Have you decided to invest in Bitcoin? Then you should know that there is more than one way to do that.
In fact, there are multiple options! However, for newcomers to the digital currency space, navigating the various investment methods can be overwhelming.
In this article, we'll explore six distinct ways to invest in Bitcoin, evaluating the pros and cons of each; assessing the fees, how easy it is to buy or sell (tradability), counterparty risk, and the legal structure.
1. Direct Purchase of Bitcoin
What is it? The direct purchase of Bitcoin from a cryptocurrency exchange or peer-to-peer platform. This method ensures ownership of the cryptocurrency itself, providing investors with direct access to their Bitcoin.
Advantages:
- Low Fees: Transactions typically incur minimal costs.
- Full Ownership and Control: Investors have complete ownership and control over their Bitcoin.
- Counterparty risk: does not exist if you are using your own wallet and not a centralized exchange.
Disadvantages:
- Technical knowledge required to deal with the wallet.
2. Bitcoin Investment Trusts (BITs)
What is it? Investment vehicles that hold Bitcoin on behalf of investors, offering a more traditional investment method within the cryptocurrency space. Ownership is represented through a fund share rather than direct ownership of the cryptocurrency itself.
Advantages:
- Accessibility for traditional investors due to institutionalized setup.
- Counterparty Risk: Medium, depending on the trust's credibility and operational integrity, assets are usually managed by trust entities that provide an additional security layer.
Disadvantages:
- Fees: tend to be rather high, with management fees typically applied.
- Tradability: rather limited to end of day/week/month or quarter dates, depending on subscription and redemption policies.
- Regulatory Constraints: Possible regulatory issues may affect availability and accessibility for investors.
3. Bitcoin Futures
What is it? Contracts that allow for speculation on the future prices of Bitcoin, representing ownership through a derivative contract.
Advantages:
- Tradability: High, particularly on regulated exchanges.
- Capital efficiency: high due to limited margin and possibility to use leverage.
Disadvantages:
- Fees: Rather high, especially the funding rates, with trading fees comparable to traditional futures markets, which can be a significant drawback for investors.
- Complexity: Requires a good understanding of futures trading.
- Counterparty Risk: High
4. Bitcoin Funds
What is it? Mutual funds or hedge funds that invest in Bitcoin and other cryptocurrencies, providing investors with ownership in a fund share.
Advantages:
- Counterparty Risk: Medium, as funds are professionally managed.
- Accessibility for traditional investors due to institutionalized setup.
Disadvantages:
- Tradability: rather limited to end of day/week/month or quarter dates, depending on subscription and redemption policies.
- Fees: Medium to high management fees can significantly impact returns, posing a considerable disadvantage.
- Accessibility: Often limited to accredited investors.
5. Bitcoin Exchange-Traded Funds (ETFs)
What is it? Publicly traded funds that mirror the price movements of Bitcoin, offering investors ownership in a fund share.
Advantages:
- Fees: Medium, with management fees like traditional ETFs.
- Tradability: High, as these funds are traded on stock exchanges.
Disadvantages:
- Price Deviation: Prices may deviate from the Net Asset Value (NAV), which can be a concern for investors seeking close tracking of Bitcoin's market price.
- Counterparty Risk: Medium, given that ETFs are regulated investment products. Unclear how delivery of Bitcoins would work in case of trust issues.
6. Bitcoin Exchange-Traded Products (ETPs)
What is it? Similar to ETFs but may include a broader range of products such as ETNs. ETNs are a type of debt issued by financial entities, designed to track the performance of Bitcoin. Instead of owning Bitcoin directly, investors own a piece of debt that follows Bitcoin's price changes.
Advantages:
- Fees: Medium, however often higher comparable to those of ETFs.
- Tradability: High, as these products are traded on regulated exchanges.
Disadvantages:
- Counterparty Risk: High, varying with the product's structure and the issuing entity's jurisdiction. Particularly relevant for ETNs and their issuing legal entities, as well as the jurisdiction's regulatory framework, which can affect investor security.
- Market Influence: Prices may be significantly influenced by market demand, which can lead to variability in investment returns.
6 ways to invest in Bitcoin - table summary.
To sum up, Bitcoin investment offers various options, each with its own benefits and risks, as shown in the table above.
Whether you choose to own Bitcoin directly, invest through traditional methods, or explore derivatives, knowing about the fees, tradability, the risks involved, and the legal aspects is key.
Before you start investing in Bitcoin, it's wise to do your homework and possibly talk to a financial expert. This can help you make smart choices in the fast-changing world of cryptocurrency. If you'd like to discuss investments in Bitcoin with us, please reach out via our website.
With careful thought and smart decisions, investing in Bitcoin could be a valuable addition to your investment portfolio.
Disclaimer: This piece of information is for marketing and entertainment purposes only and should not be taken as an investment recommendation. Remember that all investments involve risk. Please read our full Marketing Disclaimer here.