How To Invest In Bitcoin
Bitcoin is a digital asset, the first of its kind. As such it is scarce and exists as a digital bearer instrument. This means that bitcoin the asset can be held independently of any third party. All you need is a digital wallet to store your bitcoin on. Since bitcoin is divisible into 100,000,000 Satoshis, you can either hold one bitcoin or a fraction thereof, more commonly known as Sats.
Read the Guide: What the F&ck is Bitcoin?
Read the guide: How to Buy Bitcoin
While buying & holding bitcoin is one option available to us all and one we should consider seriously. There are other options available to the market, from generating passive income from our existing stack to investing in companies how hold Bitcoin on their balance sheet. In this guide, we endevour to take you through a few of these options.
Lending out your coins
While the Bitcoin network is secured by proof of work (PoW) mining, many newer cryptocurrencies use an alternative consensus mechanism known as proof of stake (PoS). Proof of stake is the mechanism which enables staking. With PoW it’s not possible, but there are ways.
If you hold bitcoin yourself, you can either store it safely away in a hard wallet, or you can take your stack and have it work for you. There are various crypto lending companies that let you lend out your coins for interest. Some of the most reputable are BlockFi, Celsius, Labs, Nexo, or IconFi. Most of these services can be accessed using a smartphone app. Because demand is high and overall crypto markets are hot, yields offered by these crypto lenders are substantially higher compared to what you get on your traditional bank account.
Bear in mind though: Once you are using one of these crypto lending services, you are giving up on owning your own coins because you are no longer in control over the private keys to bitcoin at hand. ‘Not your keys, not your bitcoin’ is just as relevant here as it is with exchanges on which you leave your coins when trading. Before using any of these services, you should do your own, proper due diligence to see if you are comfortable taking the accompanying third-party risk.
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The dominance of Grayscale
While holding your bitcoin (and potentially lending them out) is one way to gain exposure to bitcoin, there are also various options to allow you to invest in bitcoin via traditional investment vehicles. At the moment, many people are asking the same question: how to invest in bitcoin without having to leave the safety and comfort of the familiar old-world financial system? For one, there are various structured products on Bitcoin and other cryptos like tracker certificates, mini futures, or reversible convertibles. At the same time, the market is offering more and more crypto funds, be they actively or passively managed.
The most famous traditional products on the market are bitcoin and ether futures that are traded on renowned trading venues like CME. While they are cash-settled in USD, they are still considered to be a prominent and easy way to get bitcoin exposure by traditional investors.
Arguably the most popular crypto fund provider to date is Grayscale. With currently USD 45 billion assets under management, they are the crypto world’s largest asset manager. While they offer a variety of funds covering different crypto assets, bitcoin and ether make up over 95 percent of their assets. The management fees with these two biggest trusts are 2 percent.
Demand for Grayscale’s product is quite remarkable. This is also shown by the huge premiums their trusts usually trade at. While the premium on the Bitcoin fund has been around 37 percent on average for the past five years, premiums for other funds giving exposure to different crypto assets have been way higher. In the case of ether, the premium’s average lies at around 579 percent.
Watch the video: An Investor’s Perspective On Grayscale
Bitcoin ETF on the horizon
In the industry, Grayscale’s trusts are labeled “quasi-ETFs” as their shares are traded publicly but as closed-end funds. As has been stated in this article, the company is currently hiring a team that focuses on exchange-traded products, although Grayscale does not have any ETFs at the moment. This might be about to change.
After all, a US ETF on Bitcoin has still not found SEC’s approval. While many different investment firms have already applied to launch a Bitcoin ETF, so far nobody has been successful. Rumor has it though, that a US Bitcoin ETF is ever more likely to be approved since the market around it has grown up and come a long way. This is also shown by the fact that the United States’ neighbor Canada has already launched two Bitcoin ETFs with a third one in the pipeline.
In the place of ETFs similar investment products like exchange-traded products (ETPs) have been running for quite a while already. The most prominent companies behind them are 21Shares, a crypto native company from Switzerland that has collected one billion assets in just two years as well as WisdomTree, a traditional ETF provider.
Remember: With every traditional investment vehicle you use to invest in bitcoin, your investment is exposed to counterparty risk. Although these companies are audited and regulated, there is no guarantee that things can’t go south. So, also for these investments, personal due diligence is of high importance.
Holding shares of crypto companies
Holding on to public companies that are dealing with crypto is an option some investors do consider. The most peculiar one is certainly MicroStrategy. This is a US software company that already owns 109,000 bitcoin currently worth more than five billion dollars. Because of their significant exposure, some observers have called their public stock a Bitcoin ETF in disguise, since if you hold Microstrategy’s shares, you are effectively participating in Bitcoin’s price movement.
The crypto exchange Coinbase is one of the industry’s darlings & publicly listed since April 14th 2021 are expected by many investors to be a good investment alternative to gain indirect exposure to bitcoin. As Raoul speculated on Twitter, Coinbase’s IPO could even have a short-term price impact on bitcoin.
What investing strategy to choose?
When investing in bitcoin, the most popular investment strategies boil down to some kind of dollar-cost averaging (DCA). You define an amount, a timeframe, and certain days on which you invest your money into bitcoin – and then you stick to it no matter what. This way you will smoothen out your average cost, buying when bitcoin has risen but also buying when bitcoin has dropped.
Choosing this rule-based strategy gives a person peace of mind. And the numbers also speak for themselves: If one had invested USD 100 a month over the last three years (starting the 20th of January 2018), one would have turned a total investment of USD $3,700 into exactly USD $16,710. If one had started five years ago, the total amount of USD $6,100 invested would currently be worth USD $115,017. As the saying has it: For many Bitcoiners, time in the market is better than timing the market. After all, dollar-cost averaging is perfectly in line with one of Bitcoin’s core philosophies: hodling. This simply means that a bitcoin investor holds on to his bitcoin no matter what the circumstances are.
Mind the hype cycle
Whoever masters the hodl philosophy is perfectly suited for the bitcoin market. Because of the volatility, this market is no easy pill to swallow. But bitcoin’s volatility is inherent to its design: Bitcoin has a built-in hype cycle. Because supply cuts occur every four years, a new bubble can build once prices start rising because demand is chasing fewer supply.
For the past three halvings, this has been the case. Following the halvings, Bitcoin’s price surged to new all-time highs, recently observable after the halving in 2020. It normally takes some time for the markets to adjust to the scarcer demand, meaning prices only start increasing several weeks or months after the halving. Once the unfolding bubble hits a new peak, the price crashes to a new higher low.
Because of this hype cycle, investors should be aware of where in the cycle we are. This can give indications, whether it is a good time to invest a larger sum of money. For investors that have decided to do dollar-cost averaging for a few years into the future, short-term market movements are of no particular relevance.
As always, people want to get detailed answers to questions like “should I invest in bitcoin” or “how much to invest”. But there are no responses to such questions. If one sees any merit in a scarce digital bearer instrument, it might well be worth it to invest some money. If one is ready to invest but does not want to deal with coins themselves, traditional products like the ones mentioned above might do it. Concerning the amount, there is really only one piece of advice: Never invest more than you are comfortable losing.
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