Cryptocurrency investors have made money hand over fist in the last year. The price of one Bitcoin has surged from less than $4,000 last March to a record high of $61,000 this year. At the time of writing, a single Bitcoin is currently worth $57,743. One of the primary reasons behind the rise of digital currencies in the last year is the widespread adoption by institutional investors.
Companies such as Tesla (NASDAQ: TSLA), MicroStrategy (NASDAQ: MSTR), and Square (NYSE: SQ) hold Bitcoin on their balance sheet. Other fintech companies including PayPal (NASDAQ: PYPL), Visa (NYSE: V), and Mastercard (NYSE: MA) are also backing crypto payments driving the prices higher.
It has been an interesting time to gain exposure to this highly disruptive space. One way to invest in Bitcoin is by initiating a position in the Grayscale Bitcoin Trust (OTC: GBTC), which is the first publicly traded security that invests solely in the world’s largest cryptocurrency.
What is the Grayscale Bitcoin Trust?
The Grayscale Bitcoin Trust is a traditional investment vehicle or a digital currency investment product where you can buy and sell via a brokerage account. The trust trades at a premium to its underlying asset and charges a 2% annual management fee. Shares of the Grayscale Bitcoin Trust are eligible to be held in tax-advantaged accounts including the IRA and Roth IRA.
Established back in 2013 by the Digital Currency Group, Grayscale is now a trusted authority on digital currency investing with around $37 billion in assets under management.
The founder of Grayscale, Billy Silbert, is expectedly bullish on the long-term prospects of Bitcoin and stated, “Bitcoin has the potential to radically transform our concepts of money, store of value, and the means by which assets are exchanged the world over.”
Are cryptocurrencies here to stay?
There has been no other asset class that has managed to outperform Bitcoin in the last decade. But historical returns don’t matter much to future investors. We need to analyze if Bitcoin remains a top bet for 2021 and beyond.
Bitcoin and other digital currencies have been built on blockchain technology. They are decentralized and offer a significant advantage for people seeking value over fiat currencies.
A report from the Motley Fool states, “Bitcoin owners don't have to worry about the actions of central banks or regulators and their potential impact on its value in comparison to other forms of money. As a result, bitcoin has tended to perform the best when there's doubt about the ability of the traditional monetary system to handle challenging conditions.”
The last year has given several reasons to doubt the efficacy of the traditional monetary system. The uncertainties surrounding the COVID-19 pandemic continue to haunt the global populace and have pressurized economies all over the world. This has led to an uptick in unemployment rates and governments have stepped in and pumped in billions of dollars to increase consumer spending and revive the economy.
The Joe Biden government has announced another stimulus package totaling over $2 trillion which might result in a depreciation of the dollar and further increase demand for Bitcoin.
Bitcoin is a high-risk investment
Before you take the plunge, investors should understand that Bitcoin is a high-risk investment. The lack of regulation and massive volatility doesn’t help investors. According to investment mogul Warren Buffett, cryptocurrencies offer no utility and are not a store of value.
We know that store of value assets like gold have distinguishable relationships to fiat currencies and are far less volatile. For example, gold has an inverse relationship to the U.S. dollar and interest rates and is impacted by demand and supply.
The final takeaway
It's difficult to ignore Bitcoin that is now valued at a market cap of over a trillion dollars and accounts for 50% of the total crypto space. You can use Bitcoin as an intermediary asset to purchase other digital currencies. However, you should also invest only as much as you can lose in this asset class as investors have experienced up to 90% declines in their Bitcoin portfolio multiple times in the past.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
