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Bitcoin Part II

Now that we have established a potential motivation for buying bitcoin, the natural question arises: how? Being a new technology, there are many things to learn and to get comfortable with. What follows is my own experience and knowledge of the opportunities, but it is by no means all-encompassing nor should it be construed as a recommendation or advice.

 

In today’s environment, many people are in search of the easiest way to access a given asset class. The ETF structure has provided untold convenience to investors looking to access anything from gold to stocks. While it’s not the focus of this blog, it is important to understand the way in which ETFs operate to contrast that against the current offerings for bitcoin. How much would you pay for a plastic bag with four quarters inside? Silly question, right? At the risk of oversimplifying things, ETFs do a pretty good job of ensuring that the amount paid for the package equals the value of the things inside. As of this writing, there is no bitcoin ETF. There are similar solutions, but the differences in experience for you, the investor, can be vast. As you can see in the graph below, the premium that people were willing to pay for one of these products was 33.12% recently. In our example, this is like paying $1.33 for that bag of quarters.

 

 

As a result, the performance of the chosen product can differ vastly from the underlying asset as seen below.

 

 

The current discount could turn into a premium again, but as Dave Nadig at ETFtrends.com details here, with the increasing number of direct access routes, why would people be willing to pay a premium moving forward?

 

My personal experience has been to use an all-in-one platform via an app on my phone. There are an increasing number of options for this such as Coinbase, Cash App, and Gemini. The interfaces are user-friendly and my experience with depositing and withdrawing US Dollars has been seamless. Of course these enterprises don’t provide these services for free so each transaction carries a fee. Security and being able to remember your password are two issues that get a lot of press, but custodian platforms aim to solve these problems for the average user. Hackers will do anything to get their hands on your money so caution is warranted in all these endeavors.

 

This blog was written with the perspective of the average investor in mind, but I would be remiss if I did not mention that there are many other options and considerations regarding crypto investing. I’ll admit that I am just scratching the surface here and my knowledge on the subject is constantly evolving. For those interested, the CFA Institute put out a very in-depth summary of the landscape which I would highly recommend. I’ll reiterate that any decisions made about your money should be done in the context of your personal capacity and desire to take risk.


Questions? Contact the author, David Rath, at drath@contwealth.com