Bitcoin Investment Strategies: Choosing The Right Bitcoin Type

Bitcoin is a cryptocurrency, a virtual currency that uses peer-to-peer technology to facilitate instant financial transactions and removes the need for third-party involvement. It was introduced to the public in 2009 and has since become the most well-known and largest cryptocurrency globally. Its popularity has inspired the development of many other cryptocurrencies, and it continues to lead the pack in terms of market capitalization, user base, and popularity.

Investing in Bitcoin can be done in several ways, including buying it directly from a cryptocurrency exchange, investing in Bitcoin-related stocks, or using investment vehicles such as exchange-traded funds (ETFs) or mutual funds. When investing in Bitcoin, it is important to understand the risks involved, including regulatory, security, insurance, fraud, and market risks.

This paragraph provides an introduction to the topic of investing in Bitcoin, including its definition, history, and some of the ways individuals can invest in it. It also highlights some of the risks associated with investing in this volatile asset class.

Investing in Bitcoin through ETFs

Bitcoin Exchange-Traded Funds (ETFs) are investment funds that hold Bitcoin-related assets and issue securities as shares of the fund, which trade on an exchange. Bitcoin ETFs are traded on stock exchanges, providing investors with diversified exposure to the asset class and the flexibility to buy or sell shares throughout the trading day at market prices.

History of Bitcoin ETFs

The first concept for a Bitcoin ETF emerged when investors noticed that Bitcoin prices were trending upwards and gaining popularity. As Bitcoin's price rose, retail and average investors lost the opportunity to invest directly in Bitcoin, prompting brokerages to design Bitcoin ETFs. Applications to the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers.

The first official Bitcoin-linked ETF was the ProShares Bitcoin Strategy ETF (BITO), approved by the SEC in October 2021 and listed on the New York Stock Exchange. This ETF mainly uses futures contracts.

In January 2024, the SEC approved 11 Bitcoin spot ETFs, marking the first time that ETFs could directly hold Bitcoin. These spot ETFs began trading in January 2024.

Benefits of Bitcoin ETFs

Bitcoin ETFs are designed to allow more people to invest in Bitcoin without the necessary expenses and hassles of buying the cryptocurrency directly. They eliminate the need for security procedures and large amounts of capital while providing a familiar investment vehicle.

Additionally, Bitcoin ETFs can be traded on traditional exchanges, removing the risks associated with cryptocurrency exchanges, such as hacking and fraud.

Limitations of Bitcoin ETFs

There are also some downsides and limitations to investing in Bitcoin ETFs. One key consideration is the tracking error, which refers to the discrepancy between the performance of the ETF and the actual price movement of the underlying Bitcoin futures. This can be due to management fees, transaction costs, or logistical issues.

Another factor to consider is the regulatory uncertainty surrounding cryptocurrencies. Changes in regulations can impact the legality, trading, and valuation of Bitcoin futures, introducing uncertainty for investors.

Examples of Bitcoin ETFs

• IShares Bitcoin Trust ETF (IBIT)
• Fidelity Wise Origin Bitcoin Fund (FBTC)
• ARK 21Shares Bitcoin ETF (ARKB)
• Bitwise Bitcoin ETF Trust (BITB)
• VanEck Bitcoin Trust (HODL)
• Valkyrie Bitcoin Fund (BRRR)
• Grayscale Bitcoin Trust (GBTC)
• ProShares Bitcoin Strategy ETF (BITO)
• Volatility Shares 2x Bitcoin ETF (BITX)
• ProShares Short Bitcoin ETF (BITI)

Choosing a Bitcoin ETF

When choosing a Bitcoin ETF, investors should consider their personal financial goals, investment timeline, and risk tolerance. It is essential to research the investment strategy and holdings of the ETF, as well as metrics such as expense ratios, total assets under management, and past performance.

Where to Buy Bitcoin ETFs

Bitcoin ETFs are generally available through any broker that allows customers to purchase stocks on major U.S. exchanges. The best brokers for stock trading offer commission-free purchases of ETFs, allowing investors to buy and sell positions at a low cost.

Bitcoin ETFs provide a cheaper and easier way to gain exposure to Bitcoin without the risks associated with cryptocurrency exchanges. However, it is important to remember that investing in Bitcoin, whether directly or through ETFs, carries significant risks due to the volatile nature of the cryptocurrency market. Investors should carefully consider their financial situation and risk tolerance before making any investment decisions.

Buying Bitcoin directly

Investing in Bitcoin directly is an increasingly popular option. As of December 8, 2023, one Bitcoin is worth almost $66,000 AUD. However, you don't need to buy a whole Bitcoin; you can purchase a fraction, making it a flexible option for both small and large investors.

When you buy Bitcoin directly, you gain full ownership of your investment. This direct approach provides complete control over your digital assets. Bitcoin, as one of the most liquid digital assets, offers the advantage of ease in buying and selling, facilitating quick portfolio adjustments in response to market movements.

The process of buying Bitcoin is relatively straightforward. First, choose a reputable exchange that adheres to local regulations and security standards. After creating and verifying an account, you can deposit funds, typically through bank transfer or credit card, and then proceed to buy Bitcoin.

However, investing in Bitcoin directly also has its challenges. The most notable is storing it. Owning cryptocurrency requires meticulous management of your digital wallet, which poses security risks. The cryptocurrency space is prone to hacking and theft, and safeguarding your investment demands diligence.

You can opt for a third-party wallet, which a crypto exchange or other crypto provider generally manages. While convenient for quick transactions, third-party wallets require trusting a third party with your money and are not generally considered the best option.

Cold wallets, such as hardware wallets, offer offline storage, significantly enhancing security. Implementing robust security measures like strong passwords and two-factor authentication is essential, regardless of the storage method chosen.

Additionally, maintaining a backup of your wallet details in a secure location is crucial for asset recovery in case of device failure or loss.

Investing in crypto-related stocks

• Coinbase Global Inc. (COIN): Coinbase is a leading cryptocurrency exchange that allows users to buy, sell, and trade various cryptocurrencies. It has been a popular platform for purchasing major cryptocurrencies and currently offers trading for more than 250 altcoins. Coinbase earns revenue through transaction fees and has also expanded its services to include a debit card and a cloud platform for companies using digital currencies.
• Block Inc. (SQ): Formerly known as Square, Block is a digital payment platform and the parent company of Cash App. The company has invested heavily in blockchain technology and digital assets, including Bitcoin. Cash App users can buy, sell, send, and receive Bitcoin, and Block holds a significant amount of Bitcoin on its balance sheet.
• Marathon Digital Holdings Inc. (MARA): Marathon is one of the largest Bitcoin mining companies in the US. It provides various services to the crypto industry, including transaction and custody verification, as well as blockchain security. The company operates a large number of miners across different locations and is also known for its focus on sustainable energy sources.
• Riot Platforms Inc. (RIOT): Riot Platforms is a cryptocurrency mining company based in Colorado. It independently mines Bitcoin and provides critical infrastructure for other Bitcoin mining operations. The company has a market value of over $3 billion and is one of the leading publicly traded mining companies.
• PayPal Holdings, Inc. (PYPL): PayPal is a well-known digital payment platform that facilitates transactions for consumers and merchants. It allows users to buy, sell, and transfer cryptocurrencies, including Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. PayPal's mobile wallet, Venmo, also offers crypto trading features.
• Meta Platforms (META): Meta Platforms, the company behind Facebook, has shown interest in the cryptocurrency space. While its initial attempt to develop its own cryptocurrency, Diem (formerly Libra), faced setbacks, the company is reportedly exploring other options to enter the market. Meta's focus on the Metaverse and its collaboration with Shopify to accept cryptocurrencies as payment further highlight its involvement in the space.

It is important to note that investing in crypto-related stocks comes with its own set of risks and considerations. The performance of these stocks is influenced not only by the price movements of cryptocurrencies but also by company-specific factors and broader market conditions. Therefore, investors should carefully research and understand the prospects of both the cryptocurrency market and the individual companies they are considering investing in.

Using a cryptocurrency exchange

To use an exchange, you'll first need to choose one that operates in your jurisdiction and offers the crypto you want to trade. You'll then need to create an account and verify your identity. Once your account is set up, you can deposit funds, typically via bank transfer, wire, or credit/debit card, and then use those funds to purchase Bitcoin or other cryptocurrencies.

There are three main types of crypto exchanges: centralized, decentralized, and hybrid. Centralized exchanges are held by a single entity and often provide an easier user experience, but they are more vulnerable to attacks. Decentralized exchanges are open-source and depend on users to trade peer-to-peer, which can make them more secure and less prone to hacking. Hybrid exchanges aim to blend the benefits of centralized and decentralized exchanges.

It's important to note that crypto exchanges are vulnerable to hacking, fraud, or theft, and if an exchange goes down, users may lose access to their funds. Additionally, some exchanges don't allow users to move their crypto off the platform into their own wallets. Therefore, it's crucial to research different exchanges and understand the risks involved before choosing one.

Investing in Bitcoin through a futures account

A futures account is a great way to gain exposure to the Bitcoin market without actually owning any coins. This method of investing in Bitcoin has become popular due to its familiarity and the regulated nature of the investment.

Bitcoin futures are contracts between two investors who bet on the future price of Bitcoin. These contracts are traded on exchanges such as the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE).

Benefits of Bitcoin futures:

• Regulated exposure to cryptocurrencies: This is a significant advantage in a volatile market with wild price swings.
• Simplicity: You do not need to create a Bitcoin wallet or put money into custody solutions for storage and security.
• Safer than owning crypto: Bitcoin futures contracts have positions and price limits that enable investors to curtail their risk exposure to the asset class.
• Institutional adoption: Bitcoin futures are traded on traditional markets, allowing institutional investors to invest in Bitcoin.

Disadvantages of Bitcoin futures:

• Price volatility: Bitcoin is more volatile than traditional asset classes, which can lead to significant profits or losses.
• Use of futures contracts: The performance of Bitcoin futures ETFs is correlated to the price of the underlying contracts, which introduces complexity and heightened risk.
• Tracking errors: Discrepancies between the ETF's performance and the actual price movement of Bitcoin can occur due to management fees, transaction costs, or logistic issues.

How to invest in Bitcoin futures:

You can purchase Bitcoin futures through a broker or advisor, and they trade on exchanges such as the New York Stock Exchange ARCA and Nasdaq. Popular Bitcoin futures ETFs include:

• Proshares Bitcoin Strategy ETF (BITO)
• Valkyrie Bitcoin and Ether Strategy ETF (BTF)
• VanEck Bitcoin Strategy ETF (XBTF)
• Global X Blockchain & Bitcoin Strategy ETF (BITS)

It is important to note that these ETFs are not entirely comprised of Bitcoin futures. They mainly invest in traditional securities and hold Bitcoin futures contracts when they meet the fund's strategy.

Risks of investing in Bitcoin futures:

Yes, investing in Bitcoin futures is risky due to the highly speculative and volatile nature of cryptocurrencies. However, you can invest smaller amounts, making it a good option if you want to speculate on Bitcoin prices without committing a large sum of money.

Frequently asked questions