Strategic Bitcoin Splitting: A Guide To Smart Crypto Investing

Bitcoin is a cryptocurrency that relies on a network of computers linked over the internet to process and record transactions in a digital ledger called the blockchain. Bitcoin's blockchain is maintained by miners, who are incentivized with new bitcoins for their work. One of the fundamental pillars that Bitcoin is founded on is the principle of absolute scarcity, with a fixed supply of 21 million. In 2017, a new currency called Bitcoin Cash was created from a hard fork of Bitcoin, which increased the blockchain's capacity and allowed for more transactions in a given time.

This paragraph introduces the topic of investing in Bitcoin and its hard fork, Bitcoin Cash. It provides an overview of Bitcoin's key features, the reasons for the fork, and sets the context for further discussion on the investment potential of these cryptocurrencies.

Bitcoin Investment Characteristics

Bitcoin Investment Trust's stock split

Bitcoin Investment Trusts Stock Split

The Bitcoin Investment Trust (GBTC) is a cryptocurrency trust that trades like stocks. It was designed by Grayscale Investments to allow investors to get exposure to cryptocurrencies without the hassles of holding the digital coins themselves. The trust works like an exchange-traded fund (ETF) and enables investors to bet on the price of bitcoin.

In January 2018, the Bitcoin Investment Trust announced a 91-for-1 stock split. This meant that shareholders would receive 90 additional shares for every share they owned. The stock split took effect on January 26, 2018, and reduced the price of each share from nearly $2,000 to around $21. The main purpose of the stock split was to make the shares more accessible to smaller investors.

The stock split was generally seen as a positive move by the market. Stock splits are often done to make shares more affordable to retail investors after a period of strong returns. They are also seen as a sign that management believes the stock's value is not overinflated. Additionally, the lower price after a stock split can make the shares more attractive to investors.

It is important to note that while the stock split reduced the price of each share, it did not directly affect the overall intrinsic value of the business. The amount of bitcoin represented by each share of the fund also decreased by the same factor.

Bitcoin Cash

The technical difference between Bitcoin Cash and Bitcoin is that Bitcoin Cash allows larger blocks in its blockchain than Bitcoin, which, in theory, allows it to process more transactions per second. At the time of the split, the Bitcoin Cash block size was increased from 1MB to 8MB. As of 2023, Bitcoin Cash has a block size of 32MB, compared to Bitcoin’s block size of 1MB.

Like Bitcoin, Bitcoin Cash has a limited total supply of 21 million coins. It is secured by a Proof-of-Work (PoW) consensus mechanism, where miners solve complex puzzles to validate transactions and create new blocks.

Stock splitting

Stock splits occur primarily to increase the liquidity of the stocks and make them more affordable without losing value. They typically signal that a company is healthy, as its valuation is usually high before the split. Introducing a stock split also makes a company's stock more palatable for investors. Investors are generally more willing to invest in a higher number of stocks with a lower value per stock than a smaller number of more expensive stocks.

In the case of Bitcoin, there are two scenarios to explore. The first is if bitcoin were to change its total number of coins. However, this is unlikely as one of the fundamental pillars that Bitcoin is founded on is the principle of absolute scarcity. If the number of bitcoin in existence were to ever change, it would be devastating to the BTC’s valuation proposition – that its supply reliably never changes. The belief in Bitcoin’s value arises from the fact that it has a fixed supply of 21 million. This is encoded in every miner and node that runs the bitcoin blockchain. Therefore, the concept of stock splitting would undermine the very thing that gives Bitcoin its value.

The second scenario, which seems more plausible, is to have more units in a bitcoin. A case can be made to divide one bitcoin into more than 100 million units. In this case, instead of 100 million units, each bitcoin could be divided into a billion units (10x increase), or a trillion units (a 10,000x increase in units). Nothing changes about the price of 1 BTC, but there is a perceptual difference in how many units someone owns.

Bitcoin ETFs

In January 2024, the U.S. Securities and Exchange Commission (SEC) approved the first 11 spot Bitcoin ETFs, marking a significant milestone for the cryptocurrency industry. These ETFs began trading on January 11, 2024, and include well-known names such as Fidelity, BlackRock, and Invesco.

Spot Bitcoin ETFs work by holding Bitcoins in secure digital vaults managed by registered custodians. The ETFs buy Bitcoins from other holders or authorized exchanges and then store them in digital wallets, often using multiple security layers, including cold or offline storage to reduce the risk of hacking. The ETFs then issue shares corresponding to the number of Bitcoins they hold, and these shares are traded on traditional stock exchanges.

One of the key advantages of spot Bitcoin ETFs is their convenience. They lower the barriers to entry into the crypto market by eliminating the need for investors to manage wallets, navigate crypto exchanges, or deal with private and public keys. Spot Bitcoin ETFs also offer increased liquidity, making it easier to buy and sell Bitcoins through familiar brokerage accounts. Additionally, they provide regulatory oversight and standardized regulations, protecting investors and ensuring transparency.

However, it is important to consider the risks associated with spot Bitcoin ETFs. The volatility of Bitcoin prices can lead to significant financial losses. While spot Bitcoin ETFs simplify asset management, they do not insulate investors from the inherent risks of the cryptocurrency market. Regulatory uncertainty and the lack of comprehensive oversight also pose challenges, as future regulations could impact the performance of Bitcoin ETFs. Security risks are another concern, as spot Bitcoin ETFs, holding a large number of coins, could be attractive targets for cybercriminals.

Overall, spot Bitcoin ETFs offer a regulated and simplified way to gain exposure to Bitcoin's price movements. They have the potential to enhance market liquidity, improve price discovery, and attract more institutional participation, contributing to the stabilization and broader adoption of Bitcoin.

Bitcoin as a favourite investment choice

Bitcoin has become a popular investment choice for many. Here are some reasons why:

Continuous Growth

Bitcoin's user base has been growing steadily since its inception. According to data, the number of Bitcoin users grew from 45 million in January 2020 to 65 million in January 2021, a 44% increase in just one year. Currently, there are approximately 100 million Bitcoin wallets with value, and 1 million users transact with Bitcoin daily. This continuous growth makes Bitcoin an attractive investment option for those looking to diversify their portfolios.

Track Record

Bitcoin has consistently surpassed its all-time highs, demonstrating resilience and recovery capability. It has a strong track record of achieving full recovery after a price crash or other setbacks. For example, in 2017, Bitcoin's price raced toward $20,000, and buyers had to wait until December 2020 to recover their losses. This resilience and ability to bounce back make Bitcoin a favourable investment choice.

Liquidity

Bitcoin has high liquidity and can be easily converted into cash or other assets like gold, often instantly and with low transaction fees. This makes it a great investment option for both short-term traders looking for quick profits and long-term investors seeking market demand and stability. The high liquidity of Bitcoin provides flexibility and ease of trading, making it a convenient choice for investors.

Lower Inflation Risk

Unlike traditional currencies regulated by governments, Bitcoin is not susceptible to inflation. Its supply is limited to 21 million coins, and it is not influenced by price fluctuations. This limited supply makes Bitcoin an effective hedge against inflation, as it is not subject to the same inflationary pressures as government-regulated currencies, where supply can be increased. This feature adds to the appeal of Bitcoin as an investment option.

Simplified Trading

Trading Bitcoin is simpler than stock trading as it does not require a certificate, license, or broker. Investors can simply buy or sell Bitcoin on exchange platforms and store their coins in digital wallets, making the process more straightforward and accessible. This simplicity attracts a diverse range of investors, from beginners to experienced traders, as it lowers the barrier to entry and simplifies portfolio management.

While Bitcoin has its advantages, it is essential to remember that it is still a risky and volatile investment. Investors should carefully consider their risk tolerance, conduct thorough research, and only invest what they can afford to lose.

Frequently asked questions