Should I Invest in Cryptocurrency at all?
Before tackling whether you should buy a Bitcoin ETF or whether you should invest in cryptocurrency at all, let’s examine the cryptocurrency and Bitcoin landscape. In fact, before making any investment, you need to understand what you’re investing in and whether that investment fits in with your financial goals, risk level and time horizon.
We’ll explore the definition of Bitcoin along with it’s pros and cons. Then you’ll find ways to invest in Bitcoin and cryptocurrency, learn about a Bitcoin ETF and decide if digital currency investing is right for you.
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What is Bitcoin?
Unlike physical currencies, for which proof of ownership is simple (you keep a dollar in your wallet or your bank), digital currencies can seem a little convoluted. Bitcoin, the most popular digital currency, is tracked by the so-called “blockchain,” which is essentially a ledger that contains all proof of ownership. Transactions are recorded on the blockchain, allowing ownership to be verified by anyone.
The main idea of Bitcoin is decentralization. In his original eight-page paper on this cryptocurrency, Satoshi Nakamoto, the creator of Bitcoin, emphasized the lack of need for “trust” (e.g., trust in a fiat currency or the government controlling it). No government or similar entity has control over Bitcoin. Instead, those who actually own Bitcoin determine its value, through demand.
Studies have shown this to be true as demand, popularity, and sentiment are the main drivers of Bitcoin price. For example, in a recent Journal of Asian Finance, Economics and Business article by Fauzi, Paiman and Othman, show that the price of Bitcoin has been directly correlated to searches for the cryptocurrency in Google and Wikipedia. Speculation on Bitcoin is skyrocketing, leading to violent price action, and thus Bitcoin is one of the most volatile currency investments on the market.
There’s conflicting opinions about whether Bitcoin is actually a currency or an asset. ScienceDirect claims that a currency must meet these criteria:
- Serve as a store of value
- A medium of exchange
- A unit of account
Bitcoin barely meets any of those criteria. The few merchants who do accept Bitcoin, are dwarfed by conventional payment systems. Since it’s founding in 2009, the initial cryptocurrency is still finding it’s place in the financial markets.
Who Invests in Bitcoin?
According to a recent Frontiers in Psychology article, Bitcoin investors tend to differ from traditional retail investors in many ways.
Bitcoin investors are:
- More likely to believe in getting rich quickly
- More susceptible to the fear of missing out
- More attracted to the idea of highly volatile markets
- More likely to be active online (e.g., forums or social media)
In short, Bitcoin tends to attract investors who are comfortable with higher risk investments and whose time horizons tend to be long-term. Some of the price action in Bitcoin can be explained by online and social media trends, as many Bitcoin investors are highly active online.
If you do not fall into these groups, Bitcoin is not necessarily a bad investment vehicle for you. Despite its high volatility, Bitcoin’s rise has been a steady and consistent one, and a diversified portfolio with some Bitcoin holdings would have seen some benefit over time. Uncertain as an asset, Bitcoin still offers some promise, for speculative investors.
Pros and Cons of Investing in Bitcoin
Bitcoin, as an investment, is quite polarizing. On the one hand, you have cryptomanics claiming that Bitcoin will only go up in the long term. On the other hand, you have cryptoskeptics claiming Bitcoin to be a huge Ponzi scheme.
Let’s take a more realistic approach – a balanced approach that weighs the pros and cons – to find out whether Bitcoin is a good investment, for you.
Bitcoin is a finite commodity. Unlike gold, which can be mined, or fiat currency (the dollar), which can be printed, Bitcoin is finite by design. While we are currently undergoing the Bitcoin mining process, eventually the last Bitcoin will be mined and the world will be limited to 21 million Bitcoins (although some posit that the ultimate number of coins will be increased). A limited currency cannot be artificially devalued and thus can store value more safely than an unlimited currency.
Bitcoin could have the potential to replace physical currencies. While this idea is still speculative, the world does seem to be turning toward digital payments. Bitcoin continues to be accepted as payment in more places now than ever.
Bitcoin has first-mover advantages. While only 0.7% of the world’s money is in the form of cryptocurrency, Bitcoin accounts for over half of all cryptocurrency, thereby being the horse leading this race. Bitcoin is thus not only secure (and trusted) but more liquid than other cryptocurrency investment options.
Bitcoin is highly volatile. A look at the chart of Bitcoin prices shows a currency that fluctuates wildly in value, rallying and crashing in short time periods. Anyone who is investing in Bitcoin will see their account value vary greatly over time.
Bitcoin can be manipulated and faces hacking and theft risks. Despite being decentralized, some market actors can (and have) influenced the price of Bitcoin in-line with their agendas. For example, China has declared all Bitcoin transactions illegal, driving down demand for the digital currency and thus reducing the total number of potential investors. The potential for other governments or entities to attack Bitcoin is ever-present.
Bitcoin is not a hedge. Unlike gold, which often acts as a hedge against market downturns, no evidence of hedging properties has been found in Bitcoin. So, if you are holding Bitcoin as part of a market hedge in your portfolio, you could very well see both your market holdings and your Bitcoin holdings fall in sync.
Other risks include cryptocurrencies lack of access to a banking system, with deposit insurance. It’s acceptance is further hindered by the reality that it’s not used to denominate consumer credit or loan contracts.
How to Invest in Bitcoin and Other Cryptocurrency
To directly invest in Bitcoin, you need to set up a digital wallet and connect it to a cryptocurrency broker that allows Bitcoin. But you have other methods, too. Consider these easier ways of investing in Bitcoin including the newly launched Bitcoin ETF:
1. BITO, the Bitcoin ETF
BITO is the first Bitcoin futures ETF (see the FAQ, below). You can indirectly invest in Bitcoin futures by buying shares of BITO through your online broker. This is perhaps the easiest way for retail investors to invest in Bitcoin and comes with only one obvious downside, a 0.95% fund management expense ratio.
A futures contract is a derivative investment. The contract obligates the buyer and seller to transact the asset (bitcoin – BTC) at a predetermined future date and price, regardless of the current market price at the expiration date. Futures contracts are bought and sold for many types of financial assets.
2. Wealthfront Robo-advisor
Wealthfront, a digital money manager offers the opportunity to invest in Grayscale’s cryptocurrency funds as well as over two hundred ETFs. Included in the list of ETFs is BLCN, Siren Nasdaq NexGen Economy ETF, a blockchain-focused fund. Wealthfront investors receive professional digital money management where you can create your own portfolio exclusively or invest in a risk adjusted diversified investment portfolio and add in cryptocurrency and bitcoin funds. Wealthfront manages and rebalances your entire portfolio for a low 0.25% AUM fee. Click below to receive your first $5,000 managed for free.
3. SoFi Crypto
This well-known lending platform also offers cryptocurrency investing. If you don’t want to go through the digital wallet set up, you can buy Bitcoin, Ethereum, Cardano, Dogecoin, Litecoin and roughly 20 more digital coins on the SoFi Invest platform. There’s a 1.25% markup to trade, but you can leave the security to SoFi. In addition to lending and cryptocurrency investing, you can trade stocks and funds or invest in the SoFi robo-advisor.
4. GBTC, the Bitcoin Fund
Grayscale (GBTC) is a fund that trades over the counter. Grayscale pools investors’ funds to buy Bitcoin. The annual fee is 2%, making it more expensive than other options. Founded in 2013, this is the oldest Bitcoin fund. Currently trading on the over-the-counter market, the company has applied with the SEC to create a Bitcoin ETF. You can buy shares of GBTC through any brokerage account, or as mentioned above, through your Wealthfront account.
5. BLCN, the Siren Nasdaq NexGen Economy ETF
This ETF is more focused on blockchain technology than Bitcoin itself and thus offers diversification. The blockchain itself will be of increasing importance in future economic transactions, and BLCN allows investors exposure to the technology itself. The expense ratio is competitive, at 0.68%. This is one of several block-chain ETFs. As previously mentioned, you can also buy BLCN within your Wealthfront account or your SoFi account.
6. BITQ, the Bitwise Crypto Industry Innovators ETF
With an expense ratio of 0.85%, this competitively priced ETF holds around 30 different crypto-related assets, from Coinbase Global to Galaxy Digital. BITQ is an alternative ETF choice for investors interested in the crypto market but who don’t want to invest in cryptocurrency directly. This is a diversified ETF offering broad exposure to the digital currency market. Like BLCN and GBTC, you can buy BITQ in any investment brokerage account.
There’s an ETF that owns Bitcoin futures contracts, BITO. While the Grayscale Bitcoin Trust (GBTC) is a fund that invests in Bitcoin and trades on the over-the-counter OTCQX market. At present, this is the only fund that directly invests in Bitcoin in the US. Although, there is a Canadian Bitcoin ETF. The GBTC fund typically trades at a premium or discount to the underlying value of its assets.
Bitcoin ETFs prevail over direct ownership of Bitcoin in a number of ways and should be the default choice for investors looking for Bitcoin exposure. The approval of Bitcoin ETFs means that investors can now own Bitcoin in their IRAs. It also means that Bitcoin can be bought and sold via your current brokerage account. ETFs simply make investing in Bitcoin and cryptocurrency easier and more versatile than before.
A Bitcoin futures ETF, like BITO, tracks the price of Bitcoin via futures contracts on the currency. Because futures contracts expire, while ETFs do not, the Bitcoin futures contracts are rolled over constantly in the fund. No Bitcoin is actually held in the fund, yet the fund is able to trade in a similar manner to Bitcoin, acting as a surrogate for investors who want to – but cannot (or prefer not to) – directly invest in Bitcoin.
Should I Invest in Bitcoin Funds or Wait?
Whether a retail investor should invest in Bitcoin now is a difficult call. Blockchain innovation and Bitcoin prevalence are moving ahead quickly. Investors who wish to leverage this fact need to cultivate a willingness to learn about the potential of Bitcoin and its surrounding technological advancements before investing. At present, the cryptocurrency market is driven primarily by sentiment, and thus understanding the levels of optimism (and pessimism) surrounding the market is important for timing your entry, lest you buy in right before fear grips the market and drags you underwater. Technical analysis might be useful in predicting price action.
Overall, patience will behoove you more than rushing into the wild Bitcoin market; we advise you take your time in building your thesis on Bitcoin before making an investment decision.
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