The ranks of cryptocurrency enthusiasts increasingly include mainstream investors seeking diversification rather than revolution © FT montage; AFP/Getty, Dreamstime

Bitcoin was built on the belief that no one should trust the financial establishment. Yet the ranks of cryptocurrency enthusiasts increasingly include mainstream investors seeking diversification rather than revolution. Bitcoin funds tap into the frenzy with a semblance of respectability.

This explains surging demand for shares in two funds. In the US, the value of the Grayscale Bitcoin Trust has increased fourfold over a year to $25bn, according to Bloomberg. In Germany, the Bitcoin Exchange Traded Crypto (BTCE), a vehicle created by the ETC Group, has been a big hit too.

In the buying stampede, some investors will have overlooked the risks of such investments.

Open-ended exchange traded funds, invested more conventionally in indices, passed last spring’s volatility test. Crypto investment vehicles run on the same basis might still struggle in future. They have grown in scale, even as bitcoin has jumped 308 per cent to about $35,000 per unit over six months.

The underlying investment and its imitators are exceptionally volatile. In a broader market rout, prices for cryptos would probably plunge steeply. Traders who cover a fund’s liabilities might struggle to sell exposures before they bottomed.

Closed-end vehicles such as Grayscale Bitcoin Trust avoid this problem when investors sell the shares, no corresponding sale of underlying exposures is needed. Instead, a hefty discount may open up. At present the reverse applies: GBT trades on a 19 per cent premium. It would be cheaper to invest directly in cryptos.

One snag is that they could be stolen. Some of BTCE’s charges are for specialist insurance against theft. Equally, you might lose the keys to your holdings. Protecting keys — via a fiduciary — is one reason enthusiasts pay fees to a bitcoin fund manager.

Lex initially dismissed cryptos as no more than a medium for speculation and illicit transactions. We have been forced to concede they have a broader usefulness. For cynics, prices are a better barometer of the irrational exuberance of retail investors than the boring old Vix index favoured by institutions. As investments, however, they are still to be avoided.

The Lex team is interested in hearing more from readers. Please tell us what you think of crypto funds in the comments section below

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