Whether you love it, hate it, or are still on the fence, Bitcoin has made it on to a mainstream investment platform in New Zealand. The Vault International Bitcoin Fund launched on 4 October 2021 on InvestNow, giving everyday Kiwis convenient access to this alternative asset class alongside their traditional fund investments.
This review covers the ins and outs of the fund, including fees, tax treatment, and how it compares to direct investment into Bitcoin. Is it better than buying Bitcoin directly, and could this fund be a worthwhile addition to your portfolio?
Warning: Bitcoin is a highly volatile and speculative investment. You may wish to check out our article Digital Gold? 5 things to know about Bitcoin to get a better understanding of the asset.
This article covers:
1. What’s on offer?
2. Fees
3. Other considerations
4. Does investing in the fund go against the spirit of Bitcoin?
Update (21 Jul 2022) – Vault have reduced the management fee from 2.50% to 1.75%
1. What’s on offer?
The Vault International Bitcoin Fund (VIBF) is a new investment fund available to New Zealand investors. The fund aims to track the price of Bitcoin, just like how index funds track market indices like the NZX 50. So if you invest in this fund, you could make money if the price of Bitcoin goes up, and you could lose money if the price of Bitcoin goes down.
The fund doesn’t hold any Bitcoin directly, instead investing in internationally domiciled Bitcoin funds and ETFs. According to the fund’s Product Disclosure Statement, this could include:
- Grayscale Bitcoin Trust – Issued by the world’s largest crypto fund manager who have over $40 billion in assets under management.
- CI Galaxy Bitcoin ETF – Bitcoin ETF listed in Canada.
- 3IQ Coinshares Bitcoin ETF – Bitcoin ETF listed in Canada.
- Purpose Bitcoin ETF – Bitcoin ETF listed in Canada.
Where you can invest
The Vault International Bitcoin Fund can be accessed via fund platform InvestNow (although is not available through the InvestNow KiwiSaver scheme). Like with InvestNow’s other funds, the minimum investment is $250, or $50 if you set up a regular investment plan.
The fund will also available though cryptocurrency broker Easy Crypto in the future.
The fund managers
Vault Digital Funds manages the investments of the fund. Their team include Janine and Alan Grainger, the founders of Easy Crypto.
Working alongside them is Implemented Investment Solutions (IIS) who issues and takes care of the administration side of the fund. IIS is InvestNow’s parent company who already have a track record in packaging up investment products into funds for Kiwi investors.
Bitcoin becomes mainstream?
Currently the main option for Kiwis to invest in Bitcoin is to buy the coins directly from a broker like Easy Crypto, or an exchange like Binance. It’s very much a DIY approach, with investors having to learn about the various aspects of the crypto ecosystem, like which wallets to use, and how to keep your coins safe.
An alternative is to invest in funds that hold in Bitcoin – just like how you can invest in funds that hold shares, instead of buying individual shares directly. Such funds are not a new concept in New Zealand. Crossgate Capital has been offering a diversified cryptocurrency fund since 2019, but lives largely off the radar, and their units are hard to buy and sell.
So this is the first time we’re seeing Bitcoin on a mainstream NZ investment platform alongside traditional investments like Smartshares’ ETFs and Milford’s funds! I think it’s a big step for cryptocurrency to appear on a platform that’s so reputable among the NZ retail investor community.
2. Fees
Like all other funds, you will need to pay fees on the Vault International Bitcoin Fund:
- Management fee – 1.75% p.a. This fee is reflected as a small reduction in the value of the fund daily. This fee includes the management fees of any underlying Bitcoin funds or ETFs the fund invests in.
- Buy/Sell Spread – 0.25%. This fee applies when you buy or sell units in the fund, and means you will buy units at a 0.25% premium to the unit price, and sell units at a 0.25% discount to the unit price.
At first glance the management fee is very high for a fund.
Fee comparison with holding Bitcoin directly
Management fees
There are no management fees to hold Bitcoin directly in your own wallet. So ongoing costs are much higher when investing in Bitcoin through VIBF.
Transaction fees
Transaction costs for buying Bitcoin directly may involve the following:
- Brokerage/margin – A fee charged by your broker or exchange.
- Foreign exchange – A fee for changing your NZD to USD or other foreign currency, given most brokers and exchanges source their coins from overseas.
- Network fees – A fee charged by the Bitcoin network for sending your coins from your broker/exchange to your own wallet.
Using popular broker Easy Crypto to buy Bitcoin would cost you 0.95% in brokerage/margin + 0.45% in foreign exchange + no network fees (given Easy Crypto covers this for Bitcoin purchases). This is a total fee of 1.40%. When selling Bitcoin, you’d have to pay similar fees, plus the network fee for sending your Bitcoin out of your wallet.
The 0.25% spread charged by the fund appears to be very reasonable in comparison.
3. Other considerations
Ease of investment
VIBF makes it convenient for investors to get exposure to Bitcoin, and is sure to open up the asset class to a new group of investors. There’s no need to set up a wallet, consider how to store your keys, or navigate your way around cryptocurrency exchanges (for reference, see link below for how to buy Bitcoin directly). Plus a lot of Money King NZ readers will already be InvestNow customers – in that case you don’t even need to sign up to a new investment platform to get access to this fund.
Further Reading:
– How to buy Bitcoin in New Zealand (step-by-step guide)
Having the fund listed on InvestNow also makes it easy to sell your Bitcoin investment – the fund can be sold at any time through the platform. This is easier than other crypto services like Binance and Crypto.com (where the best option is to transfer your coins to Easy Crypto to sell) or Crossgate Capital (who require you to sell your units through the hard to access and illiquid Unlisted Securities Exchange).
Further Reading:
– How to sell Bitcoin in New Zealand
However, there is a risk that investors might not be able to sell their units in the fund when they want to. The fund manager has the ability to defer redemptions (selling out of the fund) in the following cases:
- If redemptions exceed 10% of units on issue within a period of 60 business days.
- If they “consider deferral to be in the general interests of all Fund investors.”
The fund manager can also suspend redemptions for up to 6 months:
Fund redemptions may be suspended if we believe allowing investors to take their money out would not be workable or would prejudice investors generally.
The reasons for deferring or suspending redemptions don’t appear to be entirely black and white – while I’m sure this is more for legal reasons, it’s a risk investors should consider.
Safety of funds
Safety of your cryptocurrency is an ongoing issue for investors. There are typically two ways direct Bitcoin investors can store their coins:
- Self-custody – Involves storing your coins on your own wallet, in your custody. This requires a deeper level of knowledge of Bitcoin, as there are a lot of things that could go wrong with self-custody – you could lose the keys to your coins, have your keys stolen, be a victim of user error or complacency (like wiping your Bitcoin wallet off your phone before backing up your keys), or fall for a scam.
- Exchange custody – Involves storing your coins on your cryptocurrency exchange. This is probably less safe than self-custody as your account could get hacked, the exchange could get hacked, or the exchange could suspend your account (sometimes for no apparent reason).
There are countless stories of people losing their coins through self-custody mistakes or exchange hacks.
VIBF offers an alternative solution where investors don’t have to worry about self-custody, or putting their funds under the control of exchanges. The risk of your coins getting lost or stolen isn’t eliminated here – you could say that the custody problem is just being passed on to where the underlying Bitcoin is stored (by the underlying fund managers like Grayscale). Though these fund managers take appropriate custody measures (using cold storage), and conduct regular audits, which mitigate the risks.
Tax
VIBF is structured as a Portfolio Investment Entity (PIE), just like your KiwiSaver fund and most other funds on InvestNow. The underlying assets of the funds are Foreign Investment Funds (FIFs) taxed using the Fair Dividend Rate (FDR) method. In other words, the fund needs to pay tax on the underlying investments (calculated as 5% of the fund’s value at the start of the tax year), and this tax is passed on to investors who are taxed at their Prescribed Investor Rate (PIR). This tax is payable after the end of the tax year (31 March) or whenever you sell units in the fund.
Further Reading:
– What taxes do you need to pay on your investments in New Zealand?
The benefits of the fund’s tax treatment are twofold:
- Due to using the FDR method, the fund is taxed with the assumption it made a profit of 5%. So even if the price of Bitcoin doubled in value over the tax year (producing a return of 100%), the fund would be taxed as if Bitcoin went up only 5%!
- The fund is a PIE, so is taxed at your PIR which has a maximum rate of 28%. This is especially beneficial for investors whose marginal tax rate is higher than their PIR rate (e.g. investors who are on a 33% or 39% marginal tax rate).
This could potentially be a HUGE tax advantage over holding Bitcoin directly, where all your capital gains are likely taxable at your marginal tax rate. We are usually taught to avoid high fees, but this might be the factor that makes the 1.75% fund management fee worth it. However, this tax treatment can also be problematic:
- If the returns for the year are less than 5% or negative, the fund will still be taxed as if it made a return of 5%.
- There is a risk that this tax treatment could change. As per the PDS:
We have received advice that the Fund’s Underlying Fund holdings are taxed under the FDR tax methodology. There is a risk this advice is incorrect.
This suggests they do not have authoritative guidance from the IRD regarding the tax treatment of the fund, so it’s possible the fund’s tax treatment could be forced to change to something less favourable in the future.
Trading Frequency
The fund is only traded once every business day, with an order cut-off time of 12pm to have your order processed on the same day. Buying Bitcoin direct provides more flexibility, with crypto brokers and exchanges staying open and processing orders 24/7.
The daily trading frequency of the fund might not bother investors with a long-term buy and hold view. However an issue investors may face is that the price your order is processed at might be very different to the price at the time you placed the order (due to Bitcoin’s high volatility). Some investors may prefer 24/7 real-time trading to take advantage of buying any dips, or for more visibility of what price their order will be executed at.
4. Does investing in the fund go against the spirit of Bitcoin?
There are many unique properties that Bitcoin possesses that makes the asset what it is. This is one last thing you should consider – by investing in Bitcoin through VIBF you will lose many of these properties, so is investing in the fund a genuine investment in Bitcoin?
Bitcoin as a currency
A direct holding in Bitcoin can be used as currency. While very few places in New Zealand accept Bitcoin as payment, the options are growing, and services like Wirex provide a workaround for spending your coins.
Meanwhile VIBF cannot be used as currency, and must be sold for NZD before you can use the money elsewhere.
Bitcoin as an on-ramp to the wider crypto eco-system
Direct holdings in Bitcoin can be more than a simple buy and hold investment. There are large eco-systems of financial products built around cryptocurrencies like Bitcoin. You can easily swap it for other cryptocurrencies, or place it into the interest bearing accounts that some exchanges offer.
By investing in Bitcoin through VIBF, you do not have the ability to access these products. You can only hold your units and profit (or lose) from Bitcoin’s price movements. But at least this restricts you from gambling away your money on shitcoins.
Bitcoin as a hedge against the Dollar
Bitcoin is considered a hedge against inflation. While governments can ruthlessly print money causing a currency to devalue, Bitcoin’s attraction is that it has a finite supply of 21 million coins. It could even be considered a hedge against the entire monetary system in an apocalyptic scenario where our current financial systems fall over.
VIBF cannot be used to fully hedge against the current monetary system as there is always a Dollar element involved. For example, to sell out of the fund, you must sell your units for New Zealand Dollars – a currency that might be worthless in a worst case economic apocalypse. There does not appear to be a way to extract pure Bitcoin out of the fund.
Bitcoin as your own bank
Bitcoin is often considered a standalone monetary system, and having self-custody of your coins is like being your own bank. Bitcoin is not owned or controlled by any government or bank, nor is it controlled by a fund manager. Your coins cannot be confiscated as long as you have your keys.
You can’t use the fund to “be your own bank”. VIBF is controlled by the fund manager who may defer or suspend withdrawals at any time, or may alter the fund’s fees.
Further Reading:
– Digital Gold? 5 things to know about Bitcoin
While investing directly into Bitcoin is already a speculative investment, owning it through the fund strips away the properties that arguably are what makes Bitcoin valuable. This makes the fund simply a financial instrument for speculating on the movement of Bitcoin’s price, while actual Bitcoin is much more than that.
Conclusion
On the surface, the fees are very expensive for a managed fund offering. But the features of the Vault International Bitcoin Fund make it a very competitive option for investing in bitcoin. It’s less intimidating than buying and holding the coins yourself, and potentially has significantly better tax treatment. While Bitcoin is not a must have investment, nor will it suit everyone’s portfolio, the fund is an excellent addition to InvestNow’s product range. The prospect of the fund being available through InvestNow KiwiSaver, or having Vault Digital and IIS launch more cryptocurrency funds further down the line is also exciting.
However, I think the biggest downside with the fund is that it strips away many of Bitcoin’s qualities that make it attractive to some investors. These include the ability to use it as a currency, and as a hedge against our current monetary system. This makes the fund pretty much just a tool for speculating on Bitcoin’s price. There will be plenty of InvestNow customers who won’t mind, and will add the fund either as a serious part of their portfolio, or simply just to take a punt – it’s a better way to own Bitcoin than not owning Bitcoin at all. But true Bitcoiners might prefer to stick to being their own bank.
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Disclaimer
The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.
