a recommendation.