Options Available for Bitcoin Investors
As bitcoin’s price rises, bounces, and continues onward into its eighth year, an additional wave of investors are being drawn back towards the technology. Bitcoin’ began 2017 with its price breaking through the $1,000 barrier along with strong returns in 2016. Combine that with an additional wave of interest after the Presidential Election of Donald Trump and the rising cash crises in India and Venezuela are encouraging more investors to ask the question, how do they obtain their first 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 for most, those looking to obtain Bitcoin began trading them in exchange for fiat currency such as U.S. Dollars.
The 2014 collapse of early exchange Mt. Gox sent shockwaves throughout the industry and forced investors towards seeking safer, more institutionally supported means of accessing the digital currency. In turn, Bitstamp, CoinBase, and Bitfinex have emerged and served customers fairly well over the past 3 plus years.
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’s 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 “ETF’s”, are an asset vehicle that trades during the day on the capital markets while quoting a price at the end of the day or period. These investments trade on exchanges, which make it possible for all investors, including those with a retail brokerage account to gain access to bitcoin’s investment potential. These are without the forces of illiquidity, theft, hacking, and poor accounting and security practices found in early bitcoin exchanges and companies.
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 a multitude of advantages to investors to help to make the prospect of investing in bitcoin increasingly appealing. 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 an investment that provides access to 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 will impact the underlying value. In reality, investors are paying for security, ease of use, and liquidity. At the time of press, the GBTC fund had $164.21M under management.
Through arranging strong storage mechanisms and securing the bitcoins themselves, GBTC allows for investors who are less technical to safely access the new technology. Because the fund trades on the capital markets, it can trade at a premium or discount to its net asset value (NAV). The fund has been trading at a premium to its NAV and this seems to indicate that there’s a strong interest in a bitcoin-based investment, as it’s currently unique in the investment markets. The fund continues to grow and gain support, as ArKInvest LLC recently invested in the GBTC, becoming the first public fund management group to invest in bitcoin.
Performance of the GBTC has been strong, providing strong returns to customers throughout its history. A comparison chart between the underlying price of bitcoin and the price of GBTC shows the significant and surprising premium of 15-40 percent above the Bitcoin price that the fund has been pricing at in the markets. Once again, the fact that the GBTC has provided such strong returns and also trades at a premium price compared to the Bitcoin market prices demonstrates the market level support for the established, credible investment avenue in America in relation to the globally traded Bitcoin market.
Since the GBTC launch in May 2015, the fund has provided strong returns, as the low entry point from 1.5 years ago gave early investors in the GBTC an advantage in obtaining shares.
Approval of Bitcoin ETFs Remains Uncertain
The Winklevoss twins applied for an ETF in July 2013, and is still awaiting approval by the SEC. It was thought at the time that their network and known name would push support and momentum towards this proposal in a quicker manner. Government officials, however, are taking a more conservative approach towards the Bitcoin ETF approval. Worry over the potential illicit use for bitcoin and worries over money laundering muddle regulator’s attitude around enabling another investment vehicle into bitcoin.
SolidX, an S-1 registered group offering the pending SolidX Bitcoin Trust, is also under review and the SEC, having recently delayed a decision, will confirm on its status on March 30th, 2017.
A recent report by CoinDesk on Needham & Company speculated that total ETF funds for bitcoin investment could total $300m, near double from the current holdings of GBTC, if the Winklevoss ETF were to be approved. The SEC will decide whether or not to approve the Bitcoin ETF on March 11th, 2017, with the CoinDesk report estimating a 25 percent chance of approval.
China’s Rule in the “Bitconomy”
As the United States continues to fall behind China in the adoption of and mining for bitcoin, approving the ETF will help to speed up efforts to bring America on an even playing field. Bitcoins themselves, however, primarily been classified as property in governmental rulings. 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, bitcoin as property seems to make more sense philosophically.
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 decline of January 10th-11th, 2017, corresponded with skepticism amongst Chinese officials around the operations of bitcoin exchanges, in turn causing a short-lived panic in the markets. At the time of writing the price is recovering to $784.
The Present and a Look Forward
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’s 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. As an investment, however, its prospects remain strong and resilient. The real utility is provided to the unbanked as well as small businesses looking to lower their overhead payment costs.
GBTC, SolidX and the Winklevoss Investment Trust could establish the groundwork for another wave of investment in America. Particularly if the SolidX or Winklevoss ETF applications are approved, an additional wave of investment from American investors is likely to follow, adding bullish pressure to the bitcoin price.