Understanding the Various Ways to Invest in Bitcoin
Bitcoin was designed with the intent of becoming an international currency to replace government-issued (fiat) currencies. Since Bitcoin’s inception in 2009, it has turned into a highly volatile investing asset that can be used for transactions where merchants accept it.
Could you and should you invest in bitcoin? You can, and it depends on your appetite for risk. Learn the various types of ways you can invest in bitcoin, strategies you can use and the dangers involved in this cryptocurrency.
Over the past decade, multiple ways to invest in bitcoin have popped up, including bitcoin trusts and ETFs comprised of bitcoin-related companies.
Buying standalone Bitcoin
The first way you can invest in Bitcoin is by purchase a coin or a fraction of a coin via trading apps like Coinbase. In most cases, you'll need to provide personal information to set up an account, then deposit money you'll use to purchase bitcoin.
Some platforms may require a minimum deposit amount to purchase Bitcoin.
Then, like any stock or ETF, you have access to bitcoin's price performance and the option to buy or sell. When you buy, your purchase is kept safe in an encrypted wallet only you have access to.
Investors looking to invest in bitcoin through the capital markets can access an investment through Greyscale’s Bitcoin Investment Trust (GBTC).Using Greyscale provides certain advantages that make an investment in bitcoin a more digestible option. For one, shares of GBTC are eligible to be held in certain IRA, Roth IRA, and other brokerage and investor accounts—allowing easy access for all levels of investors in a wide variety of accounts.
Investors are provided with a product that tracks the value of one-tenth of a Bitcoin. As an example, if the value of bitcoin is $1,000, each share of GBTC should have a net asset value of $100. This value is not without costs, as GBTC maintains a 2% fee that impacts the underlying value.
In reality, investors are paying for security, ease of use, and liquidity (conversion to cash). By arranging strong offline storage mechanisms, GBTC allows investors who are less technical to access the bitcoin market safely.
GBTC trades on the capital markets as well, which allows it to trade at a premium or discount of its net asset value (NAV).
Amplify Transformational Data Sharing ETF (BLOK)
BLOK is an actively managed fund that has holdings in 15 different industries and is traded on the New York Stock Exchange Arca. The company invests in other companies that are involved with and developing blockchain technologies. BLOK’s net expense ratio is 0.70%.
Bitwise 10 Private Index Fund
The Bitwise 10 Private Index Fund is based on the Bitwise 10 Large Cap Crypto Index, a basket of large capacity coins in which the company tries to provide security and the ease of use of a traditional ETF.
The Bitwise 10 Private requires a $25,000 minimum investment and has a fee ratio of 2.5%. Similar to GBTC, the assets are held in cold storage (offline), providing necessary security for its investors.
Bitcoin Investment—Buy and "Hodl"
Hodl (an intentional misspelling of hold) is the term used in the bitcoin investment community for holding bitcoin—it has also turned into a backronym (where an acronym is made from an existing word)—it means "hold on for dear life." An investor that is holding their bitcoin is “hodling,” or is a “hodler.”
Many people invest in bitcoin simply by purchasing and holding the cryptocurrency. These are the people that believe in bitcoin's long-term prosperity, and see any volatility in the short term as little more than a blip on a long journey toward high value.
Long Positions on Bitcoin
Some investors want a more immediate return by purchasing bitcoin and selling it at the end of a price rally. There are several ways to do this, including relying on the cryptocurrency's volatility for a high rate of return, should the market move in your favor. Several bitcoin trading sites also now exist that provide leveraged trading, in which the trading site effectively lends you money to hopefully increase your return.
Short Positions on Bitcoin
Some investors might bet on bitcoin's value decreasing, especially during a bitcoin bubble (a rapid rise in prices followed by a rapid decrease in prices). Investors sell their bitcoin at a certain price, then try to buy it back again at a lower price.
For example, if you bought a bitcoin worth $100, you would sell it for $100, and then wait for that bitcoin to decrease in value. Assuming the buyer of that bitcoin wanted to sell, you could buy it back at the lower price. You make a profit on the difference between your selling price and your lower purchase price.
It can be difficult to find a platform for short selling, but the Chicago Mercantile Exchange is currently offering options for Bitcoin futures.
There is always the danger that the market will move against you, causing you to lose the money that you put up. Any trader should understand the concepts of leverage and margin calls before considering a shorting strategy.
Understanding Risk if You Invest in Bitcoin
Bitcoin is a Volatile Asset
Those fluctuations can be dramatic. In April 2013, the world gasped when bitcoin’s value jumped from around $40 to $140 in one month. That increase, however, paled in comparison to the Bitcoin surge of 2017. In January, Bitcoin was hovering between $900 and $1,000. In the first week of September, it pushed past $4,700, only to drop down near $3,600 two weeks later. By mid-December, it raced to an all-time high of $19,891.99, then plummeted to around $6,330 less than two months later.
Exchanges May Have Glitches and Hacks
Exchanges can be tricky because many of them have proven to be highly unreliable—especially in the early days of bitcoin. One of the first and largest bitcoin exchanges, Japan-based Mt. Gox, collapsed after being hacked—losing 850,000 bitcoin and hundreds of millions of dollars. In April 2016, a glitch in an exchange led to Bitcoin’s price to momentarily drop to $0.60 on Coinbase.
The Bottom Line
Bitcoin’s drawbacks aren’t prohibitive. However, it is extremely important that you know what you're doing, and that you don't invest more than you can afford to lose. It is considered a very high-risk investment, meaning that it should represent a relatively small part of your investment portfolio.
If you are interested in investing in bitcoin, you have multiple options. Buying bitcoin through an exchange subjects you to volatility, but opting for a trust or an ETF investing in crypto-tech companies could minimize the risk you’d face buying coins.
Coinbase. "How to Buy Bitcoin." Accessed April 30, 2020.
Grayscale. "Grayscale Bitcoin Trust." Accessed April 30, 2020.
Grayscale. "Grayscale Bitcoin Trust Fact Sheet." Page 1. Accessed April 30, 2020.
Grayscale. "Bitcoin Trust." Accessed April 30, 2020.
Amplify ETFs. "Amplify Transformational Data Sharing ETF." Accessed April 30, 2020.
Bitwise. "Bitwise 10 Private Index Fund Fact Sheet." Page 2. Accessed April 30, 2020.
Bitwise. "The Bitwise 10 Private Index Fund." Accessed April 30, 2020.
Chicago Mercantile Exchange. "FAQ: CME Options on Bitcoin Futures." Accessed Apr. 30, 2020.
Coinbase. "Bitcoin Price." Accessed Apr. 30, 2020.