How To Invest In Bitcoin

Investing

How To Invest In Bitcoin

Most investors have heard of bitcoin, but very few actually know how to invest in the cryptocurrency. Here we explore some different ways to gain exposure to bitcoin in your investment portfolio.

Published on 13 November 2017

With bitcoin prices going through the roof, the original cryptocurrency is attracting a great deal of interest from all quarters. Investors, hedge funds, financial institutions, and even people who don’t have any investments or savings at all, want to get in on the action – it seems investing in bitcoin is too good an opportunity to pass up.

Consider the fact that when bitcoin was launched, it was practically worthless. Bitcoin’s founder, the mysterious Satoshi Nakamoto who has never actually been identified, reportedly posted in 2009: “It might make sense just to get some in case it catches on.” It took a few years, but it did catch on. Three years ago, bitcoin was trading at US$330. By the beginning of this year, prices had jumped to US$998.

But in 2017, the demand for bitcoin seems to be insatiable. It is very difficult to explain why the price is now US$6,358 (as of 11 November). In fact, there is no way to benchmark bitcoin prices. Stock market data is available for the last 100 years, gold prices for even longer, but there is simply no point of reference for bitcoin prices.

Tidjane Thiam, the chief executive officer of Credit Suisse, says, “From what we can identify, the only reason today to buy or sell bitcoin is to make money, which is the very definition of speculation and the very definition of a bubble.” Jamie Dimon of JPMorgan has called bitcoin a “fraud” and has predicted it will “blow up.” Meanwhile, investor interest and prices continue to rise.

Coinbase, a popular platform for buying and selling bitcoin, has over 11 million accounts. Japan’s Financial Services Agency has officially recognised 11 cryptocurrency exchanges. In April this year, the country enacted a law that defines bitcoin to be legal tender.

So you may be wondering: how do I actually invest in bitcoin? Here we take a look at several ways in which you can add the digital currency to your investment portfolio.

Mining your own bitcoin

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It is possible to “mine” your own bitcoin. Every ten minutes, bitcoin mining computers that are on the internet present a new mathematical puzzle. Miners on the network have an opportunity to solve this puzzle. The first one who gets the answer right gets 25 bitcoins as a reward. The process is highly complicated and can involve using thousands of computers and vast amounts of electricity.

Obviously, the mining process is a specialised task that can only be undertaken by those who have the expertise and the resources.

Bitcoin exchanges

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For all practical purposes, the best way to purchase bitcoin is from an exchange. There are dozens available. You will first need to create a wallet to hold your bitcoin. If you decide to use Coinbase, all that you have to do to create your account is to enter your name and email address and a password. After signing up, you will be asked to verify your account by using a link that will be sent to your phone.

Link your PayPal account or your bank account and you are ready to make your first purchase. Once your account is activated, there are a few precautions that you must take:

  • It is a good idea to maintain separate wallets for different purposes. For example, you may want to keep one wallet for spending from and another for saving bitcoin. You can have as many wallets or bitcoin addresses as you like.
  • Remember that your bitcoin can be stolen if someone gets access to your “private key.” This is a secret number that is stored in your wallet, which allows you to spend the bitcoin that you own. Keep your private key confidential.
  • Consider getting a hardware wallet. These devices are very secure and will help to protect you from online thieves. Get one with a screen so that you can see your wallet details.

What if you don’t want to create a bitcoin wallet or transact on a bitcoin exchange? You can consider purchasing securities that are linked to bitcoin.

ETFs, ETNs, and mutual funds

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The Bitcoin Investment Trust, a type of exchange-traded fund (ETF), promoted by Grayscale Investments, a firm specialising in digital currency investments, allows investors to gain exposure to bitcoin without the related hassles. You don’t need to open an account at a bitcoin exchange or deal with the issues of storing your bitcoin safely.

Bitcoin Investment Trust shares track bitcoin prices. The trust owns a little over 170,000 bitcoins. Each share in the trust represents 0.09211978 bitcoin. Based on this ratio, a share in the trust should have been valued at US$596 on 31 October 2017 as the price of bitcoin on that date was US$6468.

But on 31 October, one share in the Bitcoin Investment Trust was trading at US$828. That’s almost a 40% premium on its intrinsic value. Why should you have to pay this premium?

It seems that the demand for financial products that provide the opportunity to benefit from a rise in the price of bitcoin is very high. For those who don’t want to buy bitcoin directly, there are few options available. This has pushed prices up. Additionally, shareholders are also entitled to a certain amount of Bitcoin Cash, a new currency that all bitcoin owners received.

There are other drawbacks too. At 2%, the trust’s annual fee is high. However, the returns that it has provided have been spectacular. In the beginning of January this year, a share in Bitcoin Investment Trust was worth US$136. Ten months later, it trades at US$950.

You can also take an exposure to bitcoin by investing in a mutual fund that holds shares in the Bitcoin Investment Trust. The Kinetics Internet Fund – which had 12.1% of its total investments in the Bitcoin Investment Trust on 30 September 2017 – has provided a return of 23.6% so far this year.

There are several other funds that have bought shares in Bitcoin Investment Trust. The list of these funds includes Ark Innovation ETF, which had invested 5.1% of its total assets in it, and Ark Web x.o ETF with 6% of its holdings in the Bitcoin Investment Trust.

Some other funds with an exposure to bitcoin include the Kinetics Paradigm Fund, the Kinetics Market Opportunities Fund, the Horizon Strategic Value Investment Fund, and the Kinetics Small Cap Opportunities Fund.

Another option is to invest in an exchange-traded note (ETN) that allows you to gain exposure to the cryptocurrency. Saxo Bank has recently introduced two new bitcoin ETNs.

The bottom line

Despite the rising chorus of voices that say that it is only a matter of time before bitcoin crashes, the demand for the cryptocurrency continues to rise. Recently, the Chicago Mercantile Exchange (CME) announced plans to launch bitcoin futures by the end of the year – subject to receiving regulatory approvals. When this happens, it will give institutional investors the opportunity to invest in bitcoin. This could help the cryptocurrency gain greater legitimacy and could lead to a further rise in prices.

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