Bitcoin was the star of last week. It traded above $ 23,700, a new high.
The bitcoin was undoubtedly the star of last week. Is that, for the first time in its history, it exceeded $ 20,000, reaching a price above $ 23,700, marking a new high. This, unsurprisingly, has triggered a fever for this cryptocurrency again. I keep receiving inquiries from readers who want to invest.
While I was never a fan of bitcoin, it is undeniable that it is in an uptrend. I've been saying for some time that if it managed to exceed 20,000 we could see a very strong rise in the near future.
And there are two central arguments that could justify an even higher rise: on the one hand, a possible crisis of the fiat currencies (those that the central banks of the countries print) after the enormous monetary issue in response to the Coronavirus crisis; on the other hand, it seems a greater and greater possibility that institutional investors (who until now looked from the outside) are launched to invest in cryptocurrencies.
But I don't want to talk to you about that today. You have probably already read many notes about the reasons why bitcoin could go up. In today's note I'm going to talk about something different: other ways that exist to invest in bitcoin besides buying the cryptocurrency.
In some cases they can make sense since we could multiply the profits. Let's see what they are:
This is perhaps the best known option for most. Instead of buying bitcoins, we can earn them by "mining" them. I will not go into technical details. In very simple words, the bitcoin network is sustained thanks to the computational power contributed by the community. Those who put their computers at the service of the network, receive a reward in bitcoins.
The issue here is that there is a relationship between the reward and the computational power provided relative to the size of the network. In the early days of bitcoin, as the network was small, anyone could mine bitcoins with their personal computer or a small equipment intended for that.
However, today, the network has grown so much that it is virtually impossible to make money mining bitcoins with a personal computer, since there are companies that are dedicated exclusively to it and spend millions of dollars in specialized equipment.
In order to mine bitcoins and earn money, you have to make very large investments of money, so in practice it is a possibility that is ruled out for the small investor. What is still possible with some home equipment is to mine other cryptocurrencies, especially those that do not yet have highly developed networks.
In addition to buying bitcoin, it is also possible to buy futures and options of this cryptocurrency. The advantage that the use of derivatives can have is the possibility of multiplying the gains in case the bitcoin moves in the direction we expect.
The Chicago Mercantile Exchange (CME Group) futures market currently offers bitcoin futures, and recently announced that it will shortly be listing Ethereum futures as well.
There are also private initiatives such as Deribit, which is dedicated to offering access to bitcoin futures and options.
Deribit is a Dutch exchange, but it is important to clarify that, unlike the CME Group, it is not a regulated derivatives market, so there is a risk that the company will go bankrupt and we will lose our investment.
Funds that invest in bitcoin
Another possibility to earn with bitcoin is to buy shares of private funds that invest in bitcoins. The interesting thing is that there is one that is listed on the US stock market: Grayscale Bitcoin Trust (Ticker: GBTC).
The reason to buy GBTC is basically convenience. For those who have an investment account in a US broker, they can buy shares in this fund and immediately gain exposure to bitcoin.
However, this alternative is only recommended for very short investment terms. Just a few days. Keep in mind that we can buy and sell GBTC only at the times and days that the markets open, and this can be a problem since bitcoin operates 24 hours a day, 365 days a year.
On the other hand, interestingly, the shares of Grayscale Bitcoin Trust trade at a premium of approximately 20% over its liquidation value (that is, the market value of the fund is greater than the value of the bitcoins it owns), so that we are paying a higher price to gain that exposure in bitcoin.
In addition, we must always keep in mind that we are trusting an intermediary. We do not have the bitcoins, a third party has them, so the risk is greater than if we had them. Therefore, whoever is thinking of buying bitcoins to keep in the medium or long term, it is better to buy the bitcoins directly in an exchange and keep them in a personal wallet.
ETFs are funds that trade on the US stock market just like a stock. There are no ETFs that invest directly in bitcoins yet, but there are some interesting alternatives.
As a side note, keep in mind that Grayscale Bitcoin Trust is not an ETF in the technical sense. I don't want to go into detail, but I leave you with an important consequence of this: Institutional investors cannot buy shares in Grayscale, but they could buy shares in an ETF.
That is why it is said that when cryptocurrency ETFs are approved, the price of these assets will rise a lot, because large institutional investors will start to enter the game.
That said, there are interesting alternatives. One of them is the Amplify Transformational Data Sharing ETF, which trades under the ticker BLOK, and which invests in companies linked to blockchain technology.
Finally, another way to earn with bitcoin is to invest directly in companies that are directly or indirectly related to this cryptocurrency.
In the US stock market there are several options of companies that can rise strongly along with bitcoin. One of those is RIOT Blockchain, which is traded under the RIOT ticker and is a company dedicated to mining bitcoins.
If you are interested in knowing all the available options, please read this carefully. I prepared a free report for Scope readers with 7 shares of companies listed on the US stock exchange that are related to Bitcoin and Cryptocurrencies (and that will go up if Bitcoin goes up). You can download it at this link .
As you can see, there are many different ways to gain exposure in bitcoin. The use of derivatives can serve to amplify the results, but you have to be very careful, since just as we can multiply the gains, the same can happen with the losses.
Also, keep in mind that in many cases you can trade options on companies related to bitcoin. That is, another way to amplify the results could be to buy options on RIOT.
To finish I want to leave you a reflection. Many think that by buying bitcoin they are diversifying and doing something totally different from buying stocks. However, the data shows the opposite: in the last 10 years the correlation between bitcoin and the US stock market was 85%.
This means that if the US stock market falls, bitcoin has a very good chance of falling as well.
