Bitcoin is becoming the new investment vehicle

18 May, 2018

As the market becomes larger and larger, its inherent volatility has mellowed somewhat. Bitcoin adoption is growing by the day and with it bitcoin's value as a vehicle for long-term investment. Here's a quick look at the bitcoin investment landscape.

Although originally conceived by the still-unknown entity Satoshi Nakamoto as a way to store and transfer value without involving traditional financial institutions, bitcoin has slowly but surely been going mainstream.1

Only about 8 percent of the U.S. population owns a stake in any cryptocurrency. The reasons given for not owning bitcoin or other cryptocurrencies are wide-ranging and differ markedly by gender and age, but one of the overall patterns is that many folks consider it difficult to understand with an uncertain future.

This perception is fading away, however, as another 8 percent of U.S. citizens have expressed interest in buying bitcoin in the future. Bitcoin is settling into an investment scheme that puts it alongside traditional hedge funds, 401ks, and long-term savings accounts.2

The model bitcoin owner, as expressed by Nakamoto, serves as his or her own bank. Indeed, a large portion of the bitcoin-owning public chooses to invest in this fashion.

With the assumption that bitcoin will slowly but surely gain in value until it hits a critical mass of usage and adoption, bitcoin early adopters prefer to accumulate their coins and set them up in cold storage for long-term holding. This can be done via online or software wallets, but the truly investment-minded opt for hardware storage.

These tech-savvy investors, however, represent just a fraction of the money available to bitcoin. As the currency stabilizes and gains in reputation, it's likely to bring more organized investors to the table.3

Renowned financial institution Goldman Sachs is considering a cryptocurrency trading operation, despite nay-saying from peers like JP Morgan who continue to call bitcoin a scam and more. This is likely a signal of things to come. Big banks are not, by definition, in the business of losing money. Riskier investment schemes, like the derivatives trading in equity swaps that ultimately caused the 2008 housing crisis, have already made the rounds. Bitcoin offers a potentially much more viable long-term store of investment value with only a slight technological hurdle. Although it may run counter to Nakamoto's original vision, it might soon be possible to deposit bitcoin with an established financial institution much as one would deposit fiat currency, deeds, and other traditional financial instruments.4

That's still a flavor of individual investing, however. A bitcoin holder would likely still need to follow the market on his or her own, using the bank as a kind of government-regulated wallet.

The next evolution of bitcoin investment is likely to come for a derivative-driven market, exemplified by exchange-traded funds.

Exchange-traded funds build portfolios for investors with exposure to cryptocurrency markets managed by professionals. Investors can buy a share in these funds by depositing fiat cash and thus gain exposure to cryptocurrency markets while retaining a level of insulation from the market forces themselves. This type of fund is already widely used in the stock market. Rather than holding or maintaining shares in any one individual company, investors buy into a fund that distributes their wealth across a variety of selected stocks and manages those stocks accordingly.

This is likely going to provide the next surge of investment money into the bitcoin market. It addresses two of the primary concerns regarding bitcoin - namely its complexity and its legitimacy. The average investor probably doesn't have much more insight into the complexities of the stock market than they do the complexities of the cryptocurrency market. If professionals are managing the fund, the danger of scam coins, sudden dips, bubbles, and the like are significantly lessened. A certain measure of respectability also comes with the introduction of exchange-traded funds. This both legitimizes the exchanges themselves, which must now suddenly a handle a much greater sum of wealth, while simultaneously exposing the inner operations of the fund to government regulation. It can go wrong, of course, as one exchange-traded fund found when it ran afoul of Sweden's laws.5 This might not make for great press in the short term, but it definitely acts as a check on future doubt and uncertainty. Regulation is not ideal in the cryptosphere when the larger vision of the project is considered. However, a certain amount is going to be necessary to coax traditional investors into putting their hard-earned fiat cash into the seemingly confusing world of cryptocurrency.

One of the early movers in this field, Grayscale, currently offers exchange-traded funds based around six key cryptocurrencies, including bitcoin and bitcoin cash. The company also offers diversified portfolios that more closely resemble the traditional stock portfolio. Grayscale's comments on the advantages of investing via a fund versus direct investment can be applied to any of the new investment vehicle companies developing in this space.

"Often, individuals and institutions seeking to directly purchase or sell bitcoin must themselves transact via unfamiliar exchanges or intermediaries that in some cases may be unregulated and insecure," the company wrote in its FAQ. "This often requires investors to transmit funds to jurisdictions where they might not be comfortable. In addition, storing bitcoin on one's own can add additional headaches, as the private keys (the bitcoin equivalent of passwords) which ensure access to an investor's bitcoin can be susceptible to loss or theft. This potentially exposes one's bitcoin position to partial or total loss, often with limited or no recourse to regain access to the bitcoin."6

Some might cringe at this watered-down explanation of bitcoin, but it's a known fact that bitcoin's primary investors are young, tech-savvy millennials. This isn't necessarily a bad thing, but the vast majority of wealth is never concentrated in the young. By and large, it's concentrated in the savings and retirement accounts of older workers and the large financial institutions built to serve them. By opening investment, in an admittedly limited way, to this demographic, exchange-traded funds provide a liquidity injection that benefits the market as a whole.

This has a direct trickle-down effect to that original investor following Nakamoto's white paper. While big institutional money plays along the sidelines, individual bitcoin owners can see their holdings gain in value, legitimacy, and usefulness. Bitcoin might soon morph from the technological fringe to the mainstream, as bitcoin becomes an accepted part of doing business from the financial instrument level all the way down to the corner grocery.7

Bitcoin has done a lot of growing up since Nakamoto's white paper. Some of this has been controversial, as traditional bank and investment vehicle involvement clouds the original vision of a peer-to-peer currency. The bitcoin revolution, however, can be expected to come by degrees. Large-scale involvement by traditional financial institutions pumps more money into the overall bitcoin economy, fueling adoption and spurring yet more money to the table. This creates wealth for adherents of the original bitcoin philosophy while laying the groundwork for a bitcoin economy divorced from the traditional players. It can be viewed as an intermediate stage in the process of moving the world economic system from fiat currency to cryptocurrency. It might be distasteful in the short term, but inviting traditional investment into the cryptosphere is one of the surest ways to make sure that the sphere remains healthy and active in the future.


1) "Bitcoin: A Peer-to-Peer Electronic Cash System." bitcoin - Open Source P2P Money.

2) Zuckerman, Molly Jane. "New Survey Shows Around 26 Mln Americans Own - And 8 Percent Plan To Buy - Cryptocurrencies." Cointelegraph. 14 May, 2018.

3) Gondo, Nancy. "Before You Buy bitcoin, Read This." Chicago Tribune. 18 Nov, 2017.

4) Strauss, Ryan. "Best Options for Beginner bitcoin Investors." The Balance.

5) "Bitcoin Investment Vehicle Fined $120k by Nasdaq Exchange." Coindesk. 27 July, 2017.

6) "GBTC - bitcoin Investment Trust - Invest in bitcoin with Grayscale." Grayscale.

7) O'Brien, Sarah. "Don't Let These Dumb Moves Crack Your Nest Egg." CNBC. 3 Nov, 2015.