Understanding Bitcoin Investment Funds: A Beginner's Guide

Bitcoin investment funds are a way for investors to gain exposure to Bitcoin without having to buy and hold the cryptocurrency directly. These funds, known as Bitcoin exchange-traded funds (ETFs), are traded on stock exchanges and provide investors with a convenient and familiar way to access the cryptocurrency market. ETFs are similar to mutual funds but are traded directly on a stock exchange like stocks. Bitcoin ETFs can be tied to the spot price of Bitcoin or to Bitcoin futures contracts. The former holds Bitcoin as the underlying asset, while the latter holds futures contracts that derive their value from the potential future price of Bitcoin. Bitcoin ETFs offer investors a way to speculate on the volatile price movements of Bitcoin without the need to own the cryptocurrency directly, providing a level of familiarity and security for those who are hesitant to enter the often wild world of crypto.

Bitcoin investment trusts

One of the most well-known Bitcoin investment trusts is the Grayscale Bitcoin Trust (GBTC), which was established as an open-ended private trust in 2013 by Alternative Currency Asset Management. The trust is now sponsored by Grayscale Investments LLC and began trading publicly in 2015 under the symbol GBTC. It was the first securities product pegged to Bitcoin to be traded publicly. As of October 17, 2023, the trust had $17.7 billion worth of assets under management.

The Grayscale Bitcoin Trust offers investors a simplified way to access Bitcoin, as it allows them to trade shares in traditional brokerage accounts without needing a deep understanding of blockchain technology or cryptocurrency exchanges. The trust is also available within tax-advantaged accounts like individual retirement accounts or 401(k)s, providing potential tax benefits for investors.

However, one of the main drawbacks of the Grayscale Bitcoin Trust is its high management fee of 2%, which could erode returns, especially during bear markets. The trust has also faced regulatory challenges, with critics arguing that it carries significant risks, including volatility and high premiums.

Another example of a Bitcoin investment trust is the Valkyrie Bitcoin Miners ETF (WGMI), which is an actively traded fund on the Nasdaq exchange. This fund invests in companies involved in the Bitcoin ecosystem, such as mining on the Bitcoin blockchain. As of October 17, 2023, the fund had $13.59 million in assets under management and an expense ratio of 0.75%.

In summary, Bitcoin investment trusts provide investors with a way to gain exposure to Bitcoin and other cryptocurrencies without the need to directly purchase and store these assets. These trusts offer simplified access to the cryptocurrency market and can be traded through traditional brokerage accounts. However, it is important to carefully consider the fees, risks, and regulatory environment associated with these investment vehicles before deciding to invest.

Bitcoin strategy ETFs

Bitcoin Strategy Exchange-Traded Funds (ETFs) are funds that aim to track the price of Bitcoin indirectly. They do not invest directly in Bitcoin or other cryptocurrencies; instead, they invest in Bitcoin futures contracts on the Chicago Mercantile Exchange. Some Bitcoin Strategy ETFs also invest in Bitcoin mining stocks. Due to the indirect nature of these investments, the returns of these funds are prone to deviate from Bitcoin's returns.

• Global X Blockchain & Bitcoin Strategy ETF (BITS): Invests mostly in Bitcoin futures and also in the Global X Blockchain ETF (BKCH).
• Valkyrie Bitcoin Miners ETF (WGMI): Invests in Bitcoin mining stocks.
• Bitwise Bitcoin Strategy Optimum Roll ETF (BITC): Invests in Bitcoin futures and has a reduced fee of 0.85% until February 6, 2025.
• ProShares Bitcoin Strategy ETF (BITO): Invests in Bitcoin futures and was the first bitcoin-linked ETF in the US market.
• Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP): Invests in Bitcoin futures and has a reduced fee of 0.85% until October 2, 2025.
• Valkyrie Bitcoin and Ether Strategy ETF (BTF): Invests in Bitcoin and Ether futures.

It is important to note that the returns of these Bitcoin Strategy ETFs may differ significantly from the returns of directly investing in Bitcoin due to the indirect nature of their investments.

Bitcoin's price volatility

Bitcoin is a decentralised form of digital cash that eliminates the need for traditional intermediaries like banks and governments. It is a cryptocurrency that can be used as a currency or an investment.

Bitcoin's price is volatile, and there are several reasons for this. Firstly, like most commodities, Bitcoin's price depends heavily on supply and demand. As an asset, it was quickly adopted by investors and traders, and speculation about price movements plays a critical role in its value at any given moment. Media outlets, influencers, and industry moguls can create investor concerns, leading to price fluctuations.

The varying belief in Bitcoin's utility as a store of value and method of value transfer also influences its price volatility. Many investors believe that Bitcoin will retain its value and continue to grow, using it as a hedge against inflation. However, others are unsure of its long-term viability, which can cause fluctuations in its price.

Additionally, fear and greed are primary drivers behind Bitcoin's volatility. Due to its well-known volatility, investors fear missing out on big upswings or falling victim to large downswings, causing panic buying or selling and influencing demand and prices.

Finally, the cryptocurrency industry thrives on speculation, with investors betting on Bitcoin's price increasing or decreasing to make profits. This can cause sudden increases or decreases in Bitcoin's price, leading to volatility.

Bitcoin wallets

At their most basic, Bitcoin wallets are software applications that store a user's private and public keys, which are needed to access and manage their Bitcoin holdings. These keys are used to "sign" transactions, allowing users to prove they own the Bitcoin they are looking to send. It is important to note that Bitcoin wallets do not actually store the Bitcoin itself; instead, the Bitcoin exists on the blockchain, and the wallet enables users to interact with it.

There are several types of Bitcoin wallets available, each with its own unique features and security considerations:

• Hot Wallets: These wallets remain connected to the internet, making them easily accessible and convenient for users. However, this always-on connection also makes them more vulnerable to hacking attempts. Examples include web wallets, desktop wallets, and mobile wallets.
• Cold Wallets: Cold wallets function primarily offline, making them highly secure and virtually impervious to hacking. They are a good option for users with large Bitcoin holdings or those seeking maximum security. Hardware wallets and paper wallets fall into this category.
• Custodial Wallets: In this type of wallet, a third party, usually a crypto exchange, holds the user's private keys and manages the transactions on their behalf. While this option offers convenience, it also comes with risks, such as the exchange being hacked or going bankrupt.
• Non-Custodial/Self-Custody Wallets: With these wallets, the user is solely responsible for keeping their private keys safe. This option provides more control but also requires a high level of self-trust, as losing or compromising the private key can result in irreversible loss of funds.

When choosing a Bitcoin wallet, it is essential to consider your priorities, such as ease of use, security, and accessibility. For example, if you prioritise security over convenience, a cold wallet like a hardware wallet might be the best option. On the other hand, if you want quick access to your Bitcoin for regular transactions, a hot wallet like a mobile wallet could be more suitable.

Additionally, it is worth noting that some wallets may be better suited for specific purposes, such as hardware wallets for long-term savings and mobile wallets for regular spending. Ultimately, it is advantageous to use multiple wallets for different purposes to ensure both the security and accessibility of your Bitcoin holdings.

Bitcoin mining

The Bitcoin mining process works as follows:

• A transaction is made between wallets
• The addresses and amount are entered into a block on the blockchain
• The block is assigned some information, and all of the data in the block is put through a cryptographic algorithm (called hashing)
• The result of hashing is a 64-digit hexadecimal number, or hash
• Miners guess the target hash by randomly making as many guesses as quickly as they can, which requires major computing power
• The first miner to guess the correct hash receives a reward in Bitcoin

Frequently asked questions