So You Are Ready To Buy Bitcoins. Which method should you choose?

Bitcoin (CRYPTO: BTC) lost 75% of its value in the last year. The cryptocurrency market may have raced very high, very fast in the fall of 2021, setting almost every digital coin up for a sharp correction. Rampant inflation and painful government measures designed to combat this problem have also affected high-risk investments this year, and Bitcoin falls into that category. And if these high-profile market concerns weren’t bad enough, crypto investors have lost some faith in the sector after the collapse of a leading crypto-trading exchange.

There may yet be another shoe to drop, pushing token prices even lower. This ongoing slump is neither the deepest nor the longest cryptocurrency winter on record, as the post-crypto gold rush crash in the fall of 2017 sent prices down more than 80% from their all-time highs, and the next recovery began 14 months later . Still, this 12-month decline is a force to be reckoned with.

Thus, Bitcoin prices have fallen significantly and there is no guarantee that the negative trend is over. Investors who doubt the long-term value of Bitcoin (or any cryptocurrency in general) may see this sharp decline as the beginning of the end. From this point of view, Bitcoin may never regain its previous all-time high of $68,790, and there is no reason to invest cold, hard dollars in this outdated fad.

However, I can’t completely agree with the Bitcoin bears. In my view, blockchain ledgers are poised to reshape how business, money transfer and store of value are done. Bitcoin has a special place in this revolution due to its unique market opportunities and its inflationary lifetime limit on the number of bitcoin tokens on the market. In this regard, a long and deep price drop is starting to look like an open invitation to buy some digital coins at fantastic prices.

Let’s say you’re ready to put some bitcoins into your portfolio — but maybe you don’t actually want to own that cryptocurrency outright. You actually have several options, and each alternative has its own pros and cons.

Shares in companies with Bitcoin holdings

Some publicly traded companies hold significant amounts of Bitcoin on their balance sheets. In some cases, this option makes a lot of sense.

Bitcoin miners Digital Marathon (NASDAQ: MARA) and Riot Blockchain (NASDAQ: RIOT)for example, it currently holds approximately 11,300 and 6,800 Bitcoins respectively. In October, Marathon mined 615 Bitcoins and Riot created 509 coins in the same period. This is what these companies do for a living, so of course they have a lot of Bitcoin.

But you have to be careful with Bitcoin miners. Ideally, they produce new bitcoins whose value exceeds the value of all this math. Bitcoin prices are rising in the long term and so are the miner’s home-grown cryptocurrency tokens. The development potential of this double-layered business idea is huge.

Although this is not always the case. When electricity prices are high and Bitcoin prices are low, pure crypto-mining companies may struggle to keep the lights on. Selling some of those hard-earned bitcoins just to pay the bills is a last resort, especially when cryptocurrency is cheap. Moreover, miners have to deal with various real-world problems that have nothing to do with the crypto market. For example, in the second quarter of 2022, Marathon faced production delays due to bad weather in Montana and a dispute over wind energy tax credits in Texas. These headaches can lead to serious financial problems, so cryptocurrencies add a significant additional layer of risk to an already unpredictable cryptocurrency market. This is why these stocks are more volatile than Bitcoin itself:

Bitcoin Price data by YCharts

Other Bitcoin holders are less open. The financial technology giant Block (NYSE: SQ) It doesn’t mine Bitcoin, but CEO Jack Dorsey sees great value in the biggest cryptocurrency, and Block has invested $220 million in Bitcoin so far. That’s a drop in the bucket next to Block’s $4.3 billion cash equivalent and $1.1 billion in short-term debt securities, but this collection of roughly 8,000 bitcoins is still respectable. Investing in blockchain gives you some exposure to Bitcoin and cryptocurrencies backed by the larger financial services business. This is one of the safest ways to dip your toes into digital currency waters.

At the other end of the spectrum, you’ll find a business intelligence specialist MicroStrategy (NASDAQ: MSTR ). Under the leadership of former CEO and current CEO Michael Saylor, this company has raised 130,000 bitcoins. MicroStrategy has invested most of its cash reserves in cryptocurrency and continues to fund more through the software operation’s free cash flow. MicroStrategy is also willing to take out loans and sell additional shares to buy more Bitcoins. The company recently took out a $205 million loan Silvergate Capital (NYSE: SI), where the collateral for the loan consists of MicroStrategy’s Bitcoin holdings. Of course, the Silvergate loan was immediately invested in more Bitcoin.

MicroStrategy’s Bitcoin is worth about $2.14 billion at current prices. That’s 35% more than the stock’s market cap of $1.58 billion. The software business provides a safety net in case a Bitcoin investment doesn’t pay off, but in many ways MicroStrategy is like a Bitcoin miner without a mining business. This stock is a high-risk, high-return entry into the crypto market, with a risk profile closer to Marathon and Riot than Block.

Funds and trusts

Many financial firms want to introduce exchange-traded funds (ETFs) that reflect the price of Bitcoin but trade like ordinary stocks. However, the Securities and Exchange Commission (SEC) has rejected these proposals, arguing that they do not provide sufficient protection against fraud and money laundering. If the steady stream of rejections ends, a Bitcoin-based ETF could become a solid combination of familiar trading rules and a direct link to Bitcoin’s price.

But we are not there yet. In the meantime, investment management professionals have offered several close but not quite alternatives.

  • Gray Bitcoin Trust (OTC: GBTC) it’s almost like an ETF. The trust holds 633,600 bitcoins, worth $10.5 billion at today’s prices. The Grayscale fund trades at a 40% discount to this Bitcoin value because the fund structure lacks many investor-friendly features. Investors expect the discount to disappear once Greyscale is allowed to convert this security into a related ETF.
  • Like ETFs ProShares Bitcoin Strategy ETF (NYSEMKT: BITO) Provide the ETF structure you want, but the fund’s market value is not backed by Bitcoin holdings. Instead, fund managers try to mirror the actual Bitcoin price by trading US Treasuries and Bitcoin futures contracts. This idea works, but price matching is rarely perfect, and heavy management effort adds overhead that reduces investor returns.

Both Grayscale Trust and futures-based ETFs like the ProShares fund above tend to underperform Bitcoin over the long term. Until investors can acquire full-featured Bitcoin ETFs that cover the currency’s performance with adjustable hedges, it’s probably better to own Bitcoin directly. The exception to this rule of thumb is that the Grayscale trust comes with a built-in inverse feature that should be triggered when the SEC starts creating Bitcoin-based ETF securities. The massive discount shows that many investors did not expect this to happen.

Bitcoin Price Chart

Bitcoin Price data by YCharts

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Anders Bylund holds positions at Bitcoin and Silvergate Capital Corporation. The Motley Fool owns and recommends positions in Bitcoin and Block, Inc. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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