The economy has had a bad year. The value of Bitcoins and other cryptocurrencies has exploded despite the recession.
Bitcoin has risen by almost 800% since its April 2020 low!
How can you benefit from the rise of Bitcoin in the global economy? What’s the easiest and best way to include cryptocurrency in your investment portfolio? There is a Bitcoin ETF.
Answers to these questions and many more are available here.
Table of Contents
Bitcoin Basics
Bitcoin: Is it a good investment?
How to Invest In Bitcoin – Does There Exist a Bitcoin ETF
Bitcoin ETF: Benefits
The risks of an ETF for Bitcoin
Bitcoin ETF Alternatives
Bitcoin ETF: Final Word
Bitcoin Basics
In 2008, someone or several people using the pseudonym Satoshi released a paper entitled “Bitcoin – A Peer to Peer Electronic Cash System”, which described Bitcoin’s operation. Nakamoto mined his first Bitcoin on 3 January 2009.
Bitcoin was a new concept because it was an entirely peer-to-peer digital currency. It could be used to facilitate instantaneous payments between two individuals without the need for a third-party (such as a financial institution) to get involved.
Bitcoin relies on decentralized nodes to record all transactions in a blockchain.
A blockchain is an electronic ledger that records every Bitcoin transaction. Anyone can see and access the transactions because each node has a copy. The blockchain is duplicated many times and this prevents anyone from cheating because every node has the same information.
Bitcoin was originally designed to remove power from governments and banks to artificially increase and decrease the money supply and to eliminate the need for a financial institution to get involved in individual transactions.
According to its design, a maximum of 21,000,000 bitcoins can be mined. Then, there will be no more. This means that the supply is known and therefore demand will determine whether or not it goes up.
Bitcoin: Is it a good investment?
Imagine that you had invested $1,000 in Bitcoins at the start of 2012. What would it be worth today if you invested $1,000 in Bitcoin? $10,000? $100,000?Try $8 MILLION.
Comparatively, $1,000 would be worth up to $2,500 in the Dow Jones Industrial Average; it is around $3,000 in the S&P 500.
The cryptocurrency market is a great place to invest.
Bitcoins were trading for $5 each at the start of 2012. Bitcoin has risen to $40,000 as of this writing – an 8000x increase from its value nine years ago. If you invested $10,000 in the beginning of 2020 you would have made an average of $200 per day.
What was the cause of this huge increase? Supply and demand, in a nutshell. Bitcoin is an innovative, unique product that has never been seen before. Bitcoin is a new way to send money around the world with no costs and no intermediaries.
The Bull Case
Bitcoin Bulls (those who support Bitcoin) consider it to be the gold of the modern age. Gold itself has no intrinsic value. It is only used for industrial purposes. However, the supply of gold is limited. Gold is a great hedge against inflation, especially since most countries now use fiat currencies (not gold or silver).
Bitcoin’s value is also derived from its scarcity, and that it will continue to hold value as world currencies devalue due to inflation and money printing. Even Wall Street banks and hedge funds have begun to recognize the potential.
Ray Dalio is one of the greatest hedge fund managers and sees Bitcoin as an asset that can be compared to gold. While the future of Bitcoin remains uncertain, Mr. Dalio admits that Bitcoin has crossed the line between being a highly speculation idea and something that may have value in future.
The Bear Case
Bitcoin, on the flip side (pun intended), is still a relatively new technology. Many people find it hard to believe that an asset which is invisible can be worth anything.
Regulators and governments are also starting to scrutinize it, as they see it as a threat to their own currencies. It is possible that Bitcoin could be outlawed or modified to the point that it no longer resembles the Bitcoin we know today.
How to Invest In Bitcoin – Does There Exist a Bitcoin ETF
This all leads to a big question: How can you invest in Bitcoins?
Up until recently, the only option to purchase Bitcoin was via specialized exchanges like Coinbase or Gemini. Then, you could either store it on the exchange’s account (which carries a risk of being hacked and losing your Bitcoin) or move it to “cold storage”, which is a Bitcoin wallet. This wallet requires a special encryption key in order to access the 64-character long password.
It is a fairly clumsy procedure with the risk of losing your password or being hacked and unable to access Bitcoin for ever.
In the world of traditional stocks and bonds it is easy to invest in an asset or a company, such as gold or silver. There is an ETF or a mutual fund for just about anything these days. You want to add some gold to your investment portfolio. Purchase a Gold ETF such as GLD.
Unfortunately, Bitcoin has yet to be accepted by Wall Street or its regulators. There is currently no Bitcoin ETF in the U.S. because it’s not legal.
Many experts believe that it is not a matter of if but rather when, with its increasing popularity, regulators will work out all the kinks and offer a fully-fledged Bitcoin ETF.
The Bitcoin ETF will make it easier for investors to adopt cryptocurrency.
Bitcoin ETF: Benefits
If you are interested in investing in Bitcoin ETFs and cryptocurrencies, you should be aware of both the advantages and risks associated with this new asset class.
Bitcoin is a relatively new investment option. If you are able to withstand its volatility, it could be a great way to add to your portfolio. These are a few of the benefits that a Bitcoin ETF can provide.
- Increased Investor Adoption
Investing in Bitcoins is not an easy process. Many investors are interested in adding Bitcoin to their portfolio, but they do not want to open another account or learn the details of how Bitcoin is stored on a hard drive.
A Bitcoin ETF allows anyone with a brokerage to invest in Bitcoin. This opens up the market to a wider audience.
- Reduce Compliance Risk
Bitcoin is in its infancy and is at risk of being outlawed or regulated by the government.
The introduction of an ETF for Bitcoin would do a lot to legitimize it as a currency and force regulators into removing some of the obstacles to its mainstream adoption.
- Better Storage Solutions
Investors do not want to deal with cold storage wallets and other complications to hold Bitcoins in their portfolio.
A Bitcoin ETF managed by an institutional investor would relieve the investor of all this burden, and also provide peace of mind and security.
Reduced Transaction and Holding Charges
Bitcoin is currently a fragmented market, with many new exchanges appearing to compete with the existing ones. Fees can be high because they operate outside of Wall Street’s efficiency.
On one of the largest exchanges, Coinbase for example, fees to buy or sell Bitcoin can range anywhere from 0.5%-1.5%. Even though that may not sound like much, considering the current value of Bitcoin at $40,000, just paying fees for one Bitcoin can cost up to $600.
You would not have to pay any fees for buying or selling Bitcoins with an ETF. Most ETFs have a low annual management fee (0.1-0.25%), which is a cost saving for investors.
The risks of an ETF for Bitcoin
The risks of investing in Bitcoin are also significant, whether you choose to invest through a Bitcoin ETF, or buy the asset outright. To determine if Bitcoin is a good fit for your portfolio, you need to know your level of risk tolerance. It is wise to keep your Bitcoin allocation at a small portion of your liquid networth.
Bitcoin and other cryptocurrencies are extremely volatile due to the many unknowns. They can rise or fall in value by thousands in a day.
- Risks Regulatory
Bitcoin is a rival to fiat currencies like the dollar and euro. It is possible that governments will want to regulate Bitcoin’s use, which could affect its value and make it illegal to possess.
The “seedy” underbelly of cryptocurrency could also lead to more regulation.
Bitcoin’s early days saw it being used to facilitate transactions on the black market. Silk Road, a dark-web marketplace that was known for illegal drug trafficking, was shut down only recently.
Bitcoin transactions, which are anonymous and untraceable, have been used (and continue to be) in the illegal trade of anything from drugs to guns.
- Security Risk
Although Bitcoin has been able to withstand the test of the time so far without major security or hacking incidents, the future performance of the blockchain is still uncertain.
Bitcoin, unlike gold, is a collection of zeros and ones on the Internet. It is therefore more difficult to trace stolen Bitcoin if anything were to happen.
- Perceived value risk
Many people are still skeptical about an entirely digital, intangible money that they can’t feel or touch. Bitcoin is valuable because people think it is and there’s a demand for the currency.
The price of an asset could fall rapidly if something happened that changed the demand for it, or if people stopped believing it to be a good store of value.
Bitcoin ETF Alternatives
There is currently no Bitcoin ETF but there are many new ways to invest and trade in Bitcoins and other cryptocurrencies.
These are the top Bitcoin ETF alternatives currently available.
- Grayscale Bitcoin Trust (GBTC)
Grayscale Bitcoin Trust comes the closest to an ETF for Bitcoin. It is traded on the stock market under the ticker GBTC, and can be purchased and sold just like an ETF.
The only difference between GBTC (closed-end fund) and an ETF is the fact that it’s closed-end. It can be traded at a discount or premium to its NAV (net assets value).
Historically, GBTC traded at a premium of 20-30% to NAV. You could pay $1.20 to $1.30 per $1.00 of Bitcoin, plus the 2% fee.
- BlockFi
BlockFi calls itself the “future in finance”. It is not a traditional bank but it has many of the same functions. You can purchase and sell cryptocurrency, earn interest by holding cryptocurrency on their platform, or even borrow against the value your Bitcoin.
You can earn 6% interest for Bitcoin and 8.6% for “stablecoins” such as USDC. These high interest rates are possible because they charge such high rates when they lend money based on the value their deposits.
This sounds like an excellent deal in a world where “high yield” accounts offer interest rates as low as 1%. Since BlockFi isn’t a bank its deposits aren’t FDIC-insured. You could lose your money if the company’s value or its performance were to drastically change.
- Coinbase
Coinbase is a popular exchange for buying and selling Bitcoins and other cryptocurrencies.
Coinbase offers a convenient and user-friendly way to purchase and hold Bitcoin, without having to deal with encryption keys or cold storage wallets. The site also offers a wide range of altcoins, which are non-Bitcoin currencies that can be hard to locate.
- Bitcoin ETF
A blockchain-based crypto ETF can be an alternative to investing in a crypto ETF.
Blockchain is being used by many companies for various purposes, ranging from public records to banking.
You can invest in the future of blockchain technology by investing in an ETF like BLOK.
Bitcoin ETF: Final Word
Exists a Bitcoin ETF? This is one of most searched terms in the Bitcoin world. The answer is “no” at the moment, but there are signs that this may change soon.
Many innovations make it easier to purchase, sell and hold Bitcoins and other cryptocurrencies.
Even before the Bitcoin ETF was introduced, you can invest in Bitcoin.
This article was originally published on Wealth of Geeks. It has been republished by permission.
