Ready to bypass the dollar and buy into bitcoin?


When you think of your financial legacy, it’s more likely to be shares of General Electric (GE) than a nascent, unregulated electronic currency that is outside the traditional banking system.

But the day is coming when investing in that currency won’t seem so risky or far-fetched.

You see, I’m kind of a fan of Bitcoin.

The fact that there’s a currency that operates outside of the governments of the world is a concept I am on board with. I think it’s disturbing and humbling to government leaders and central bankers.

Here’s a currency that eludes their manipulations, their taxations and their scrutiny: a private, democratic currency that is about as free market as it gets.

And it’s earning its place as a legacy for future generations.

Its origins

Bitcoin is an experimental, decentralized digital currency that enables instant payments to anyone, anywhere in the world.

Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.

Some of the advantages:

  • Bitcoins are sent easily through the Internet, without needing to trust any third party.
  • Transactions:
    • Are irreversible by design
    • Are fast. Funds received are available for spending within minutes.
    • Cost very little, especially compared to other payment networks.
  • The supply of bitcoins is regulated by software and the agreement of users of the system and cannot be manipulated by any government, bank, organization or individual. The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) to miners who help secure the network.

The disadvantages are that while transactions are discreet, and everything is encrypted, and it’s very difficult to track the transactions or the money, or who holds how much…

… as my colleague Brandon Smith pointed out, “Bitcoin trading and Bitcoin mining requires the continued operation of the Web. The Internet is not a creative commons, as many believe. It is, in fact, a controlled networking system that we have simply been allowed to use. The exposure by Edward Snowden of NSA activities has proven once and for all that nothing you do on the Web is private. Everything is tracked and recorded. Period.”

Unease from the establishment

As you can well understand, large organizations, like the Government at large, the U.S. Treasury in particular, and even Wall Street find bitcoin’s hidden structure a cause for concern, even with all their tracking prowess.

It will be a good case study in how well a government can actually control the way the people use currency, and whether the people and not the government will get to chooses how they transact business.

The top-down view is that it isn’t regulated (except for through peer networks) and the price of coins can swing wildly.

Now as far as price volatility, that hasn’t seemed to bother anyone when it came to precious metals or commodities. But then again, they’re priced in dollars, which means anyone who wants to buy gold or copper needs to hold dollars. And that’s good for the U.S. government and Wall Street. It’s an easy, predictable system that can be gamed by traders because there’s a long history of the interplay.

You’ve heard the term “the markets hate uncertainty.” Well, there are few things that are as uncertain as a brand-new cyber currency built by an unknown person or people and beholden to no one or nothing. It’s a collective store of value only relative to other Bitcoin holders and vendors.

Wading in

Certainly these are early days for cryptocurrencies and financial tech, and it’s prudent to be careful. But now is the time to start thinking about how you want to engage these new realities.

Governments have been trying to disrupt the bitcoin market now and again to declare the dangers and instability of the system. But Bitcoin programmers have reworked the algorithms and analytics to make the system more robust.

You can obviously buy bitcoin, or mine them yourself. But they are now very difficult to mine without a LOT of computing power. However, there are three other ways in: a trust, an ETF “wrapper” and hedge fund.

  • The first is Grayscale’s Bitcoin Investment Trust, which is a publicly quoted security solely invested in and deriving value from the price of bitcoin.

It trades on the OTCQX exchange under ticker symbol: GBTC. You can buy or sell any time, and buy into GBTC for whatever account you want.

  • Ark Invest, which likes to invest in what it calls “disruptive innovation.” So it added bitcoins to one of its ETF portfolios.

You get direct exposure to the crypto currency in an ETF “wrapper.” The Winklevoss Bitcoin Trust ETF (COIN) was supposed to give investors a true bitcoin ETF, except that the SEC – which took years to approve a gold ETF – has not approved COIN to track the value of the newly-designated commodity known as bitcoin.

However, the ARK Web x.0 ETF (ARKW) includes an allocation to bitcoins accrued through publicly traded shares of the Bitcoin Investment Trust.

  • There are also quite a few hedge funds looking to make a return with bitcoin. These funds usually have initial minimum subscriptions of $100,000 or more, and you will pay fees. But, there are analysts who feel that capital flight from China and other countries exercising currency controls will cause the value of bitcoin to soar.

Your own risk profile should be enough to move you toward one of these choices. The next time you’re eyeing some obscure biotech or mining shares, maybe give Bitcoin some thought. It may be just the kind of thing that helps inspire the next generation of investors.

— GS Early