Explore Top Funds For Bitcoin Investment

Bitcoin is a well-known cryptocurrency that has sparked interest from investors since its creation in 2009. It is a decentralised digital currency that is not tied to any country or regulatory body. The blockchain technology that underpins Bitcoin has spawned thousands of altcoins and decentralised finance applications. While it is relatively easy to buy Bitcoin, it is a risky and volatile asset. Its value is susceptible to government actions, and it is also vulnerable to hacking. For those who want to invest in Bitcoin, there are several options, including buying it directly, investing in a Bitcoin fund or exchange-traded fund (ETF), or investing in a traditional investment fund that focuses on cryptocurrency and blockchain.

Bitcoin exchange-traded funds (ETFs)

Bitcoin ETFs are investment funds that track the price of Bitcoin and trade on traditional market exchanges, such as the NYSE or TSX, rather than cryptocurrency exchanges. They allow investors to gain exposure to Bitcoin's price movements without actually owning the asset itself. Shares of Bitcoin ETFs are traded on stock exchanges, making it easier for investors to participate in the cryptocurrency market.

A Bitcoin ETF works by investing in assets related to Bitcoin, such as companies and other ETFs that are connected to Bitcoin or cryptocurrency. The price of one share of a Bitcoin ETF will fluctuate with the price of Bitcoin. For example, if Bitcoin increases in value, the ETF will also increase in value, and vice versa.

Types of Bitcoin ETFs

There are two main types of Bitcoin ETFs: spot Bitcoin ETFs and Bitcoin futures ETFs.

Spot Bitcoin ETFs

Spot Bitcoin ETFs aim to provide investors with direct exposure to the current market price of Bitcoin. In this context, "spot" refers to the immediate or current price of Bitcoin. A spot Bitcoin ETF typically holds actual Bitcoin as its underlying asset and attempts to track the real-time price of Bitcoin as closely as possible.

Bitcoin Futures ETFs

Bitcoin futures ETFs do not hold actual Bitcoin. Instead, they use Bitcoin futures contracts to gain exposure to the cryptocurrency. A Bitcoin futures contract allows investors to speculate on the future price of Bitcoin.

Advantages of Bitcoin ETFs

Investing in a Bitcoin ETF provides several advantages, including:

• Ease of access: Bitcoin ETFs are traded on traditional stock exchanges, making it easier for mainstream investors to buy, hold, and trade Bitcoin-related assets through their existing brokerage accounts.
• Regulatory oversight: Bitcoin ETFs are subject to regulatory oversight, providing investors with transparency and protection.
• Portfolio diversification: Investors can incorporate Bitcoin into their investment portfolios without directly holding and managing digital assets.
• Convenience: Bitcoin ETFs simplify the process of investing in Bitcoin, eliminating the need for investors to learn about how Bitcoin works or sign up for a cryptocurrency exchange.

Disadvantages of Bitcoin ETFs

Some disadvantages of Bitcoin ETFs include:

• Management fees: ETFs typically charge management fees, which can lead to high costs over time, especially for investors who own a significant amount of shares.
• Tracking error: While Bitcoin ETFs try to mirror the performance of Bitcoin closely, differences between the ETF share cost and the value of Bitcoin can occur due to liquidity, delayed rebalancing, and management fees.
• Lack of Bitcoin ownership: Bitcoin ETFs do not provide investors with direct ownership of Bitcoin, which eliminates some of the benefits of Bitcoin, such as its independence from central banks and privacy through the Bitcoin blockchain.

Examples of Bitcoin ETFs

• Grayscale Bitcoin Trust (GBTC)
• IShares Bitcoin Trust ETF (IBIT)
• Invesco Galaxy Bitcoin ETF (BTCO)
• Bitwise Bitcoin ETF (BITB)
• ProShares Bitcoin Strategy ETF (BITO)
• Volatility Shares 2x Bitcoin ETF (BITX)
• ProShares Short Bitcoin ETF (BITI)

Bitcoin ETFs offer a convenient and regulated way for investors to gain exposure to Bitcoin without directly holding the asset. They have gained significant interest from both retail and institutional investors. However, it is important for investors to understand the risks and considerations associated with Bitcoin ETFs before making any investment decisions.

Bitcoin's volatility

Bitcoins Volatility

Bitcoin is considered a volatile asset, and its price can change rapidly and often without warning or explanation. This volatility is due to the speculative nature of the cryptocurrency industry, where investors bet on Bitcoin's price going up or down to make a profit. This causes a sudden increase or decrease in Bitcoin's price, leading to volatility.

Measuring Volatility

Volatility is a statistical measure of how much the price of a financial asset varies over time. It is calculated as the standard deviation of daily returns for the preceding 30- and 60-day windows. Bitcoin's daily volatility can be calculated using the formula:

> Bitcoin's daily volatility = Bitcoin's standard deviation = √(∑(Bitcoin's opening price – Price at N)^2 /N)

For a general timeframe volatility calculation, the formula is:

> √timeframe * √Bitcoin's price variance

Bitcoin Volatility vs. Other Assets

When compared to some prominent individual securities, Bitcoin has been less volatile than Netflix (NFLX) stock. Over the last two years, Netflix's realized volatility on a 90-day timeframe averaged 53%, while Bitcoin's averaged 46%.

Impact of Volatility

Volatility indicates that an asset is risky to hold, and investors may want to limit their exposure to it. It also increases the cost of hedging, contributing to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Historical Trends in Bitcoin Volatility

In 2023, Bitcoin's market cap rose while its realized volatility fell, indicating a potential growing belief in Bitcoin's maturation.

Investor Perspective on Volatility

While volatility is associated with risk in traditional finance, it can be "good" or "bad" depending on the returns. Bitcoin has historically exhibited high volatility but has provided investors with disproportionately positive returns. This is evident in Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024, indicating that investors have been compensated for the risk.

Additionally, Bitcoin's Sortino ratio of 1.86 suggests that much of the volatility was on the upside, with more instances of the price moving up quickly versus down over time.

Volatility and Price Movements

Historically, low volatility in Bitcoin has occurred at the end of long bear markets, and it has been a precursor to a price increase. This is because low volatility indicates that selling energy is low, and investors are either apathetic or have left the market. As new buyers enter the market, prices can be kept high for some time before a drop-off occurs.

Bitcoin's risks

Investing in Bitcoin and other cryptocurrencies requires more work than investing in stocks, bonds, and similar assets. Many traditional brokerage firms do not support cryptocurrency trading, so investors often need to open an account with a crypto trading exchange and store their crypto in a crypto wallet. However, a workaround for these issues is to buy a Bitcoin ETF or fund that trades on a stock exchange, allowing investors to hold their Bitcoin alongside their other investments.

Volatile and Fluctuating Market

The price of Bitcoin is constantly changing, and the market is unpredictable. There is no guarantee of a return on investment, and investors can suffer massive losses. To avoid this, investors are advised to keep a vigilant eye on the market and make small investments.

Cyberattacks and Fraud

As a technology-based currency, Bitcoin is vulnerable to cyberattacks and hacking. There is also a fair amount of fraud in the market, with fake exchanges duping investors out of their Bitcoins. Additionally, if an investor loses or misplaces their wallet key, they may not be able to retrieve their coins.

Little or No Regulation

The Bitcoin market currently operates with little to no major regulations, as it is a new market and governments do not have a clear stance on it. While the lack of taxation can be enticing, it could also lead to problems if Bitcoin competes with government currency. The future of the Bitcoin market is uncertain, and investors could be left with a worthless asset.

Technology Reliance

Bitcoin is entirely reliant on technology, and without it, cryptocurrency is worth nothing. Bitcoin owners are more vulnerable to cyber threats and online fraud, and the system could be shut down. There is also no physical collateral backing up the value of Bitcoin, unlike other forms of investment such as gold or real estate.

Block Withholding

New Bitcoins are created by solving "blocks," which are mathematical equations created every time there is a Bitcoin exchange. However, a mining pool can use computational power to mine a block and hide it from honest miners, allowing a select few to benefit while others lose out.

Legal and Tax Risks

The legal standing of cryptocurrency is uncertain, and regulatory agencies, tax authorities, and central banks are still working to understand the nature and meaning of digital currencies. In the US, the IRS has defined cryptocurrencies as property rather than currencies, subjecting investors to capital gains tax laws. The lack of a centralized authority can create legal and financial risks for cryptocurrency owners, and they may be required to file additional reports and disclosures.

Environmental Impact

Bitcoin relies on a large number of powerful computers worldwide to process transactions and create coins, leading to concerns about the potential environmental cost of Bitcoin, especially for investors worried about environmental, social, and corporate governance (ESG) compliance.

How to invest in Bitcoin

Step 1: Choose a Bitcoin Exchange or Brokerage

Popular places to buy Bitcoin include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi. Take note of fees and the reputation of the exchange when picking where to buy Bitcoin. Also, if you plan to transfer your Bitcoin out of the brokerage account, make sure that feature is supported.

Step 2: Open an Account

For those in the United States, plan on sharing your basic contact information and valid identification to meet the exchange's know-your-customer (KYC) requirements.

Step 3: Fund Your Account

The fastest and cheapest way is typically with an online funds transfer from a connected bank account. Depending on your exchange, you may also be able to use payment apps like PayPal.

Step 4: Enter a Purchase Order

When you think the moment is right, click the buy button to enter an order. The exchange will turn your dollars into Bitcoin, stored in the same cryptocurrency account, similar to holding stocks in a brokerage account. Once your trade executes, you are officially a Bitcoin owner.

Step 5: Store Your Bitcoin

You can choose between storing your Bitcoin in the same exchange account you used to buy the currency or using external software, hardware, or a paper cryptocurrency wallet. Offline storage with a hardware wallet, known as cold storage, is considered the safest and most secure place to keep your Bitcoin.

Risks of Investing in Bitcoin

As mentioned, Bitcoin is a relatively new and risky asset. While it’s possible that Bitcoin could double, triple, or even 10x in value over a short period of time, it could also drop to zero. Bitcoin is also susceptible to government actions and could be made illegal or severely limited, as recently happened in China. With Bitcoin or any other cryptocurrency, only invest what you can afford to lose.

Bitcoin is also susceptible to certain forms of hacking. If someone gets hold of your Bitcoin wallet address and password (private key), they can take your Bitcoin and you likely won’t have any way to recoup losses.

Pros and Cons of Investing in Bitcoin

Pros

• Relatively easy to buy
• Offers an alternative currency and investment strategy
• Secure

Cons

• Highly risky and volatile
• Potential for hacks and other losses
• Requires some level of technical knowledge

Bitcoin's legality

The legality of Bitcoin varies by country and is constantly changing. As of March 2024, Bitcoin was legal in the US, Japan, the UK, and most other developed countries. However, in emerging markets and other areas, its legal status has varied dramatically.

In the US, the Internal Revenue Service (IRS) considers Bitcoin and other cryptocurrencies property and has issued appropriate tax treatment guidelines for taxpayers. The US Securities and Exchange Commission (SEC) has also approved Bitcoin exchange-traded funds (ETFs), allowing anyone from pension funds to ordinary investors to invest in them.

In the UK, Bitcoin is considered "property," meaning citizens are allowed to buy and sell Bitcoin and are subject to taxes depending on their income from trading or staking.

In Canada, Bitcoin is not considered legal tender but is legal. The Canada Revenue Agency (CRA), the country's tax authority, has deemed Bitcoin a digital commodity, and transactions are taxable depending on the type of activity.

In the European Union, there is no specific legislation regarding the status of Bitcoin as a currency, but VAT/GST is not applicable to the conversion between traditional (fiat) currency and Bitcoin. However, VAT/GST and other taxes, such as income tax, still apply to transactions made using Bitcoin for goods and services.

In China, while the leadership has touted blockchain technology as a critical innovation, the country has a long history of cracking down on cryptocurrencies. In 2021, Chinese authorities began ramping up the enforcement of regulations, making cryptocurrency trading and transactions, including those involving Bitcoin, illegal and banning local and foreign exchanges.

In India, the government has sent mixed signals about the legality of Bitcoin. In 2018, the Reserve Bank of India (RBI) banned banks, lenders, and financial institutions from dealing in cryptocurrencies. However, this prohibition was later revoked by the Supreme Court. More recently, the government has provided some clarity with new crypto legislation that designates cryptocurrencies and NFTs as "virtual digital assets," making them illegal as a payment method but allowing users to trade and invest in them as assets.

Other countries where Bitcoin is legal include Australia, Japan, Singapore, and El Salvador, the first country to adopt Bitcoin as legal tender.

On the other hand, some countries have completely outlawed Bitcoin or placed heavy restrictions on its use. For example, Bangladesh has expressly declared that using cryptocurrencies is a "punishable offense," and authorities have been actively pursuing illegal Bitcoin traders. Bolivia has also officially banned the use of any currency or tokens not issued by the government, making cryptocurrencies and Bitcoin illegal.

Frequently asked questions