It's been a dismal year for the economy. But one bright spot amidst the recession has been the explosion in the value of Bitcoin and other cryptocurrencies.
Since its low in April 2020, Bitcoin is up almost 800% in less than 12 months!
So how can you take advantage of Bitcoin's rise in the world economy? What is the best and easiest way to get exposure to cryptocurrency in your portfolio? Is there a Bitcoin ETF?
Read on for answers to all those questions and more.
In 2008, a person or persons using the pseudonym Satoshi Nakamoto released a whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” that described how Bitcoin would operate. Nakamoto mined the very first Bitcoin on January 3, 2009.
Bitcoin was a novel concept in that it was an entirely digital peer-to-peer currency. That means that it could facilitate payments between two people instantaneously without a third party (such as a bank) in the middle.
The Bitcoin cryptocurrency relies on a system of decentralized nodes that record all transactions on a blockchain.
A blockchain is a digital ledger of sorts that stores every transaction on the Bitcoin network. Each node keeps a copy of the same blockchain, and anyone can access and see the transactions. Because the blockchain gets duplicated thousands of times, it prevents cheating the system because each node contains all of the same information.
Bitcoin was initially conceived to take power away from banks and governments to artificially increase or decrease the supply of money and remove the need for a bank to be involved in transactions between individuals.
Per its design, there are a total of 21 million bitcoin that can be mined. After that, no more can be created. That means that supply is a known quantity, and thus demand will drive the price up or down.
Is Bitcoin a Good Investment?
Imagine you invested $1,000 in Bitcoin at the beginning of 2012. Can you guess what it would be worth today? $10,000? $100,000?Try $8 MILLION.
By comparison, $1,000 in the S&P 500 would be worth around $3,000; in the Dow Jones Industrial Average, up to $2,500.
There is much opportunity in the cryptocurrency market.
A single Bitcoin was trading at around $5 at the beginning of 2012. As of this writing, Bitcoin is hovering around $40,000 – 8000x what it was worth nine years ago. Even if you had invested $10,000 at the beginning of 2020, you'd have averaged making $200 a day since then.
What caused the enormous increase? In a few words, supply and demand. Bitcoin is a unique, innovative product that the world has never seen before. It offers a way to send money globally with virtually no cost and no intermediary, and by its design, there is a limited supply.
The Bull Case
Those who champion Bitcoin (the Bitcoin Bulls) see it as the equivalent of gold for the modern world. While gold itself doesn't have any inherent value, other than for some industrial uses, there is a limited supply. That, coupled with the fact that most countries have moved to a fiat currency (i.e., one that is not tied to the value of gold or silver), makes gold an excellent hedge against inflation.
In the same way, Bitcoin's value comes from it's scarcity and the fact that as the world's currencies become devalued by inflation and money printing, Bitcoin will hold its value. Even traditional Wall Street bankers and hedge funds are starting to see the potential.
One of the great hedge fund managers, Ray Dalio, sees its potential as a gold-like asset, calling it “one hell of an invention.” While Bitcoin's future is still very much unclear, Mr. Dalio also admits that “Bitcoin has succeeded in crossing the line from being a highly speculative idea to something that could have value in the future.”
The Bear Case
Of course, on the other side of the coin (pun intended), Bitcoin is still relatively young. Many people have a hard time believing that an invisible asset is worth anything at all.
It is also beginning to be scrutinized by regulators and governments who see it as competition for their currencies. There is certainly the risk that it could be regulated out of existence or at least modified such that it bears no resemblance to the Bitcoin of today.
How to Invest in Bitcoin – Is There a Bitcoin ETF?
All of this leads to the big question: how can you invest in Bitcoin?
Until recently, the only way to buy Bitcoin was through specialized exchanges such as Coinbase or Gemini. You would then either keep it in an account with the exchange, which entails a not-insignificant risk of hacking and losing your Bitcoin, or transfer it into “cold storage” to a Bitcoin wallet. With this wallet, you would need a specific encryption key to access a 64 character long password of sorts.
In short, it is a reasonably clumsy process with a considerable downside risk of either hacking or losing your password and being unable to access your Bitcoin forever.
In contrast, in the traditional world of stocks and bonds, it's pretty simple to invest in a company or an asset like gold or silver. These days there is a mutual fund or an ETF (exchange-traded fund) for almost anything. Want to add gold to your portfolio? Buy a Gold ETF, such as GLD.
Unfortunately, Bitcoin still has not reached universal acceptance by Wall Street and its regulators. Currently, in the U.S., there is no such thing as a Bitcoin ETF because it is not legally allowed.
However, many experts see it as a question of not if, given its rising popularity, but when regulators would work out the kinks to offer a full-fledged Bitcoin ETF.
A Bitcoin ETF would make it much easier for the average person to invest in cryptocurrency and open the door to broader investors' adoption.
Benefits of a Bitcoin ETF
If you're interested in cryptocurrencies and investing in a Bitcoin ETF, make sure you understand both the benefits and the risks of this new digital asset class.
As a relative newcomer to the financial industry, Bitcoin could be an excellent way to make extra money in your investment portfolio if you can withstand the volatility. Here are some of the benefits of a Bitcoin ETF.
1. Increased Investor Adoption
Investing in Bitcoin is not a streamlined process. Many investors may be interested in owning Bitcoin in their portfolio but are unwilling to open yet another account or dive into the specifics of holding Bitcoin in a wallet on their hard drive.
The introduction of a Bitcoin ETF would allow anyone with a brokerage account to invest in Bitcoin, which opens the doors to a much wider audience.
2. Lower Compliance Risk
Bitcoin is still in its infancy, and there is significant risk in the form of government regulations reducing its viability or outlawing it entirely.
The introduction of a Bitcoin ETF would go a long way toward legitimizing it as an asset and would force regulators to work out some of the hurdles to mainstream adoption.
3. Better Storage Solutions
The average investor does not want to mess with encrypted passwords, cold storage wallets, and other difficulties to hold Bitcoin in their portfolio.
Having an institutional investor in the form of a Bitcoin ETF manage all of this would remove the investor's burden and provide added security and peace of mind.
Lower Transaction and Holding Fees
Currently, Bitcoin is a fragmented industry with new exchanges popping up frequently to compete with existing ones. Since they have to operate outside the efficiencies of Wall Street, fees can be high.
For example, on one of the most popular exchanges, Coinbase, fees for buying or selling Bitcoin range from 0.5% -1.5% or more. While that might not seem like a lot, at a current valuation of $40,000, buying one Bitcoin could cost you $600 in fees alone.
With a Bitcoin ETF, you would not be subject to buying or selling fees. Most ETFs charge a very low (0.1-0.25%) annual fee to manage the assets, which would bring costs down for individual investors.
Risks of a Bitcoin ETF
Investing in Bitcoin, whether as a Bitcoin ETF or owning the asset outright, also comes with significant risks. You need to understand your risk tolerance as an investor to see if Bitcoin should be a part of your portfolio or not. Even then, it would be wise to limit your allocation to a small percentage of your liquid net worth.
As there are many unknowns surrounding Bitcoin and other cryptocurrencies, they tend to exhibit extremely volatile, rising or falling in value by thousands of dollars in a single day.
1. Regulatory Risk
Bitcoin is a competitor of fiat currencies such as the dollar and the euro. There is a genuine risk that governments would want to regulate how Bitcoin is used, which would affect its value or make it outright illegal to own.
Also, the “seedy underbelly” of cryptocurrencies could lead to additional regulation.
In its earlier days, one of the prominent uses of Bitcoin was to facilitate transactions in the underground black market economy. The Silk Road was a dark web marketplace known for its illegal drug trade, among other things, and was only recently shut down.
Since Bitcoin transactions are untraceable and anonymous, it was (and still is) used in illegal trade for anything from drugs to weapons.
2. Security Risk
While Bitcoin has so far stood the test of time without any major hacking or security incidents, it's still unknown whether the blockchain technology will hold up to future attacks.
Unlike gold, an actual tangible asset, Bitcoin is an ephemeral collection of ones and zeros on the internet. This makes tracing stolen Bitcoin all the more difficult if something were to happen.
3. Perceived Value Risk
There is still a lot of skepticism about a wholly digital, intangible currency that you can't touch or feel. Bitcoin has value because people believe it does, and there is a demand for it.
If something were to happen that affected the asset's demand, or people no longer believed it was a safe store of value, the price could plummet rapidly.
Best Bitcoin ETF Alternatives
While there is no true Bitcoin ETF, there continue to be innovations in the marketplace with new and easier ways to invest in Bitcoin and other cryptocurrencies.
Here are some of the best Bitcoin ETF alternatives available right now.
1. Grayscale Bitcoin Trust (GBTC)
Grayscale Bitcoin Trust is about the closest product available to a Bitcoin ETF. It trades on the market under the ticker GBTC and can be bought and sold like an ETF.
The main difference between GBTC and an actual ETF is that it is a closed-end fund. This means that it can trade at a premium or discount to the NAV (net asset value).
Historically, GBTC has traded at a 20-30% premium to NAV. So, in addition to the 2% annual fee, you could be paying $1.20 or $1.30 for each $1.00 worth of Bitcoin.
BlockFi bills itself as the “future of finance.” While it is not a bank, it offers many of the functions of a bank. You can buy and sell cryptocurrencies, hold cryptocurrencies on their platform and earn interest, and even take out a loan against the value of your Bitcoin.
You can currently earn 6% interest on your Bitcoin deposits and 8.6% on “stablecoin” deposits such as USDC. They can offer such high-interest rates because of the interest rates they charge when they loan money on the value of their deposits.
In a world of sub-1% interest rates in a “high yield” savings account, this sounds like a slam dunk deal. However, since BlockFi is not a bank, deposits are not FDIC insured. There is the possibility you could lose money if something drastic happened to the company or the price of Bitcoin.
Coinbase has been around for a while and is probably the most popular exchange to buy and sell Bitcoin and other cryptocurrencies.
While there are fees that can add up to 1-2% of the price paid, Coinbase provides a user-friendly and convenient way to buy and hold Bitcoin without dealing with encryption keys and cold storage wallets. It also provides a large assortment of other altcoins – non-Bitcoin cryptocurrencies – often hard to find.
4. Blockchain ETF
One alternative to a crypto ETF is to invest in the revolutionary technology that Bitcoin is based on – the blockchain.
Many companies are working on various uses for blockchain, from banking to public record storage.
A blockchain ETF such as BLOK would allow you to invest in the future of the underlying technology.
Bitcoin ETF: The Final Word
Is there a Bitcoin ETF? That is one of the most-searched terms in the world of Bitcoin. While the answer to that is currently “no,” there are encouraging signs that may soon change.
In the meantime, many innovations are making it easier to buy, sell, and hold Bitcoin and other cryptocurrencies as an investment.
As long as you do your due diligence and understand the risks, investing in Bitcoin (even before the advent of a Bitcoin ETF) is not only possible but could be a worthwhile investment for your future.
Andrew is the founder of Wealthy Nickel where he writes about all things personal finance. He has a passion for helping people pursue financial freedom through saving money, making money, and building wealth. Andrew documents his family’s journey to financial independence through side hustles while raising 2 kids on a single income