Today, we are exploring six of the most important methods for individual investors to invest in Bitcoin and discussing the advantages of each method to help you determine which one is most suitable for you! This article is sourced from the Bankless article “6 Ways to Invest in Bitcoin in 2024,” compiled, translated, and written by Foresight News.
(Content Overview:
Bitcoin has been hovering around $50,000 for several days, will there be a shocking pullback before the upcoming halving bull market?
)
(Background Supplement:
Bitcoin surges, Coinbase custody earns big, US banks “green with envy”
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Table of Contents
Bitcoin Miners
Spot ETFs
Exchange Custody
Futures ETFs
Self-Custody
Which Method of Investing in Bitcoin is Best for You?
You may know how to buy some BTC and now spot BTC ETFs are available for trading in the US, making it easier than ever to access Bitcoin. But not all investment methods are the same…
Bitcoin miners use high-energy computing devices to solve complex cryptographic puzzles, hoping to guess a number or hash value, thereby solving the puzzle and gaining the ability to add the next block to the Bitcoin blockchain. In return, they can earn Bitcoin from token rewards and transaction fees.
Miners do not keep most of the Bitcoin they earn on their balance sheets. Instead, they sell it to pay for operating costs (electricity) 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 is important to remember that many miners may face profitability difficulties as their income from inflationary network rewards, currently accounting for 97% of the total reward for mining a Bitcoin block, will be halved.
The consolidation caused by poorly performing companies going offline or selling mining machines will benefit the remaining miners. Their control over the increase in Bitcoin network hash rate will allow 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 custodian, currently owning nearly 1% of all existing BTC!
Although MicroStrategy holds a large amount of Bitcoin, it does not charge shareholders management fees. Instead, it uses profits from its software business operations to cover these costs.
The remaining value of the 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 it holds because there is no mechanism enforcing a hard link.
When MSTR trades at a premium, management usually raises additional funds by selling stocks to dilute shareholders’ equity and buy more Bitcoin in the future. This sets a soft upper limit on MSTR’s market value exceeding the actual value of its software business and Bitcoin holdings.
Due to Saylor repeatedly stating that he will not sell, MSTR lacks any mechanisms that truly protect against downside risks, and the company’s market value may be lower than the market value of its Bitcoin holdings for a considerable period of time, which is a major risk for holders.
MicroStrategy swings between discounts and premiums, providing profitable opportunities for traders willing to take an opposite position to the market and revert to fair value. However, holding such stocks makes no sense for investors seeking purely Bitcoin exposure in the era of spot Bitcoin ETFs.
Spot Bitcoin ETFs were approved in January 2024, marking a milestone achievement for the cryptocurrency industry, allowing anyone in the US to access pure cryptocurrency exposure through traditional brokerage accounts. Such products have already existed in Canada and Europe.
The issuers of spot Bitcoin ETFs represent the shareholders of their ETFs and hand over the actual Bitcoin to professional cryptocurrency custody institutions such as Coinbase Custody, whose sole responsibility is to store customers’ digital assets.
Authorized participants can create or redeem shares of spot ETFs at any time, meaning that the market price of shares closely correlates with their net asset value. This is different from trust-based structures, such as Grayscale’s Bitcoin Trust (GBTC), which can trade at a premium or discount depending on Bitcoin demand.
Although some issuers currently waive fees for their spot Bitcoin ETFs, these fees will eventually expire. 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 shares of these instruments from their existing traditional financial brokerage accounts, just like buying 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 ETF tickers:
iShares Bitcoin Trust (IBIT)
Bitwise Bitcoin ETF (BITB)
VanEck Bitcoin Trust (HODL)
Valkyrie Bitcoin Fund (BRRR)
Grayscale Bitcoin Trust (GBTC)
Whether you are a newcomer to the cryptocurrency world looking to buy your first Bitcoin shares or a passionate Bitcoin enthusiast committed to accumulating Bitcoin relentlessly, centralized exchanges can serve as gateways 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 complexities of storing crypto assets and exchanging tokens across different networks.
Centralized exchanges do not charge users asset storage fees but earn revenue through transaction fees and other auxiliary trading services.
For non-US users, many centralized exchanges offer perpetual products that allow traders to speculate on the price of crypto assets using leverage to enhance returns and enable users to earn asset yields through lending and structured products.
While storing your Bitcoin on centralized exchanges has certain benefits, it is important to remember that you are entrusting the security of your crypto assets to another party and to bear in mind the principle that “not your keys, not your crypto assets.”
Similar to spot products, 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 inferior investment tools for Bitcoin. This is because futures contracts expire and need to be continuously rolled over, exposing investors to the effects of futures contango and backwardation, leading to futures prices deviating from the price of the underlying asset.
The issuers of Bitcoin futures ETFs charge management fees to investors. For example, ProShares Bitcoin Strategy ETF (BITO), the largest Bitcoin futures ETF in the US, has an annual management fee of 0.95%.
The cryptocurrency industry has witnessed the collapse of many exchanges, whether due to fraud or vulnerabilities. Storing your Bitcoin on centralized exchange platforms carries a significant risk.
With a little more effort and technical knowledge, ordinary cryptocurrency users can adopt self-custody methods to eliminate various risks associated with exchange custody!
Apart from the initial cost of purchasing hardware wallets (physical devices used to store the private keys needed to access your crypto assets), self-custody does not incur any additional costs.
While modern hardware devices from companies like Ledger come with user-friendly setup processes that make self-custody accessible to anyone with basic internet knowledge, 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 with no possibility of recovery!
Since Bitcoin does not possess the ability to support smart contracts, those who self-custody Bitcoin must first send it to a centralized exchange for sale, which adds time needed to acquire investment liquidity, especially for whales with large deposits, posing a risk of triggering compliance danger signals.
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