11 min readThe Investeringssparkonto (ISK) savings account is a popular way to invest because it simplifies the way holdings are taxed.
While Swedes have traditionally used ISKs to invest in traditional asset classes, demand is growing for access to cryptocurrencies because they offer valuable portfolio diversification. But accessing crypto can be complex and risky, especially when purchasing directly through an exchange. One alternative is to invest in crypto exchange-traded products (ETPs), which provide exposure without holding the underlying asset.
This article explains how ISK accounts work and how investors can add crypto to their portfolios using XBT Provider ETPs.
What is an ISK?
Launched in 2012, the ISK is an account which allows investors to hold a wide range of asset classes including shares, bonds, funds and exchange-traded funds (ETFs). The main benefit is it simplifies the taxation of returns by applying a standard rate of 30% on holdings instead of taxing gains, losses and income.
Other benefits of investing through an ISK include:
Dividends are tax-free if withdrawn before the end of the quarter
There are no setup costs
Tax returns are easier because the Swedish tax authority automatically calculates the liability
Some ISK providers are covered by the Swedish Deposit Protection Scheme
Here's an example of how the tax liability is calculated.
1) Capital base
The balances- the value of the holdings, unused cash and transfers into the account at the start of each quarter (January, April, July and October)- are added together and then divided by four to calculate the capital base.
Q1- 50,000 Kr
Q2- 53,000 Kr
Q3- 51,000 Kr
Q4- 54,000 Kr
Total= 208,000 Kr
Capital base (208,000 Kr divided by four) = 52,000 Kr
2) Standard income
The standard income is a percentage of the capital base, calculated using the government’s borrowing rate as of 30th November in the previous year and adding 1% (the minimum rate is 1.25%).
Standard income (2.94%* of 52,000 Kr) = 1,528 Kr
*Government borrowing rate as of 30th November 2022 = 1.94%
3) Liability
The standard tax rate of 30% is applied to the standard income
Liability (30% of 1,528 Kr) = 458 Kr
Rise of Crypto-Assets as an Investment
Bitcoin was launched as a peer-to-peer electronic cash system in 2009, following the publication of a whitepaper by pseudonymous founder Satoshi Nakamoto. The market capitalisation was initially slow to grow, but in the 10 years from May 2013, it has risen from $1.3 billion to $810 billion (as of 13th December 2023), representing a compound annual growth rate of nearly 90%. Meanwhile, the capitalisation of the entire crypto market has grown to $1.61 Trillion (as of 13th December 2023).
Despite Satoshi designing bitcoin as a medium of exchange, it has also gained traction as a digital asset. One of the clearest signs of its financialization is BlackRock’s application in June 2023 to launch a bitcoin ETF in the US. As the largest global asset manager, BlackRock’s recognition of bitcoin as an asset class establishes its legitimacy among retail and institutional investors. Several other ETF providers have followed BlackRock’s lead, including big players like Fidelity (which previously had an application rejected) in June and Franklin Templeton in September.
Incidentally, should the Securities and Exchange Commission approve these applications, analysts at asset manager Alliance Bernstein predict bitcoin could rise to $150,000 by 2025. That would equate to a market capitalisation of $3 trillion.
Swedes have a reputation for being early adopters of new technologies, such as mobile phones in the late 1980s and digital payments in the 1990s. Crypto is no exception. The country ranks 70th out of 155 nations in terms of adoption according to research by Chainalysis, ahead of Israel, Singapore and its Scandinavian neighbours. Sweden is also home to XBT Provider, issuer of the first European crypto ETP (see below to learn more).
Does Crypto Have a Place in Modern Portfolios?
Crypto offers valuable portfolio diversification, as demonstrated by CoinShares research.
CoinShares tracks the monthly performance of several sample model portfolios including:
A standard allocation of 60% shares and 40% bonds
A standard allocation holding 4% bitcoin
A standard allocation with 4% gold
Each portfolio is rebalanced (returned to its original asset allocation) on a quarterly basis.
As the table below shows, the portfolio with the bitcoin holding outperforms the others based on key metrics. It delivers stronger annualised returns, while the volatility is only slightly higher. It also demonstrates a lower correlation (the degree to which two assets move in the same direction) with the standard allocation than the near perfectly correlated portfolio holding gold.
However, this isn’t investment advice. Investors should build a portfolio according to the risk they feel comfortable taking. A greater allocation to bitcoin, or choosing not to rebalance, may increase volatility.
Learn more about diversifying a portfolio with crypto.
Adding Crypto to ISKs with XBT Provider ETPs
XBT Provider ETPs allow holders to gain exposure to bitcoin and ether in their ISK without holding the digital assets directly.
As mentioned earlier, XBT Provider is a pioneer in the crypto ETP sector. Based in Sweden to take advantage of the favourable rules introduced by the country’s financial authorities, it launched the Bitcoin Tracker One ETP in 2015, the first open-ended security tracking bitcoin available on a mainstream exchange. Since then, XBT Provider has launched three other products: another bitcoin ETP traded in euros (the original traded in SEK), the Ether Tracker One and Ether Tracker Euro.
XBT Provider’s ETPs employ synthetic replication to track the performance of Bitcoin or Ethereum. Each time an XBT Provider ETP is purchased, an obligation is created to pay the investor an amount based on the performance of the relevant digital currency, less the applicable fee. To reassure investors that it won’t default on its obligations, a guarantor holds the assets in physical or synthetic form, and The Network Firm, a trusted third party, provides proof of reserves.
XBT Provider ETPs are listed on the Nasdaq Stockholm exchange, so they can be traded like shares and held in an ISK account. Investors can access them through most platforms including Nordnet and Avanza, Sweden’s largest brokers.
Key Risks
As with any asset class, buying and holding crypto ETPs involves risks which investors should take into consideration before adding these products to their portfolios.
Investors’ capital is at risk, and holders may lose part or all of their money due to price fluctuations of the underlying asset. For instance, bitcoin has experienced several bear markets, most recently in 2022 when it dropped from $46,000 to less than $16,000
Crypto ETPs are generally structured as debt securities. This exposes the holder to credit risk (the issuer could default on its obligations)
The bid/ask prices of ETPs trading on an exchange likely differ from the price of the underlying crypto. The difference between the bid (the broker’s purchase price) and the ask (its sell price) is referred to as the ‘spread’.
Finally, past performance isn’t an indicator of future returns. Investors should always seek professional advice to ensure a crypto allocation fits with their overall goals and objectives.
Conclusion
An ISK is a tax-efficient investment account which charges a standard rate of 30% on holdings rather than taxing gains, losses and income. These accounts simplify investing because the Swedish tax authority automatically calculates the liability. They’re free to set up, and some are covered by Sweden’s deposit guarantee scheme.
To take advantage of the portfolio diversification offered by crypto, investors can hold XBT Provider ETPs in their ISK. XBT Provider is a Swedish-domiciled issuer of ETPs offering exposure to both bitcoin and ether. These products trade in euros and SEK on Sweden’s largest mainstream brokers, Nordnet and Avanza.
Before investing, it’s important to thoroughly research the risks involved, for example the potential losses caused by price volatility and the risk that the issuer may default on its obligations.
Learn more about XBT Provider ETPs.