Investing in Bitcoin has made many people a large amount of money, but as with all investments, future profits are far from guaranteed.
The value of Bitcoin is highly volatile and although it has made huge gains since its early days it has also suffered some significant downturns.
However, the fact that it is so volatile means there is plenty of opportunity to make money with the right investment strategy. Here we look as some alternative ways of investing in this exciting currency.
The easiest way to invest in Bitcoin is to simply buy some from a broker website such as Coinbase and wait for its value to increase before taking profit. This is often referred to in the crypto world as “HODLing” – or Holding On for Dear Life.
If you had bought some Bitcoin at the start of 2017 you would be looking at a gain of around 1500% by the end of the year, not a bad return in anyone’s book. And of course if you had bought it a few years ago then you are probably a millionaire by now!
Naturally, the price of Bitcoin just like anything else can fall as well as rise and if you buy at the top end of a price cycle and subsequently there is a correction, you could be nursing a loss for some time before the value picks up again. You will also need to pay the website a small fee, typically around 0.5-1% of your investment.
Alternatively, you can buy Bitcoin directly from a bitcoin exchange such as Bittrex, which is subtly different from a broker. With this option you are buying directly from another trader and the bitcoin exchange is merely facilitating the transaction. They will charge a fee, but this is significantly cheaper than using a broker and is typically between 0.2 to 0.5% of your investment.
Rather than buy your Bitcoin in a single transaction, you could opt to purchase at regular intervals. That way you are less exposed to sudden fluctuations in its market price.
The other approach to investing in Bitcoin is to mine it. The days of being able to do this from your home computer are long gone and it now requires rooms filled with specialist hardware to mine Bitcoin.
So the best to way to get involved in Bitcoin mining these days is to join a cloud mining scheme like Genesis Mining where you buy a mining contract. This essentially means you are paying to rent mining hardware for a given period and receive the proceeds from that mining, minus fees paid to the company.
By doing this, you can often end up with two to three times more Bitcoin than if you just bought and held it.
Here is an example: let’s say you had $500 worth of Bitcoin – about 0.03 Bitcoin at the time of writing.
You could hold it in your wallet and then if Bitcoin increases ten-fold over the next two years, then that 0.03 Bitcoin would be worth $5,000 – a very decent return.
However, if you instead invested that $500 into a Bitcoin mining contract with a programme like Genesis Mining, you would be likely to end up with at least two to three times more Bitcoin.
So in this example you could end up with 0.09 worth of Bitcoin at the end of two years – worth $15,000 if the Bitcoin price rises 10-fold over the period.
Now the exact amount of Bitcoin you end up with will depend on a number of variables – including how much the difficulty of mining goes up and whether you reinvest some of your mining earnings in new mining contracts.
But either way, you are likely to end up with more Bitcoin than if you just bought and held it.
Hence the popularity of these mining schemes – Genesis Mining has over one million members and growing fast.
Another way of investing in Bitcoin and other cryptocurrencies is to use a social trading platform like Etoro.
What you can do with these copyfunds is basically copy the trades of other people or specialist “Copyfunds” which bundle together CFD stocks, commodities or ETFs under one chosen market strategy.
Etoro’s Crypto Copyfund offers a diversified portfolio, focusing on cryptocurrencies with a market cap of over $1 billion and an average daily trading volume of over $20 million. They allocate funds proportionally based on each coin’s market cap, so Bitcoin makes up 58% of the portfolio at the time of writing and Ethereum 10%.
The Etoro Crypto Copyfund has done extremely well, making over 320% profit in 2017 to date. It is a nice way of investing in a range of cryptocurrencies without having to go through all the hassle of buying all the coins yourself and worrying about having them potentially stolen or hacked from your wallet.
Plus your portfolio is managed for you by the fund, rebalancing it according to their criteria so that you don’t have to do anything. You can just sit back and hopefully see it grow over time.
The only downside to the Etoro Crypto Copyfund is that you will need a minimum of $5,000 to invest in it. However, there are other options with Etoro, such as copying other traders who trade in cryptos. Many of these traders do very well, making 70% or even 80% profit per year.
Again, the beauty of it is that you don’t need to do anything – just click “copy” and you will follow their trades automatically for your specified amount.
It’s a great way to trade cryptos without needing to spend hours studying charts and graphs yourself!
An alternative way to invest in Bitcoin is through spread betting. This can provide highly leveraged returns but it does carry a high risk. Spread betting is a relatively high risk enterprise, and Bitcoin is highly volatile, so this isn’t the way to go for the faint of heart. However, if you enjoy high risk as the cost of the potential for high returns, this can be an exciting market.
When you spread bet on Bitcoin, you decide on whether you think the price of Bitcoin will go up or go down, and if your prediction is correct you will make a profit. The amount of profit or loss you make depends on the amount of the price movement. If you think the price will increase, you take a long position (buy) and if you think it will fall you take a short (sell) position. Your profit or loss depends on the number of units the Bitcoin moves relative to your stake. This is a leveraged bet, so you need deposit only a fraction of the total value of the trade.
If you feel a little nervous about purchasing Bitcoins directly, an excellent alternative is to invest in ETFs. An ETF (exchange-traded fund) is a financial product that tracks the value of a commodity or index, and various ETFs are now beginning to focus on Bitcoin.
Investing in a Bitcoin ETF means you don’t have to obtain a Bitcoin wallet and buy Bitcoins; you can gain exposure to the market by simply investing in an ETF or, alternatively, a mutual fund. Again, this mitigates the risk of having your Bitcoin wallet hacked.
While many ETFs and mutual funds have exposure to Bitcoin, this is usually through the Bitcoin Investment Trust, which is the only trust that invests exclusively in Bitcoin and for which its value is derived entirely from the price of Bitcoin. Thus its NAV (net asset value) per share tracks the value of Bitcoin. However, its share price is subject to supply and demand, and currently is considerably more than its real bitcoin investment, in fact twice as high.
The latest addition to the myriad ways to invest in Bitcoin is via futures contracts.
These were introduced to the CBOE exchange on 11th December 2017 and others followed suit soon after.
Basically futures are contracts between two parties to make a sale of a given commodity at an agreed price on an agreed date in the future. When the date arrives, the buyer must pay and the seller must sell at the agreed price.
Futures contracts have been around since the 1800s and used to be paid in the actual commodity itself – gold, corn, oil etc – but these days are generally paid for in cash.
So if you think the price of Bitcoin will rise, it might be an idea to invest in Bitcoin futures on the basis that in a couple of months the price may well be quite a bit above the price of the futures contract.
For example if the price of Bitcoin was $15,000 today, a futures contract may be for the price to be $17,000 in two months’ time.
Let’s say you buy that contract. If the price is actually $20,000 in two months, then you have effectively bought Bitcoin for $3,000 less than it actually costs, thus making a nice profit.
Obviously if you think the price will fall over the next couple of months, then you would sell a futures contract.
Investing in futures can be a useful way of predicting future price movements without needing to go through the process of actually buying Bitcoin yourself. It can also be a useful way to hedge if you already own quite a lot of Bitcoin and want to protect yourself if the price crashes.
The trading of Bitcoin futures has generally been seen as positive news for the coin itself as it will allow institutional investors to become involved and it provides additional legitimacy for Bitcoin. Some have speculated that it could lead to big hedge funds shorting Bitcoin (i.e. bet on the price going down) and cause additional volatility. Only time will tell if that turns out to be the case though.
There really there is a world of choice out there for investing in Bitcoin – with more possibilities opening up all the time.
Many people have been put off by the complexity of buying Bitcoin, but it is becoming easier via sites like Coinbase.
In terms of investing in Bitcoin, it all depends on your preferences and attitude to risk. No Bitcoin investment strategy is without risk and any approach you take could be affected negatively if the price of Bitcoin crashed (unless you chose to short it of course).
However, for the best returns over the long run, it seems like mining Bitcoin via a platform such as Genesis Mining is the number one choice as it means you tend to end up with more Bitcoin than if you just bought and held it.
A copyfund could also be a good option to give you a diversified portfolio including Bitcoin and some other top cryptos.
If you have the skill and dedication for it, then trading Bitcoin either via spread betting, ETFs or futures contracts is another option. These and copyfunds have the advantage of not needing to buy Bitcoin itself.
Only time will tell if Bitcoin continues to deliver the kind of returns it has in recent years, but certainly if it does then those who have invested in it will do very well indeed.
Disclaimer: we are not financial advisors and the above article should not be taken as financial advice. Please do your own due diligence and research and take professional financial advice before investing. All cryptocurrencies are risky ventures so please only invest money you can afford to lose.