It's clear Bitcoin is here to stay. The problem for investors is that so is the currency's notorious volatility. The good news: There are a number of ways to bet on the cryptocurrency's long-term potential, without necessarily buying the coin itself.
As blockchain payment technology gains broader acceptance, more and more investors are seeking to add Bitcoin or other cryprtocurrencies to traditional investment portfolios, alongside stocks and bonds. (Although it's worth noting financial advisers warn against making speculative assets like Bitcoin more than 5% to 10% of your overall investments.)
One reason investors have — and should — remain cautious about Bitcoin and other cryptocurencies is their gut-wrenching price swings. In the first first three and a half months of 2021 alone, Bitcoin's price more than doubled — then dropped 25% in a matter of days.
Despite Bitcoin's $1 trillion market value, investors are still debating what kind of asset it is. On cryptocurrency data Web site, CoinDesk, Bitcoin is defined as “digital gold” because in the absence of major commercial applications or a dividend yield, people buy Bitcoin because of its track record of appreciation. Gold has proven its ability to hold some value through the ages. Yet Bitcoin has only been around for little more than a decade, and traded as low as $5,000 as recently as March 2020.
Buying Bitcoin directly can also be complicated for practical reasons. Because it isn't a security like a stock or bond, investors must purchase it through a special exchange and hold it in a separate account known as a Bitcoin wallet. Looking for a way to bet on cryptocurrency through your regular brokerage account — and also shield yourself from the wild ups and downs?
Here are three options:
1. Grayscale Bitcoin Trust
The Grayscale Bitcoin Trust is the closest thing on U.S. stock exchanges to a Bitcoin exchange-traded fund. Barry Silbert’s Grayscale Investment firm bypassed the Securities and Exchange Commission by allowing the trust to be traded over-the-counter under the symbol GBTC. Like an ETF, the trust owns the underlying assets, in this case bitcoins, and sells shares to investors that are supposed to track the price of the cryptocurrency.
Despite its full-grown stature — with roughly $38 billion in assets under management (it would be in the top 20 U.S.-listed ETFs by assets, according to fund data firm ETF Database) the Grayscale Trust has not always behaved like a mature ETF. When launching the fund in 2014, Silbert compared it to the wildly popular gold-tracking ETFs. Now, it’s bigger than all of those funds, except the largest, the SPDR Gold Trust, which has about $80 billion.
But, the Grayscale Trust behaves more like a tiny, illiquid ETF, dogged by “tracking error,” the failure to replicate returns on the underlying index. At various times, the Grayscale Trust has traded at a premium or a discount to its holdings. It never enjoyed the vast gains that Bitcoin saw in early 2021, and it did not see as dramatic a fall. Another potential issue: Annual fees of 2% of invested assets — double what investors might typically pay for an actively managed stock fund.
Still, the Grayscale Bitcoin Trust has one huge advantage for U.S. holders. You can hold it in a tax-protected retirement account. True, some trust companies make it possible to set up Bitcoin IRAs. But they come with hefty fees of their own. By leaving your bitcoin holdings in an IRA, you can take a long-term position on the digital currency without obsessing over the short-term swings.
2. Canadian Bitcoin exchange-traded funds
The Securities and Exchange Commission has so far rejected all applications for Bitcoin ETFs, including a high-profile effort from the Winklevoss twins and their Gemini firm.
U.S. investors already have four Bitcoin ETFs traded on the Toronto Stock Exchange to choose from, but it’s important to recognize these funds would be treated like overseas investments, for which some brokerages require special permissions.
Such investments can also involve currency risk. Unlike the over-the-counter Grayscale fund, the Canadian ETFs may not work in tax-advantaged accounts, which are intended for U.S.-listed securities, according to investment-account advice posted by the Journal of Accountancy.
Purpose Bitcoin ETF is the largest Canadian fund with more than $1 billion in assets under management. Like the Grayscale Trust, the Purpose ETF has a mixed record of replicating Bitcoin's moves so far.
To be sure, owning these funds exposes a holder to just as much price volatility as owning Bitcoin itself. There are some advantages to the ETF packaging, including convenience and familiarity.
3. Coinbase and other cryptocurrency stocks
Currently, the quasi initial-public offering of Coinbase Global is looking like the peak of Bitcoin hysteria. The exchange, which used a direct listing to float its shares on the Nasdaq market, had a valuation over $100 billion at one stage on its debut in mid-April, although that dropped as much as 40% in following days.
On the one hand, it’s a mark of the speculative excess that Coinbase was instantly worth much more than historic exchange firms such as New York Stock Exchange owner Intercontinental Exchange. But consider this: Coinbase has proven itself wildly profitable, posting first-quarter net profit of $730 million to $800 million, comparable to ICE. And, unlike investors in the cryptocurrencies themselves, Coinbase should thrive on volatility rather than get whipsawed by it.
One strategist warns against conflating Coinbase's business with views on cryptocurrencies. “At the end of the day, Coinbase is a clearinghouse and not a cryptocurrency, and it has nothing to do with blockchain which is where the interest comes from,” says Oliver Pursche, senior vice president at financial-advice firm Wealthspire.
Another company whose value has become closely tied to that of Bitcoin is Overstock.com, one of the first online retailers to accept the currency, an involvement that prompted Overstock to launch other Bitcoin ventures.
For crypto-focused companies such as Coinbase, Grayscale and Overstock, Wall Street’s adoption of Bitcoin as a legitimate asset class was an initial boost. But it could mean trouble in the long run.
With firms such as Fidelity Investments and Goldman Sachs Group preparing their crypto strategies, Wall Street is threatening to eat the whole industry. “I ,for one, would have more faith in Fidelity than I would in a Grayscale or Coinbase,” says Pursche.