Under Bitcoin’s leadership, cryptocurrencies have emerged as assets university endowments are investing in and financial institutions are trying to emulate. Blockchain companies have also emerged as top investments of the most forward-thinking venture capitalists. 2017 was a milestone year for crypto but was followed by the extended 2018 bear market.
This year so far has been largely positive for crypto, including additional institutional projects from Fidelity, JP Morgan, Facebook, and more, reaffirming its utility.
If you’re considering investing in Bitcoin, blockchain, or cryptocurrency, this article will serve as an introductory guide on ways you can invest in digital currencies. Let's begin with some of the common ways to invest in Crypto and the Blockchain:
Open to Everyone:
Buying select tokens or coins, such as Bitcoin: We often point retail investors to get their start on exchanges like Coinbase or Gemini. Crypto exchanges can be categorized as those for which you trade crypto into crypto or those that accept "fiat", or a government-backed currency like dollars, and those that only exchange one type of crypto, like Bitcoin, for another, like Ethereum. Coinbase and Gemini both will allow you to buy crypto with dollars.
For larger purchases (over $100K USD), investors may choose to contact an OTC desk such as Cumberland, Circle, or an exchange like Coinbase, Gemini, or Kraken’s own OTC desk. Please note that security with purchasing crypto is paramount, and exchanges often get hacked. Many crypto investors choose to keep their funds in a software or a hardware wallet like Exodus, Trezor, or a Ledger, instead of on an exchange. This is considered "self-custody." Many professional investors, like crypto funds, utilize 3rd-party custodians.
Seasoned Investment Trusts: Investment trusts also exist, through companies such as Grayscale and their GBTC fund. What is a trust? An investment trust is a company that owns a fixed amount of a given asset (like gold or bitcoin). Investors pool money and buy shares of the trust, owning contracts that represent ownership of the asset held by the trust. So, you're buying a share or a stock, instead of Bitcoin directly, which comes with both positives and negatives.
Non-accredited investors can only buy "seasoned" investment trust assets, meaning they have already been on the market for 1 year.
So, in the case of GBTC, Grayscale periodically sells GBTC at about market rate for Bitcoin -- to accredited investors only . After a year, those accredited investors can sell their shares to anyone on the pink sheet GBTC markets. But, these often sell at a premium, about 30-40% more expensive than buying BTC directly, or buying from Grayscale in the accredited investor private sale (minimum of $50K). It does have some of the similar advantages as funds below, such as built-in custody and allowing you to purchase through your IRA and through platforms such as TD Ameritrade, instead the of crypto-specific exchanges where you would directly purchase crypto assets.
Whether you are an accredited investor or not, you can purchase any amount of shares (with no holding period restriction) of products such as GBTC, ETCG, or ETHE. Fees charged would be imposed by your broker for purchases and sales. If you're not an accredited investor, there is no way for you to directly participate in the Investment Trust's direct private placement offerings.
Note that there is also an index fund that was just listed on the open market in July, the Amun Bitwise Select 10 Lrg Cp Crypto ETN (KEYS.SW), but it is new and there is low volume. The vast majority are not offered to non-accredited investors, so we've kept this option to that section.
Blockchain Equity ETFs: ETFs already exist that put together companies that are doing something with blockchain, such as IBM, but this is a few steps removed from actual investment in blockchain or crypto and is generally a small portion of what those companies do. The SEC is currently reviewing proposals for Bitcoin ETFs, but they do not yet exist, and it could be months to years until they do.
Accredited Investors and/or Qualified Purchasers Only:
Crypto index funds (structured as Investment Trusts): Accredited investors can buy into Investment Trusts at the time of offering rather than waiting a year for it to be seasoned. There are Investment Trusts that are structured as one asset, like GBTC explained above, and those structured as multiple assets, like Bitwise's Hold10 or the Grayscale Digital Large Cap Fund. These funds buy a market-cap weighted position in, say, the top 5 or 10 crypto assets, and hold, rebalancing monthly.
We find the industry-standard management fee for this quite high, at 2.5%. Note that index funds in crypto are currently structured as accredited-investor-only funds, meaning that investors must attest that they meet the minimum income or net worth.
Equity investments: If you’re a fan of angel investing or venture capital, you can also seek direct, private equity investments in blockchain and crypto projects. This is typically what people mean when they talk about investing in blockchain companies, as no pure-play blockchain companies are publicly listed yet.
Investors in BitBull, for example, include angel investors from groups like Sand Hill Angels, Keiretsu, and even Venture Capitalists. Our investors receive a regular “Opportunistic Deal” memo with some notable investments that our funds make that have additional room for equity allocation. To see blockchain equity deals that have been opened to a more general angel investor audience, you can visit AngelList’s venture, CoinList.
Crypto Hedge and Venture Funds: Crypto funds are actively managed by professional asset managers, and attempt to get maximum balance through utilizing various strategies and in light of market conditions. Examples include:
Crypto hedge funds typically focus on liquid investments, such as publicly-listed tokens like Bitcoin, while Venture Funds typically focus on equity investments. But, as we've learned through BitBull Fund -- through which we're investors in 10 such funds -- many crypto hedge funds also invest in equity, and many crypto venture funds also hold tokens at certain times. One investment we're proud of through our hedge funds, for example, is equity in the crypto exchange Coinbase.
Terms of the funds, then, are important to understand thoroughly.
For example, usually you can withdraw (or redeem) your capital from a crypto hedge fund monthly or quarterly, and you may have a one-year lockup for that capital, but for blockchain venture funds, you may not be able to get back your money until the investment has come to an exit, or even after that if it's decided that the return from one exit will be reinvested in other ventures; there is typically about a 5 of 7 year horizon until your money is returned. You will know the value of your returns from hedge funds monthly, while venture fund returns are often estimated annually.
For more on this, please see our article on how to diligence crypto funds.
Crypto fund returns will differ vastly depending on the strategies they use. Is the benchmark of that fund, for example, USD, or a crypto index? "Market-neutral" investment strategies like arbitrage and market-making are commonly benchmarked against the US dollar--they should go up regardless of the direction of the underlying crypto assets like Bitcoin, because they are trading on market inefficiencies rather than the direction in which crypto is going -- while "Directional" strategies such as early-stage crypto assets, including ICOs and IEOs when appropriate, and equity, may be best benchmarked against a crypto index.
Blockchain venture funds are longer-term investors in blockchain companies, aiming to profit from future appreciation, but often going down when the market goes down, while hedge funds with trading strategies may be shorter-term and (sometimes buying and selling many times in a single day), focused on immediate profits based on market volatility and risk management.
To do this, hedge funds often engage in-depth information, on both technical and fundamental aspects of the market, as well as active risk management to limit the downside. While Venture Funds are focused on long-term, directional investments, and typically have closed-ended funds where investment is required by a certain date, and then locked up for several years, crypto hedge funds typically invest in liquid crypto assets, while often also doing a smaller portion of equity investments.
Venture funds will invest close to 100% in the equity of blockchain companies, but may also hold some tokens, often those tokens associated with companies they've invested in.
Crypto fund of funds: A fund of funds is multi-manager investment, where you invest in a fund whose portfolio consists of investments in other funds. These funds strategies are varied and can include market-neutral strategies like arbitrage and market-making, as well as directional strategies such as ICO investing and equity investments in blockchain companies. Investing in a fund of funds has several advantages, especially because a fund of funds pools investments to enter into larger, more exclusive funds, which typically get early access deals into lucrative projects.
As opposed to venture funds, crypto hedge funds often typically utilize market-neutral strategies. An example of a direct crypto fund is our BitBull Opportunistic Fund, which leverages strategies around crypto’s volatility, including arbitrage and market making, and aims to generate optimum alpha.
Why invest in Bitcoin and crypto at all?
Cryptocurrencies like Bitcoin have established themselves as an emerging new asset class, distinct from bonds, equities, and fiat currencies. This recognition took considerable time, but today investors, large and small, are keen on adding more cryptocurrencies to their portfolios.
Disruptive technology: At a fundamental level, Bitcoin and other leading cryptocurrencies have the potential to disrupt the existing financial system across the world. This is the reason for the comments and concerns raised by governments, central banks, the International Monetary Fund and more recently, US Secretary of Treasury Steven Mnuchin.
Potential for and history of high payoff: This disruptive quality of Bitcoin (and cryptocurrencies) presents a unique investment opportunity in the future of the global economy, meriting consideration. Bitcoin’s average return since inception has been 993%. You can see additional BitBull research on crypto returns here and here.
A small investment can mean outsized gains: Because of crypto’s historically high payoff, even a 1% allocation would have almost doubled returns of a portfolio invested in the S&P 500 in 2017, from 22% to 42%. On the other hand, if the value of crypto were to go to 0, or face a down year such as 2018, the maximum loss would only be 1%.
Potential for high returns of diversified, actively managed strategies: Prudent investors pay attention to the correlation between their portfolio investments. Whether it is stocks, bonds, gold or real estate, it is important to have diversification so that an adverse economic event does not impact the entire portfolio in the same way.
Bitcoin and the crypto space has shown, time and again, that it does not necessarily follow traditional assets in market action. This lack of correlation makes Bitcoin a very attractive alternative investment.
Bitcoin vs traditional alternative investments
Where most portfolios are heavy on stocks and bonds, the need for diversification is fulfilled by alternative investments, which have traditionally consisted of commodities like gold or foreign currencies; private equity and venture capital; real estate, and others. Bitcoin, in our view, is a very strong contender for a spot in the ‘alternative investments’ allocation in any portfolio and has numerous benefits over traditional candidates.
"Liquid Venture Capital?": While many blockchain and crypto investors choose to make angel investments in blockchain companies, crypto can be seen as a type of “liquid venture capital” where investors get a part of a disruptive technology, while investing in an area that has up to the second pricing, and immediate liquidity (over $10B of Bitcoin trades per day per www.coinmarketcap.com). Emerging technology investments have historically been a high-performing asset, so the liquidity of crypto while enabling exposure to emerging tech has been very attractive to investors.
Even private equity is now evolving to make room for crypto investments, where equity projects raise funds via cryptocurrencies, including Bitcoin and Ethereum, and the crypto gives ownership of equity, and dividend distribution process is handled over the blockchain.
Bitcoin vs Gold: Bitcoin and gold are often discussed together, where the former is likened to the latter’s digital iteration. While some of their characteristics do overlap (mining, limited supply, store of value), gold is less liquid (due to physical storage and movement constraints) and does not present the same opportunity for growth and return as Bitcoin. Within the crypto industry, many believe that Bitcoin is superior to gold for many reasons and has the potential to be used alongside gold, and yet has about 50x to grow in value to be on par with gold.
Ray Dalio, the head of Bridgewater Capital, recently spoke in July 2019 regarding alternative assets. He said:
“Those that will most likely do best are those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweight in such assets, meaning that if they just wanted to have a better-balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”
Real Estate: Similarly, real estate, though a very stable avenue for alternative investments, is significantly less liquid, and the market price is considerably less reliable. Bitcoin, on the other hand, is traded 24 hours, 7 days a week and its spot price is readily accessible through various channels and exchanges.
Like with equity, emerging crypto assets have not only replicated equity ownership but also tokenized real estate ownership, so many real estate ventures are now emerging within crypto assets.
Fiat Currencies: Moreover, fiat currencies, which provide security and liquidity, also prove to be poor investments in comparison to Bitcoin due to their inflationary nature (whereas Bitcoin is technically a deflationary currency). While the value of one US Dollar has gone down 97% over time, Bitcoin has a finite amount that will ever be created, and its value has gone up over time.
However, these arguments do not endorse a complete substitution of all alternative investment assets with Bitcoin, they merely establish that the leading digital currency, with its unique value proposition and high-risk-high-reward nature, merits a spot in any well-managed portfolio.
Portfolio allocation for Bitcoin and Cryptos
Bitcoin and cryptocurrencies, in general, remain very risky propositions for the uninitiated, and we often find prudent investors asking ‘how much of your portfolio should be in Bitcoin and crypto?’
Having established the purpose of having Bitcoin and cryptocurrencies in an investment portfolio, we can discuss actual allocation, which comes down to an individual’s appetite for risk and consideration of both short and long-term goals.
Saving for retirement, for instance, is a long-term investment, and we would say anywhere between 0% – 5% is a good start.
For short-term objectives, a 5% – 10% allocation with active balancing every 6 months would be a prudent strategy.
Given the inherent volatility of crypto markets, rebalancing regularly is critical to generating maximum returns. This necessitates active management which takes the market’s up and downsides into consideration.
For some investors, it may also make sense to opt for an actively managed crypto fund (versus a passive investment such as an index). Again, this is due to the volatility in crypto and the benefits of a fund which actively works to profit off of that volatility.
(Disclosure: The Author is the CEO at BitBull Capital)