The Best Options for Bitcoin Investors
As bitcoin’s price rises, bounces, and continues its frenetic ride, an additional wave of investors are being drawn back towards the technology. Bitcoin began 2017 with its price through the $1,000 barrier along with strong returns in 2016. The price action of bitcoin has deterred many, and combined with the additional wave of interest after the Presidential Election of Donald Trump and the rising cash crises in India and Venezuela, more investors (especially the newly interested) are asking the question, how do they obtain their first bitcoin?
Bitcoin Industry Investing History
In the early days of bitcoin, many would mine the cryptocurrency through providing computational power to help support and secure the underlying network. As mining became more difficult and less cost-effective, those looking to obtain Bitcoin began trading them in exchange for flat currencies such as U.S. Dollars or British pounds.
Now, as investors or all sizes are looking to enter the space, safer forms of exchanging digital currency and dollars for big money players have emerged. Both price ascension and volatility grab mainstream media attention, and spark curiosity around investing in bitcoin, the nascent digital currency that many had heard about as early as 2013 (amid the initial price increase and Silk Road scandal).
Exchange Traded Funds, or ETFs, are an asset vehicle that trades during the day on the capital markets. These are without the forces of illiquidity, theft, hacking, and poor accounting and security practices found in early bitcoin exchanges and companies, and are ideal for those chasing a relatively safe investment in the bitcoin world.
Bitcoin Investing via GBTC
Investors looking to invest in bitcoin through the capital markets can access an investment through Greyscale’s Bitcoin Investment Trust, which now trades on the OTCQX as GBTC. Greyscale investment provides certain advantages making an investment in bitcoin a more digestible option. For one, shares of the GBTC are eligible to be held in certain IRA, Roth IRA, and other brokerage and investor accounts, in turn allowing easy access to all level investors in a wide variety of accounts.
Investors are provided with a product that mirrors an underlying value of 1/10th the value of bitcoin. So if the value of bitcoin is $1000, each share of GBTC should have a net asset value of $100. This value is not without costs, as GBTC maintains a 2 percent fee that impacts the underlying value. In reality, investors are paying for security, ease of use, and liquidity.
Through arranging strong storage mechanisms and securing the bitcoins themselves, GBTC allows for investors who are less technical to safely access the bitcoin market. Because the fund trades on the capital markets, it can trade at a premium or discount to its net asset value (NAV).
The fund typically trades at a premium to its NAV, indicating strong interest in a bitcoin-based investment. The fund continues to grow and gain support, as ArKInvest LLC invested in the GBTC, becoming the first public fund management group to invest in bitcoin. They also launched the first ETF to track bitcoin action, the ARK Web x.0 ETF (ARKW). As of August 2018, GBTC had $1,264 million under management, with ARKW posting over 185 percent profit since its launch in September, 2014.
Approval of Bitcoin ETFs Remains Uncertain
The Winklevoss twins applied for an ETF twice, and as of 2018 were denied for a second time by the SEC. Government officials are taking a conservative approach towards approving ETFs in the largely speculative Bitcoin market. Worry over the potential illicit use for bitcoin and money laundering have stymied progression regarding the application of traditional investment vehicles into the cryptocurrency realm.
As of August 16, 2018, there is a potential option for the ETF investor. Bitcoin Tracker One, which trades under the ticker CXBTF, is technically an exchange traded note (ETN) that is listed in Sweden, but the exposure is a step toward the exchange-traded investment vehicles so desirable to the beginner investor.
Chinese Rule in the “Bitconomy” and The Impact on New Investment
As the United States continues to fall behind China in the adoption of and mining for bitcoin, approving ETFs would speed up efforts to bring America current. Bitcoins themselves have primarily been classified as property in governmental rulings, and are subjected to subsequent tax rules.
For example, both a March 2014 IRS ruling and a February 2016 California Bankruptcy court ruling labeled bitcoin as property, not a currency. The IRS’ April 2014 ruling to require the reporting of capital gains for tax purposes on bitcoin-related trades, however, signals that regulators also qualify the asset as a stock. Given the importance of private keys needed to access the currency, bitcoin as property (despite the tax drawback) seems a logical choice.
Many have speculated what effect the approval of such an exchange would have on the Bitcoin markets. With over 97 percent of known bitcoin trading still occurring in Chinese exchanges, a strong surge is expected as North American investors enter the market. The price fall of from December 11, 2017, when bitcoin was worth just over $19,000 to August 11, 2018, with a price of $6,233, shows the volatility in the landscape, and what U.S. regulation might mean to a largely Wild West landscape of trading.
Given the scarce final amount of 21 million bitcoins that will ever be in existence, combined with the exponentially increasing mining power on the network, Bitcoin has demonstrated its staying power and seeks to provide those in the developing world with banking services, while also seeing bitcoin’s use and implementation rise amongst supply chain, media monetization, and data notarization services.
ETF listings remain a crucial step towards widening the investment network in Bitcoin within America. Investors remain nervous about the risks associated with digital currency, its market dominance from China, and potential illicit use. Beginner investors are advised to monitor bitcoin ETF regulation, as the listing of exchange traded funds and the resulting liquidity and sense of security should ring bullish in the bitcoin market.