The investment trusts exposed to the cryptocurrency crash

A handful of trusts are involved in cryptocurrency, but all limit exposure to a very small part of their portfolio.

The boom-and-bust cycles of cryptocurrency happen on the fringes of finance, but investors may not realise they have exposure.

The recent collapse of FTX, a cryptocurrency exchange based out of the Bahamas, has once again shown how risky the sector is, with investors having to contend with volatile cryptocurrency prices, but also the possibility of fraud.

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FTX, which was the world’s third-largest exchange, is accused of lending customers’ money to cover losses at a hedge fund, also owned by entrepreneur Sam Bankman-Fried.

Investment trusts are structured as companies, listed on the stock exchange, and can own cryptocurrencies directly or invest in companies involved in them, so long as they have the backing of the board.

Ruffer Investment Company made a high-profile purchase of bitcoin in 2020 before selling in mid-2021, arguing that “the future came too early” and the bitcoin price had risen too quickly. It cashed out at $50,000 (£4,140) per coin, near the top of the market, after purchasing the online coins for just $10,000 each in November 2020. The value of bitcoin has plummeted this year, dropping from around $50,000 to $16,000 per token.

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But other investment trusts are also making bets on the rise of virtual tokens and blockchain. The latter is the technology underpinning peer-to-peer transactions of cryptocurrencies, as well as other piece of online data.

One is RIT Capital Partners, the wealth preservation trust that runs money for the Rothschild banking family. As of 30 June 2022, it owned three private companies in the space, representing a total of 2.3% of its portfolio. It owns shares in private firms Webull, Kraken and Paxos, all of which offer crypto trading and custody services.

Numis, the investment trust analyst, says RIT Capital views blockchain as a platform technology that has potential over the long term, and the trust believes that smart asset selection is critical as there will be significant volatility as the sector develops.

“Therefore RIT’s approach to blockchain is based upon careful diligence, leveraging their network to identify the best-in-class businesses and entrepreneurs, and the focus remains on real businesses with real profits, not in cryptocurrencies directly,” Numis said.

Scottish Mortgage also has some exposure to cryptocurrency. It has a 0.8% position in Blockchain.com and a 0.5% position in Blockstream. Both companies build blockchain technology solutions for other companies, such as crypto wallets.

Blockstream is also held by Baillie Gifford US Growth (0.4%) and Schiehallion. Edinburgh Worldwide (LSE:EWI) has a position in Lightning Labs (0.6% of total assets), which develops software powering the Lightning Network, enabling users to send and receive crypto more efficiently, according to Numis.

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Other cryptocurrency enthusiasts include Third Point, which Numis says could have exposure to three firms: CipherTrace, ConsenSys, and Dapper, although it is unclear if Third Point owns these in its investment trust, Third Point Investors USD Ord (LSE:TPOU).

BH Macro, the listed hedge fund, had a 3% exposure to currencies, which includes digital assets. Digital assets have detracted 0.9% from performance this year, compared with 14.1% net asset value total return, according to Numis.

Finally, while not yet buying cryptocurrency for Pershing Square Holdings, Bill Ackman has declared his support. Ackman said that 2% of his personal wealth is now in crypto, including WiFi network Helium, bike-sharing company Limebike, Switzerland-based Origyn Foundation, whose projects include a blockchain-based fine art market, and Goldfinch Finance, a decentralised lending protocol that offers DeFi yield.

Ackman said on Twitter: “I invest more as a hobbyist trying to learn than as a careful investor as I minimise the time I spend on non-Pershing Square investments.

“I think crypto is here to stay and with proper oversight and regulation, it has the potential to greatly benefit society and grow the global economy.”

But not all investors are positive on crypto. Capital Gearing trust’s Chris Clothier says that bitcoin is not something they are willing to buy for clients.

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“Rather than creating a new financial system, crypto has simply recreated a facsimile of the old financial system it sought to replace,” he said.

Numis says that the activity in the investment trust sector is generally focused around exchanges/platforms, which are generally considered lower risk than direct cryptocurrency exposure, although not without risk as highlighted by the FTX collapse.

“We expect a significant tipping point to be when bitcoin/cryptocurrencies can be used more effectively on a transactional basis and these mechanisms appear [to be] developing,” the analyst said.