Investing in Bitcoin: Vault Digital Funds

Article written by Vault Digital Funds – 4th October 2021

1. Why should Kiwis include Bitcoin in their investment portfolio?

Reasons why Kiwis might consider including a small amount of Bitcoin exposure in their investment portfolio include:

  • Diversifying their portfolio.
  • It’s potential as a relatively inflation-proof asset, given Bitcoin’s scarce supply.
  • Its longer term potential, given increasing adoption rates and maturing market confidence with institutional and retail investors, which suggest demand increasing over time.
  • Its utility potential where other protocols can be built on the Bitcoin blockchain.

However, Bitcoin is volatile, and you should speak to a financial advisor before investing.

2. Why should they get exposure through this fund, as opposed to investing directly into the currencies themselves?

Vault International Bitcoin Fund (VIBF) offers:

Simple – A Simple way to Invest in Bitcoin

You can make your investment through trusted NZ platforms like InvestNow, without the complexity of investing directly in Bitcoin, and being responsible for your own security and storage.

Smart – A PIE fund taxed using the FDR method

VIBF is taxed in accordance with the FDR methodology, meaning the VIBF Is Capital Gains Tax Free to New Zealand Residents. In contrast, where NZ taxpayers invest directly in Bitcoin, they pay tax on realised capital gains.

As a PIE fund, tax is capped at a maximum of 28% on a 5% “deemed dividend” income under Fair Dividend Rate (FDR) methodology. This equates to an effective maximum total tax rate of 1.4% per annum.

Trusted – Regulated and familiar

The VIBF is a registered managed investment fund in New Zealand. VIBF only invests in regulated listed overseas funds that hold their underlying Bitcoin assets in cold storage with institutional grade security. Vault doesn’t hold your assets – these are held by a regulated NZ custodian.

3. What are the key risks and considerations investors should keep front of mind?

Some prominent risks include:

Factors which may cause the price of Bitcoin to change significantly over short periods include:

  • A limited supply of Bitcoin (maximum of 21 million) making the price very sensitive to demand changes.
  • Market dynamics, regulatory actions and changes, technical advancements, as well as broader economic and political factors.
  • Bitcoin is a relatively new asset making it difficult to value and highly sensitive to news and announcements.

Digital assets like Bitcoin may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect on their market price.

Globally, Bitcoin is largely unregulated. Hence, Bitcoin investors receive little if any regulatory protection. Bitcoin may become regulated but the form of any framework is uncertain. This means the regulatory implications of the Underlying Funds buying, holding, using and selling Bitcoin are uncertain. Current and future regulation risk may have a significant impact on the value of Bitcoin.

Blockchain technology is used to record the ownership of cryptocurrencies like Bitcoin. Blockchain related risks may affect the value of Bitcoin. These considerations include:

  • The various source codes used in digital currencies like Bitcoin are subject to change and may at any time contain one or more defects, weaknesses, inconsistencies, errors or bugs.
  • If the digital asset awarded for mining blocks and transaction fees for recording transactions on the Bitcoin network are not sufficiently high enough to incentivise miners, miners may cease expanding processing power or demand high transaction fees, which could negatively impact the value of Bitcoin.
  • The Bitcoin network requires significant computing power, which in turn consumes a substantial amount of energy, to mine Bitcoin. Its energy consumption may become, or be deemed to be, unsustainable (barring any future efficiency improvements being designed for the network). This could pose a risk to broader and sustained acceptance of the network as a peer-to-peer transactional platform.
  • Because cryptocurrencies like Bitcoin are powered by decentralized, open-source software (being blockchain), it is possible for a community to make changes to the blockchain’s protocol, or basic set of rules. This process, which is called a “fork”, can be used to create entirely new types of coins. The introduction of new types of coins could influence the price of Bitcoin negatively.

There is a potential security flaw in Bitcoin and blockchain technology. If a group gained control of more than half the computers within the Bitcoin network, they could potentially halt payments between users, or even reverse transactions. Malicious activity from such a group could negatively affect Bitcoin’s value.

Bitcoin is not the only digital currency. There is risk other digital currencies gain greater acceptance than Bitcoin. The supply and acceptance of other digital currencies could adversely impact the value of Bitcoin, and therefore the value of the Underlying Funds and the Fund.

It is possible that Bitcoin, or the Blockchain technology used by Bitcoin will never be broadly adopted by either the retail or commercial marketplace. In which case, Bitcoin may lose most, if not all, of its value. In addition, cultural adoption of Bitcoin (for example by internet subcultures) may fade.

While the Underlying Funds have security measures for safe storage of their digital assets (including holding their digital assets offline, in cold storage), there have been significant incidents of digital asset theft and digital assets are a target for hackers. Digital assets that are stolen or lost cannot be replaced, as transactions are irrevocable. The Underlying Funds have appropriate custody and related custodian insurance arrangements for their digital assets. However, there is still a risk that the Fund may suffer a loss as a result of theft or fraud.

To understand more about these risks, please read the Product Disclosure Statement (PDS) and Other Material Information (OMI) documents.

4. How does the Vault International Bitcoin Fund address issues such as safekeeping & liquidity?

Units in the VIBF and shares in the underlying Bitcoin Funds and ETFs are held by NZ regulated custodian, Adminis.

Furthermore, Vault only buys shares in Funds listed on regulated offshore exchanges, and where the Bitcoin assets of those funds are held by large institutional custody providers.

VIBF is a multi asset Fund, enabling Vault to be flexible on which assets are included in the Fund, depending on the prevailing market conditions.

Units in the Fund can be readily purchased and redeemed through InvestNow.

Things to keep in mind…

  • The digital asset space is fast-changing, volatile, and can be very confusing.
  • When considering Bitcoin exposure by investing in the VIBF we would request that investors consider the volatile nature of Bitcoin, but also consider why Bitcoin is rapidly gaining popularity as a potential store of value against inflation, amidst a backdrop of record currency and debt creation and government deficits – especially more recently with Covid – and whether this situation is likely to change.
  • The FMA provides clear, concise and easy to understand information on digital assets, and what investors should consider when investing in digital assets – see Spotlight on Crypto: Using New Zealand based cryptocurrency trading platforms | FMA.

Disclaimer:

Please note that the price of Bitcoin and, as a result, the unit price of the Vault International Bitcoin Fund is extremely volatile, subject to large intra-day movements and high degrees of risk – including a partial or total loss of invested funds.

Like all other managed funds on the InvestNow platform, investors can only buy and sell units in the Vault International Bitcoin Fund once per day (at the previous day’s close). This means that you will not be able to transact in real time in reaction to underlying Bitcoin price movements. Therefore, an investment in the Vault International Bitcoin Fund should be considered as part of a properly diversified investment portfolio with a long-term investment horizon.

Investing in units in the Vault International Bitcoin Fund is not suitable for any investor that cannot afford to lose the entire investment.

Past performance is not indicative of future performance. 

Investors must seek independent financial advice.

Investing in Bitcoin: Vault Digital Funds

Article written by Vault Digital Funds – 4th October 2021

1. Why should Kiwis include Bitcoin in their investment portfolio?

Reasons why Kiwis might consider including a small amount of Bitcoin exposure in their investment portfolio include:

  • Diversifying their portfolio.
  • It’s potential as a relatively inflation-proof asset, given Bitcoin’s scarce supply.
  • Its longer term potential, given increasing adoption rates and maturing market confidence with institutional and retail investors, which suggest demand increasing over time.
  • Its utility potential where other protocols can be built on the Bitcoin blockchain.

However, Bitcoin is volatile, and you should speak to a financial advisor before investing.

2. Why should they get exposure through this fund, as opposed to investing directly into the currencies themselves?

Vault International Bitcoin Fund (VIBF) offers:

Simple – A Simple way to Invest in Bitcoin

You can make your investment through trusted NZ platforms like InvestNow, without the complexity of investing directly in Bitcoin, and being responsible for your own security and storage.

Smart – A PIE fund taxed using the FDR method

VIBF is taxed in accordance with the FDR methodology, meaning the VIBF Is Capital Gains Tax Free to New Zealand Residents. In contrast, where NZ taxpayers invest directly in Bitcoin, they pay tax on realised capital gains.

As a PIE fund, tax is capped at a maximum of 28% on a 5% “deemed dividend” income under Fair Dividend Rate (FDR) methodology. This equates to an effective maximum total tax rate of 1.4% per annum.

Trusted – Regulated and familiar

The VIBF is a registered managed investment fund in New Zealand. VIBF only invests in regulated listed overseas funds that hold their underlying Bitcoin assets in cold storage with institutional grade security. Vault doesn’t hold your assets – these are held by a regulated NZ custodian.

3. What are the key risks and considerations investors should keep front of mind?

Some prominent risks include:

Factors which may cause the price of Bitcoin to change significantly over short periods include:

  • A limited supply of Bitcoin (maximum of 21 million) making the price very sensitive to demand changes.
  • Market dynamics, regulatory actions and changes, technical advancements, as well as broader economic and political factors.
  • Bitcoin is a relatively new asset making it difficult to value and highly sensitive to news and announcements.

Digital assets like Bitcoin may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect on their market price.

Globally, Bitcoin is largely unregulated. Hence, Bitcoin investors receive little if any regulatory protection. Bitcoin may become regulated but the form of any framework is uncertain. This means the regulatory implications of the Underlying Funds buying, holding, using and selling Bitcoin are uncertain. Current and future regulation risk may have a significant impact on the value of Bitcoin.

Blockchain technology is used to record the ownership of cryptocurrencies like Bitcoin. Blockchain related risks may affect the value of Bitcoin. These considerations include:

  • The various source codes used in digital currencies like Bitcoin are subject to change and may at any time contain one or more defects, weaknesses, inconsistencies, errors or bugs.
  • If the digital asset awarded for mining blocks and transaction fees for recording transactions on the Bitcoin network are not sufficiently high enough to incentivise miners, miners may cease expanding processing power or demand high transaction fees, which could negatively impact the value of Bitcoin.
  • The Bitcoin network requires significant computing power, which in turn consumes a substantial amount of energy, to mine Bitcoin. Its energy consumption may become, or be deemed to be, unsustainable (barring any future efficiency improvements being designed for the network). This could pose a risk to broader and sustained acceptance of the network as a peer-to-peer transactional platform.
  • Because cryptocurrencies like Bitcoin are powered by decentralized, open-source software (being blockchain), it is possible for a community to make changes to the blockchain’s protocol, or basic set of rules. This process, which is called a “fork”, can be used to create entirely new types of coins. The introduction of new types of coins could influence the price of Bitcoin negatively.

There is a potential security flaw in Bitcoin and blockchain technology. If a group gained control of more than half the computers within the Bitcoin network, they could potentially halt payments between users, or even reverse transactions. Malicious activity from such a group could negatively affect Bitcoin’s value.

Bitcoin is not the only digital currency. There is risk other digital currencies gain greater acceptance than Bitcoin. The supply and acceptance of other digital currencies could adversely impact the value of Bitcoin, and therefore the value of the Underlying Funds and the Fund.

It is possible that Bitcoin, or the Blockchain technology used by Bitcoin will never be broadly adopted by either the retail or commercial marketplace. In which case, Bitcoin may lose most, if not all, of its value. In addition, cultural adoption of Bitcoin (for example by internet subcultures) may fade.

While the Underlying Funds have security measures for safe storage of their digital assets (including holding their digital assets offline, in cold storage), there have been significant incidents of digital asset theft and digital assets are a target for hackers. Digital assets that are stolen or lost cannot be replaced, as transactions are irrevocable. The Underlying Funds have appropriate custody and related custodian insurance arrangements for their digital assets. However, there is still a risk that the Fund may suffer a loss as a result of theft or fraud.

To understand more about these risks, please read the Product Disclosure Statement (PDS) and Other Material Information (OMI) documents.

4. How does the Vault International Bitcoin Fund address issues such as safekeeping & liquidity?

Units in the VIBF and shares in the underlying Bitcoin Funds and ETFs are held by NZ regulated custodian, Adminis.

Furthermore, Vault only buys shares in Funds listed on regulated offshore exchanges, and where the Bitcoin assets of those funds are held by large institutional custody providers.

VIBF is a multi asset Fund, enabling Vault to be flexible on which assets are included in the Fund, depending on the prevailing market conditions.

Units in the Fund can be readily purchased and redeemed through InvestNow.

Things to keep in mind…

  • The digital asset space is fast-changing, volatile, and can be very confusing.
  • When considering Bitcoin exposure by investing in the VIBF we would request that investors consider the volatile nature of Bitcoin, but also consider why Bitcoin is rapidly gaining popularity as a potential store of value against inflation, amidst a backdrop of record currency and debt creation and government deficits – especially more recently with Covid – and whether this situation is likely to change.
  • The FMA provides clear, concise and easy to understand information on digital assets, and what investors should consider when investing in digital assets – see Spotlight on Crypto: Using New Zealand based cryptocurrency trading platforms | FMA.

Disclaimer:

Please note that the price of Bitcoin and, as a result, the unit price of the Vault International Bitcoin Fund is extremely volatile, subject to large intra-day movements and high degrees of risk – including a partial or total loss of invested funds.

Like all other managed funds on the InvestNow platform, investors can only buy and sell units in the Vault International Bitcoin Fund once per day (at the current day’s close, if you place your order before mid day on a trading day, or at the following trading day’s close if your order is placed after mid day). This means that you will not be able to transact in real time in reaction to underlying Bitcoin price movements. Therefore, an investment in the Vault International Bitcoin Fund should be considered as part of a properly diversified investment portfolio with a long-term investment horizon.

Investing in units in the Vault International Bitcoin Fund is not suitable for any investor that cannot afford to lose the entire investment.

Past performance is not indicative of future performance. 

Investors must seek independent financial advice.

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