It is easy to understand why investors might want to gain exposure to bitcoin. The innovative digital currency, which has been around since 2009, has appreciated immensely in that time, going from a value of just pennies to recently rising above $1,900 per coin.
In addition to enjoying this sharp appreciation, bitcoin and other digital currencies are considered by many to be the way of the future. As the first digital currency to scale, bitcoin could enjoy significant upside going forward. In this guide, we’ll take a closer look at bitcoin investing.
Investment Opportunities Abound
Fortunately, if you want to invest in bitcoin, you have options. For starters, you can purchase currency through an exchange. While establishing an account at an exchange may require supplying documentation and verifying your identity, this route will provide you with real-time market data. (See our list of Top Bitcoin Exchanges here.)
Alternatively, you can buy shares of a bitcoin fund such as Bitcoin Investment Trust or Global Advisors Bitcoin Investment Fund Plc (GABI). Bitcoin Investment Trust offers securities to the public; GABI is a hedge fund that caters to institutions, high-net-worth individuals, and family offices.
What’s the difference between the two? While Bitcoin Investment Trust passively tracks bitcoin prices, GABI harnesses various active management strategies in an attempt to outperform the market. As a result, the hedge fund was able to produce double-digit returns in both 2015 and 2016.
Before you invest in bitcoin, there are some basic tenets to keep in mind. For starters, some experts consider bitcoin to be quite risky. More specifically, it is highly volatile, with Duke professor of finance Campbell Harvey claiming that the currency is five times as volatile as the S&P 500 Index.
While many believe that bitcoin holds great promise, it doesn’t make regular interest payments like bonds, and it is not based on companies’ revenue and earnings like stocks. As a result, bitcoin is a speculative investment.
Investing in bitcoin can provide compelling returns. However, due to the altcoin’s speculative nature, you might want to use only risk capital — money you can afford to lose — when investing in it. That’s a good rule of thumb for any type of investment.
Fortunately, there are many quick tips and strategies that bitcoin investors can use in order to effectively manage risk. Here are a few.
Buy and Hold
While some strategies for investing in bitcoin are more complicated than others, the more straightforward approaches can be helpful.
A perfect example of a simple strategy is buy and hold. While everyone knows the saying “buy low, sell high,” it is not always that simple, and trying to time the market can result in significant losses. Alternatively, you can purchase assets and hold them over long periods of time. Warren Buffett, the “Oracle of Omaha” and one of the richest people in the world, has long advocated this strategy.
Using this long-term strategy can deliver compelling returns through the power of compound interest. For example, investing in a stock which returns 10 percent a year will double your money in a little more than seven years.
Bitcoin, on the other hand, has provided far more impressive returns. As first reported by CoinDesk, the currency’s price nearly doubled in 2017 before the year was half over. In addition, this impressive gain came after bitcoin’s price rose more than 100 percent in 2016, according to CoinDesk’s Bitcoin Price Index.
Diversification is another important strategy you should know as an investor. The basic idea is not putting all your eggs in one basket. Ideally, diversified portfolios will minimize volatility, as a decline in one component will be offset by a rise in other components.
For example, let’s say you create a portfolio with $100,000. You put 20 percent into emerging-market stocks, 20 percent into U.S. stocks, 20 percent into corporate bonds, 20 percent into U.S. Treasuries, and 20 percent into gold. Ideally, a 10 percent loss in your gold holdings will coincide with the remaining assets rising enough to make up for that decline.
If you invest in bitcoin, incorporating it into a diversified portfolio can go a long way in terms of helping you minimize the volatility of your overall holdings.
One strategy you can use in your bitcoin investing is fundamental analysis, which involves evaluating the key variables that drive bitcoin’s price movements in order to determine its intrinsic value.
When applying this methodology to a company’s stock, you might evaluate the company’s revenue and earnings. When using this approach to analyze bitcoin, you would likely consider factors such as adoption rates or transaction volume. (See our guide to Bitcoin Fundamental Analysis here.)
Another common investment strategy is technical analysis, which examines a currency’s price movements to help you make better-informed decisions. By using this method, you can pinpoint trends to help determine when to buy and when to sell. (See our guide to Bitcoin Technical Analysis here.)
You could also combine these approaches, using fundamental analysis to determine whether bitcoin is underpriced or overpriced and then harnessing technical analysis to figure out the best time to buy or sell the currency.
Are There Bitcoin Investment Stocks?
There is no such thing as a bitcoin investment stock. While there are securities that grant exposure to bitcoin, none of them are shares of stock.
Are There Bitcoin Investment Funds?
There are bitcoin investment funds – for example, the aforementioned Bitcoin Investment Trust and GABI – that offer retail investors, high-net-worth individuals, and institutions exposure to the digital currency. Only a handful of these funds are available at the time of this report, and many of them seek to beat the market through active management strategies.
Several industry participants have proposed exchange-traded funds (ETFs) that grant exposure to bitcoin, but the U.S. Securities and Exchange Commission (SEC) has not approved any of these investment vehicles.
There are several blockchain investments, which grant individuals and institutions the opportunity to obtain exposure to companies involved with the distributed ledger technology that powers bitcoin.
Shares of Coinsilium, which invests in early-stage blockchain companies, trade under the ticker symbol COIN. By purchasing these securities, you can gain exposure to a diversified portfolio of fintech companies.
Another investing option is BTCS, a bitcoin mining company that has been featured in the Washington Post, the Wall Street Journal, and Bloomberg.
The blockchain has generated significant visibility over the last several years, so the number of companies that permit investors to generate returns from this distributed ledger system might rise quite a bit.
As you can see, you can invest in Bitcoin in several ways. If you want more bitcoin investing ideas and information, subscribe to Bitcoin Market Journal.