Bitcoin forced its way back into investors’ collective imagination last week after wild swings that had people dreaming of the cryptocurrency as a way to make traditional dollars fast.
As the mutual-fund industry moves closer to its first real bitcoin funds, the latest upswing in the price of bitcoin — which moved from $250 to above $450 on some exchanges in the last month — again had investors wondering if they should take the plunge.
When the Bitcoin Investment Trust gained 28 percent in a single day on Nov. 4, investors and the media — which seemed to lose focus on the new currency as prices had stabilized — were again captivated by currency’s wow factor.
Although the virtual currency has fallen sharply in recent days, it is still about 20 percent higher than it was a month ago.
The Bitcoin Investment Trust (GBTC) gives investors a look at what investors might expect when issues like the Winklevoss Bitcoin Trust get regulatory approval and start up. If the Winklevoss name rings a bell, you either saw “The Social Network” or know enough about the origins of Facebook (FB) to recognize twins Cameron and Tyler Winklevoss as the guys who walked away from a lawsuit with millions after claiming that Facebook founder Mark Zuckerberg stole their business idea.
Aside from the fund they are planning, the brothers’ newest business is Gemini, a New York-based bitcoin exchange that they hope will be the “Nasdaq of bitcoin.”
Until the Winklevoss issue or another bitcoin fund surfaces, there’s the Bitcoin Investment Trust, which feels roughly the same as buying a gold or precious metals ETF that holds the physical metal.
In the case of bitcoin, of course, there is nothing physical to “hold,” but there are parallel concerns.
Gold investors must store their precious metals safely and at reasonable cost, and deliver it for sale in a timely fashion; a physical-gold ETF avoids those concerns.
Likewise, a trust or fund eliminates concerns over storing bitcoin, where investors could have their bitcoin wallet hacked and have zero recourse if they invest directly in the cryptocurrency. It also eliminates the hassles of dealing with a bitcoin exchange; the collapse of Mt. Gox in 2014 showed another potential danger to holding bitcoin directly, especially when looking to cash out quickly.
Shares of the Bitcoin Investment Trust represent roughly 0.1 bitcoin and are tied to a daily 4 p.m. valuation of the market price. Shares are sold through a private placement that is restricted to qualified accredited investors — loosely defined as individuals with personal income north of $200,000 for the last two years, or a net worth exceeding $1 million — or are open to everyone through trading on the OTCQX.
While the recent action has investors dreaming of when it will be easy and fast to choose from among several bitcoin offerings, it also raised the eyebrows of skeptics, who pointed out that bitcoin is not like other currencies, if only because you don’t see sovereign currencies having such wild swings.
According to Morningstar, the biggest one-week gain over the last decade for a currency or precious-metals fund was a 31.68 percent gain for Van Eck International Investors Gold (INIIX), which occurred the first week of November in 2008, near the depths of despair around the financial crisis. No currency or precious metals ETF had a one-week gain of more than 25 percent over the last decade.
The biggest one-week declines for funds or ETFs in the last decade were roughly 22.5 percent, also right around the worst of the financial crisis, according to Morningstar.
Bitcoin Investment Trust — despite closing with two big down days — was up about 35 percent for the week ending Nov. 6, and had gained about 22 percent the previous week, meaning it had swings bigger than just about any currency fund saw during the worst financial crisis in recent memory, but with no clear reason sparking such oversized volatility.
Those movements raise questions about bitcoin’s validity as an alternative currency.
The currency where investors might expect the most volatility right now is China’s yuan, and despite concerns that have sent China’s market reeling this year, the WisdomTree Chinese Yuan Strategy ETF (CYB) hasn’t seen anything close to double-digit moves over the course of a week.
“If there’s any argument as to why bitcoin is not a currency, it’s that it can double so quickly,” said Charles Rotblut, vice president of the American Association of Individual Investors.
But for investors who believe in the potential, it’s hard to ignore the action.
Tom Lydon, of ETF Trends, noted that “the case for Bitcoin is compelling and will continue to gain traction as global investors are affected by currency fluctuations. … Cryptocurrency will have a place in investing down the road; it just depends on whether you have the nerve to be an early adopter.”