The beginnings of Bitcoin are the stuff of folklore. The world’s first cryptocurrency was invented in 2009 by someone working under the pseudonym Satoshi Nakamoto. At the time, it was worth approximately US Dollar 0.0008 per coin. The value has fluctuated dramatically and often since. In November 2021, it reached a high of 69,000 US Dollar.
Before you get tempted, get to know Bitcoin better, and how investing bit by bit may be your best approach.
What is Bitcoin?
Bitcoin is the first and now largest cryptocurrency: a form of currency that only exists digitally. It’s decentralized, meaning it’s not owned or operated by any nation or government. It can be used to buy some goods or services, transfer values (donations), or to diversify your investment portfolio.
How can Bitcoin help me diversify my investment portfolio?
Diversification is spreading your investments across assets or asset classes (types of investments), so you’re not tied to the performance of one stock or asset class.
Bitcoin is in a different asset class than stocks or bonds, and they tend to have low correlation over the long-term. That means when the price of stocks go up or down, it doesn't necessarily influence the value of Bitcoin. This diversity in your portfolio can help you weather market bumps long-term.
What is the difference between investing in Bitcoin and a Bitcoin ETF?
Investing in Bitcoin
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Investing in Bitcoin means that you own individual Bitcoin, which is traded on a cryptocurrency exchange.
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Trading individual Bitcoin comes with transaction fees that are typically between 2-6%.
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Practically, investing in Bitcoin also means that you need a digital wallet to store it, for which you’ll need a password that you cannot lose. Bitcoin does not have a support line or password reset function.
Investing in a Bitcoin ETF
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Investing in a Bitcoin exchange traded fund, or ETF, means that you are not investing in individual Bitcoin. Instead, you’re investing in a fund that tracks the value of Bitcoin, and trades on a traditional market exchange, like the Nasdaq. In other words, the ETF attempts to closely mimic the price and performance of Bitcoin.
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There are no transaction fees with an ETF, instead they typically charge a management fee of <1%.
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You do not need a digital wallet to invest in a Bitcoin ETF.
What are Bitcoin futures?
Similar to stock market futures, Bitcoin futures allow investors to invest in the potential value of Bitcoin. They’re technically called futures contracts, because in essence, that’s how it works. By investing in Bitcoin futures, investors are signing on for what they and the market believe it will be worth.
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Here are a few ways Investing in Bitcoin futures is different from investing in Bitcoin itself.
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They’re traded on an exchange regulated by the Commodities Futures Trading Commission (CFTC), whereas most cryptocurrency trading is unregulated, which can add risk.
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A Bitcoin wallet is not required to invest in Bitcoin futures, because no physical exchange of Bitcoin takes place.
What is investing “bit by bit”?
Investing small amounts of anything over time can expose you to less risk than going all-in on any investment, at any one time. This strategy can be particularly useful with Bitcoin, a historically volatile investment, so we like the idea of investing in Bitcoin bit by bit.
Think of it like ice cream. If the top pops off the sprinkles as you’re pouring, you’ve ruined your cone. Instead, sprinkle a little Bitcoin onto your scoops of diversified investments, to help you diversify a little more for the long-term.
