Few assets have ever matched the amazing gains for bitcoin in 2017. Interest in cryptocurrencies soared along with their prices, and in particular, bitcoin prices that had started the year below $1,000 ended up climbing to nearly $20,000 by early 2018. Since then, though, bitcoin has followed its usual two-steps-forward-one-step-back approach, losing two-thirds of its value. That's turned many investors off to the cryptocurrency, although others see now as a smart time to buy bitcoin.
If you want to invest in bitcoin, you have a few different choices. Investing directly in bitcoin requires customized accounts that involve safely handling the cryptocurrency. In lieu of that extra effort, many investors have turned to the Bitcoin Investment Trust (GBTC -1.15%), an alternative that trades more like a traditional stock. Below, we'll compare these two investments to see which one makes more sense right now.
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The basics of bitcoin
Bitcoin has existed for about 10 years now, and much has been written about the way bitcoin works. From an investment standpoint, though, the thesis for buying bitcoin is relatively simple. Cryptocurrency advocates argue that with a fixed supply of bitcoin, rising demand over time should lead to higher prices. Although hundreds of other cryptocurrencies exist, and more are becoming available all the time, bitcoin's status as the first mover gives it a reputation that no other token can match.
The primary challenge for would-be bitcoin investors is figuring out how to buy it. Many companies specialize in providing bitcoin wallets to users, allowing them to link bitcoin accounts to traditional bank accounts and facilitating the purchase and sale of bitcoin. Some companies also accept purchases through automated teller machines, with the purchased bitcoin deposited in a bitcoin wallet as well.
More recently, derivatives linked to bitcoin have become available. Bitcoin futures contracts give you the ability to profit from price movements in bitcoin, but they don't give you the right to take possession of the actual bitcoin itself. Moreover, futures contracts typically require special handling from a broker as well, and not all brokerage companies allow trading of futures contracts.
How Bitcoin Investment Trust is different
Many investors weren't comfortable with all the hoops they had to jump through in order to invest in bitcoin directly, especially given some of the high-profile hacking incidents that plagued popular bitcoin exchanges. To serve those investors, funds like the Bitcoin Investment Trust offered an alternative that was far easier to use for investing.
Bitcoin Investment Trust's primary investment objective is to own bitcoin. The trust currently has about 200,000 bitcoin in its portfolio. Each of the 201.5 million shares outstanding therefore has an intrinsic value equal to just less than a thousandth of a bitcoin. So with prices around $6,500, a share of Bitcoin Investment Trust represents about $6.50 worth of bitcoin.
The nice thing about the Bitcoin Investment Trust is that buying and selling shares is just like trading a stock. Whenever the market is open, shares of the trust are available. One downside is that the trust's shares don't trade on a major stock exchange, but even though the market on which they do trade sometimes has less liquidity, interest in the trust has been high enough to keep a reasonably liquid market going.
In the past, the primary problem with Bitcoin Investment Trust was that its shares cost far more than the intrinsic value of the bitcoin it held. Premiums of more than 100% weren't uncommon when bitcoin was at its most popular. Now, the premium is a much more reasonable 10% -- although that's still 10% more than you should arguably have to pay for shares.
In addition, Bitcoin Investment Trust has hefty charges associated with it. Annual fees amount to 2% of assets, and since bitcoin doesn't generate any income, the fees gradually erode the amount of bitcoin represented by each share. That's not critical for short-term traders, but if you intend to use the trust to invest in bitcoin for the long haul, it's a pretty big price to pay.
Betting on bitcoin? Stick with the original
If you believe that bitcoin has a strong future as an investment, it's worth the hassle to get to know how it really works by using a bitcoin wallet to hold the cryptocurrency directly. Bitcoin Investment Trust is a useful tool for short-term traders, but the costs involved introduce risks that those who paid premiums of 50%, 100%, or more now know all too well.
