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You may know how to purchase some BTC, and now with spot BTC ETFs trading in the US, access to Bitcoin has never been easier, but not all investment avenues are created equal...
Today, we're exploring the six most significant ways individual investors can invest in Bitcoin and discussing the advantages of each method to help you determine which approach is best for you!
Bitcoin Mining
Bitcoin miners use high-energy computing devices to solve complex cryptographic puzzles, hoping to guess a number or hash value, thus solving the problem and gaining the ability to add the next block to the Bitcoin blockchain. In return, they can earn Bitcoin from inflationary token rewards and transaction fees.
Miners do not keep most of the Bitcoin they earn on their balance sheets but instead sell it to cover operational costs (electricity bills) or expansion (purchasing new mining machines). However, since their income is denominated in Bitcoin, miner profitability is inherently linked to the price of Bitcoin!
As the halving approaches, it's important to remember that many miners may face profitability challenges as their income from inflationary network rewards, currently accounting for 97% of the total reward for mining a Bitcoin block, will be halved.
The downsizing of companies due to poor profitability or the sale of mining machines leading to consolidation will benefit the remaining miners, who control the increasing hash rate of the Bitcoin network, enabling them to mine more Bitcoin blocks.
Popular Bitcoin Miners:
- Marathon Digital Holdings Inc. (MARA)
- Riot Platforms Inc. (RIOT)
- CleanSpark Inc. (CLSK)
MicroStrategy
Michael Saylor made his legendary BTC bet in August 2020, transforming his business intelligence technology company into a massive Bitcoin custodial tool, currently holding nearly 1% of all estimated existing BTC!
While MicroStrategy holds a large amount of Bitcoin, it does not charge management fees to shareholders but uses profits from its software business operations to cover these costs.
The remaining value of BTC held by MicroStrategy (i.e., its market value minus the value of its core software business) tends to trade at a premium or discount relative to the actual market value of BTC held by the company, as there is no enforced hard mechanism for tying them together.
When MSTR trades at a premium, management often raises additional funds by selling stocks to dilute shareholder equity to buy more Bitcoin in the future, setting a soft upper limit on MSTR's market value exceeding the actual value of its software business and Bitcoin holdings.
As Saylor has repeatedly stated he will not sell, MSTR lacks any mechanism to truly protect against downside risks, and the company's market value may remain below the market value of its Bitcoin holdings for a considerable time, which is a significant risk for holders.
MicroStrategy oscillates between discounts and premiums, offering profitable opportunities for traders willing to oppose the market and revert to parity when prices deviate, but in the era of spot Bitcoin ETFs, holding such stocks makes no sense for investors seeking pure Bitcoin exposure.
Spot ETFs
Bitcoin spot ETFs were approved in January 2024, marking a milestone achievement for the cryptocurrency industry, allowing anyone in the US to gain exposure to pure cryptocurrency through traditional brokerage accounts, a product that has long existed in Canada and Europe.
The issuers of spot Bitcoin ETFs hold actual Bitcoin on behalf of their ETF shareholders and deliver them to professional cryptocurrency custody institutions, such as Coinbase Custody, whose sole responsibility is to store clients' digital assets.
Authorized participants can create or redeem shares of spot ETFs at any time, meaning the market price of the shares is closely related to their net asset value, unlike institution-based trusts such as Grayscale's Bitcoin Trust (GBTC), which fluctuates with changes in Bitcoin demand.
While some issuers currently waive fees for their spot Bitcoin ETFs, these fees will eventually expire, and afterward, holders will pay annual management fees ranging from 0.19% to 1.5% depending on the product they invest in.
One of the most attractive features of spot Bitcoin ETFs is their integration with the traditional financial system, allowing investors to purchase these instruments' shares from their existing traditional financial brokerage accounts, much like buying more traditional investments such as stocks and bonds.
Additionally, being able to hold these ETFs in existing tax-advantaged accounts such as retirement accounts (401(k)s) or individual retirement accounts (IRAs) is a significant advantage for long-term investors seeking to optimize tax efficiency.
Popular US Spot BTC ETFs:
- iShares Bitcoin Trust (IBIT)
- Bitwise Bitcoin ETF (BITB)
- VanEck Bitcoin Trust (HODL)
- Valkyrie Bitcoin Fund (BRRR)
- Grayscale Bitcoin Trust (GBTC)
Exchange Custody
Whether you're a newcomer to the cryptocurrency world looking to buy your first Bitcoin share or a fervent Bitcoin enthusiast committed to accumulating Bitcoin relentlessly, centralized exchanges can be the gateway for you to enter the world of crypto assets!
Centralized exchanges facilitate easy conversion between fiat currency and crypto assets, while shielding users from the technical complexity of storing crypto assets and exchanging tokens across different networks.
Centralized exchanges do not charge users asset storage fees but earn revenue through trading fees and other ancillary trading services.
For non-US users, many centralized exchanges offer perpetual products that allow traders to speculate on cryptocurrency prices using leverage to increase returns and let users gain asset yields through lending and structured products.
While storing your Bitcoin on centralized exchanges has its benefits, it's important to remember that you're entrusting the security of your crypto assets to another party and to bear in mind the principle "not your keys, not your crypto assets."
Futures ETFs
Similar to spot Bitcoin ETFs, Bitcoin futures ETFs also allow investors to buy and sell Bitcoin on centralized exchanges, but they hold Bitcoin futures contracts instead of physical Bitcoin.
Compared to spot products, futures ETFs are considered a suboptimal investment tool for Bitcoin because futures contracts expire and require continuous rolling over, exposing investors to the effects of futures premium (contango) and depreciation (backwardation), leading to futures prices deviating from the underlying asset's price.
The issuers of Bitcoin futures ETFs charge management fees to investors, such as the US's largest Bitcoin futures ETF, ProShares Bitcoin Strategy ETF (BITO), with an annual management fee of 0.95%.
Popular US Futures BTC ETF:
- ProShares Bitcoin Strategy ETF (BITO)
Self-Custody
The cryptocurrency industry has seen many exchange collapses, whether due to fraud or vulnerabilities, and storing your Bitcoin on centralized exchanges where you purchased it is a risky behavior.
With a little more effort and technical knowledge, ordinary cryptocurrency users can eliminate the various risks associated with exchange custody by adopting self-custody!
Aside from the initial cost of purchasing a hardware wallet (a physical device used to store the private keys required to access your crypto assets), self-custody has no additional costs.
Although modern hardware devices from companies like Ledger come with easy setup processes that allow anyone with basic network knowledge to self-custody, key management remains a challenge for users, as those who fail to properly record or protect wallet recovery phrases face a 100% risk of fund loss and cannot recover them!
As Bitcoin does not have the ability to support smart contracts, those self-custodying Bitcoin must first send it to centralized exchanges for sale, which increases the time required to obtain investment liquidity, especially for whales with large deposits,
posing a risk of triggering compliance danger signals. |
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Post time 1-3-2024 20:03:15