Over the past two months, one of the most frequently asked questions I get is about investing in Bitcoin, observes Jim Woods, editor of Successful Investing.
These days, every speculator, trader and Main Street investor seems to be foaming at the mouth to take a rabid bite into the cryptocurrency. This affinity for Bitcoin should come as no surprise, especially when you consider the price action over the past several years.
Bitcoin has shown tremendous upside, as well as the gut-wrenching volatility, in the price of the cryptocurrency over its lifetime (from July 18, 2010, to the present).
So, I am going to answer some of the most common Bitcoin-related investor questions for you. The most obvious question when it comes to Bitcoin is the basic one: What the heck is Bitcoin?
The short answer is that Bitcoin is a digital currency, which, unlike fiat currency, is created, used and distributed electronically via a decentralized ledger system known as a blockchain.
Because Bitcoin is decentralized and resides on a peer-to-peer network, no single institution or person controls it. This makes it different from a currency, such as the U.S. dollar or the euro, which are both controlled by central banks.
One very interesting thing I discovered about Bitcoin is that, contrary to the claims of many of its proponents, Bitcoin is not a safe-haven investment like gold or Treasury bonds.
Research from the Kansas City Federal Reserve on the price of 10-Year Treasuries, gold and Bitcoin during periods of stress and no-stress between January 1995 and February 2020 show that no such correlation with safe havens existed during these periods.
The research demonstrated that the 10-Year Treasury and gold have negative, statistically significant correlations with the S&P 500, suggesting both assets have the properties of safe havens.
In contrast, Bitcoin has a weak positive correlation with the S&P 500 during periods of financial stress, suggesting Bitcoin behaves more like a risk asset than a safe haven. So, if you are looking to Bitcoin as a safe haven in the way gold and Treasury bonds have traditionally behaved, then forget it.
The better way to look at Bitcoin as an investor is to see it as a risk asset, and a very risky risk asset at that. Yes, you can make a lot of money if you time your Bitcoin entry and exit right, but don’t be fooled into thinking you’re adding some non-correlated, risk-asset diversification to your holdings. Now, that caveat aside, what’s the best way to own Bitcoin as an individual investor?
Well, you can buy direct ownership in a Bitcoin through an exchange such as Coinbase or eToro. These platforms make it easy for investors to create a digital wallet, transfer in assets and convert those assets to cryptocurrencies. This is the purest form of ownership because the holder obtains direct access to the Bitcoin.
The other way, which I think is the easier way, is to own the Grayscale Bitcoin Trust (GBTC). This unique ETF was originally launched in 2013 as a private placement for accredited investors to own Bitcoin that was held in a trust.
It since has progressed to attain the status of a Securities and Exchange Commission (SEC) reporting company that is available for public trading.
The premise of GBTC is similar to how the SPDR Gold Shares (GLD) owns and tracks the price of gold. It is set up to offer titled, auditable ownership through a public investment vehicle that holds the coins. Every share of ownership in GBTC is equal to a fraction of a Bitcoin.
Owning Bitcoin via GBTC also is easy logistically, because you can buy it on any platform where you buy ETFs. Simply log in to your brokerage account, put in the ticker symbol GBTC and buy the number of shares you want. And when you want to sell, just repeat the process with your sell orders.
So, for investors who are looking for big momentum trading vehicles, GBTC and/or straight-up Bitcoin is certainly where you’ll find a lot of action. Just beware of the downside that can befall you on any given day, as this volatile asset class requires the ability to take profits quickly — and to mitigate losses even quicker.