In the previous post of the “How to invest in Bitcoin profitably” series, I explained how indirect investments in Bitcoin would work. Though the methods described can be heralded as safe or risk averse, the returns are substantially small and are incurred over longer durations. But part 1 explained methods that are pretty risky if the market gets volatile. So people more often ask me a smart way of investing in the cryptocurrency where either the risk is not too high but the returns are substantial or a way that gives them additional benefits apart from the profits for the kind of risk they are incurring. Well there are a couple of ways and that is what this final post in the series of bitcoin investment posts is about. Let’s look into those methods:
Bitcoin Investment Trust’s GBTC:
‘Bitcoin Investment Trust’ was launched in 2013 by Barry Silbert, is an open ended trust that is invested exclusively in bitcoin and derives its value solely from the price of bitcoin. It enables accredited investors, with annual incomes greater than $200,000 or assets of more than $1 million, to gain exposure to the price movement of bitcoin for a minimum investment of $25,000 without the challenges of buying and securely storing bitcoin. The price of GBTC shares roughly account for 10% of Bitcoin price and hence people wouldn’t be directly exposed to the risk of Bitcoin. It also gives you additional tax benefits apart from the reduced exposure.
Bitcoin Investment Retirement Account:
While GBTC holds good promise, it is available only for accredited investors. The other instrument which is the most common one, that also provides tax benefits along with good return on investments in Bitcoin would be Bitcoin IRA. Bitcoin IRA allows users of any scale to invest directly in Bitcoin and hence directly apes investments in real time Bitcoin markets. The customers hold the Bitcoin directly where Kingdom Trust acts as the custodian and BitGo secures the cryptocurrency. The firm uses Genesis Trading to purchase Bitcoin and has an annual contribution limit of $5000.
Due to GBTC’s limited availability, Bitcoin IRA proves to be the better option with good amount of returns aggregated over a period of time. It would also provide tax benefits and good exposure to Bitcoin markets.
Bitcoin Valuation Adjustment
In a recent report, investment firm Needham and Company revised the estimated present value of Bitcoin from $655 to $848. The estimate accounts for a projected increase in market share in the retail payments market, upward trending adoption rates, reduced volatility, and technological developments surrounding Bitcoin. The firm believes that the global market for retail payments will reach $67.5 trillion by 2020 and that Bitcoin will likely capture .28% ($182 billion) of payments. Using confirmed Bitcoin transactions as a correlative tool to estimate total transactions, information from blockchain.info reveals that daily confirmed transactions have approximately doubled over the past two years to 200,000 per day.
Graph from Blockchain.info
Reduced volatility also contributes to Needham and Co.’s analysis of Bitcoin. Volatility is now more comparable to traditional assets, even smaller than certain energy and technology stocks. Lastly, the investment firm believes that the expansion in technologies surrounding Bitcoin that will come to market over the course of the next year will increase demand for Bitcoin, driving the value upwards. The rapid growth in valuation reflects the magnitude of these shifts.
The report was issued by New York based firm Needham and Company. The firm has offered investment banking services and asset management for 31 years. Since its founding, the firm has led or co-managed over 785 public offerings and completed over 385 mergers and acquisitions.
Report author Spencer Bogart is a chartered financial analyst, with two years’ experience as an equity researcher at Needham and Company. In a previous report, Bogart estimated the value of Bitcoin to be $655, over $200 higher than the $412 present day value of Bitcoin when the report was issued. Following his previous estimation, the value of Bitcoin exceeded his estimations, reaching $675 within three months of his projection. If his current estimates are accurate, Bitcoin investors can expect serious value growth in coming months.
Needham and Co. logo from wikipedia, Blockchain.info graph from article.
Amongst the list of disruptive innovations of the century, Bitcoin has been the most impactful one. This emerging digital asset has revolutionized money, payments and transfer of assets. Its strong selling point lies in the fact that it transfers value in a secure way via a distributed and decentralized network. Owing to the increase in its adoption, Bitcoin stands as the best performing asset and currency of 2015. Portfolio diversification is turning out to be another key use of Bitcoin.
Last Year witnessed many macroeconomic issues that hit the global economy hard. During this phase heavy funds have flown into the Bitcoin market when most assets plummeted under speculation. While this was supposed to be a short term boost, the crypto-currency continued to rise with higher trading volumes. This new found confidence in Bitcoin is due to factors which also make it an effective tool for portfolio diversification. Let us look into these factors in detail:
Bitcoin is non-correlated asset
The ideal characteristic of a portfolio is that every component should be non-related. When one asset takes a hit, the other components should be chosen such that the losses are minimized. Additionally, these components should be able to provide potential to improve returns for that level of risk. Most of the asset classes are related owing to some or the other fundamental factors. But over the past year, with so many tumultuous events, while most asset classes were dislocated, Bitcoin was unaffected. This is majorly because Bitcoin has very little or no correlation with any of the other asset classes. In comparison with fiat currencies and other assets around the world, Bitcoin had very little correlation (<0.3). Hence we believe that bitcoin could do well as a diversifier in a globally allocated portfolio.
Reduction in volatility levels
2015 saw tectonic shifts in the Bitcoin ecosystem with heavy investments till date. This included global banks, credit card issuers and hedge funds. As Bitcoin gains further acceptance and the underlying technology is adopted furthermore, we can see stability in the price levels. The recent reduced volatility levels are the testament to the fact that adoption has positive influence. As further applications of the currency and technology are found, we can see volatility on par with stable currencies. The three month average volatility for Bitcoin has been around 2% which is far better than devalued currencies of 2015.
Owing to these factors, we can see that Bitcoin serves as a really good portfolio diversifier. With growing adoption and more stability in prices, it is sure to be a major component of portfolios to come.