Bitcoin (BTC 0.87%) has lost 75% of its value over the last year. The crypto market may have raced too high, too fast in the fall of 2021, setting pretty much every digital coin up for a sharp correction. Raging inflation and the painful government measures designed to fight that problem have also weighed on high-risk investments this year, and Bitcoin belongs in that category. And if these high-level market concerns weren’t bad enough, crypto investors recently lost some of their faith in this sector after a leading crypto-trading exchange collapsed.
There could still be another shoe left to drop, driving token prices even lower. This ongoing slump is neither the deepest nor the longest crypto winter on record, as the plunge after the crypto gold rush in the fall of 2017 saw prices fall more than 80% below all-time highs and the next recovery started 14 months later. Still, this 12-month downturn is a force to be reckoned with.
So Bitcoin prices are down by a lot, and there are no guarantees that the negative trend has ended. Investors who doubt the long-term value of Bitcoin (or any cryptocurrency at all) may view this sharp drop as the beginning of the end. From that point of view, Bitcoin might never revisit the previous all-time high of $68,790 again, and there’s no reason to invest any cold, hard dollars in this expired fad.
However, I can’t entirely agree with the Bitcoin bears. In my eyes, blockchain ledgers are poised to reshape how business, money transfers, and value storage are done. Bitcoin holds a special place in this revolution thanks to its unmatched market reach and an inflation-busting lifetime limit to the number of Bitcoin tokens on the market. From this angle, the long and deep price drop is starting to look like an open invitation to pick up some digital coins at a fantastic price.
Let’s say you’re ready to put some Bitcoin in your portfolio — but maybe you don’t actually want to own that cryptocurrency directly. You actually have a couple of options available, and each alternative has a unique set of pros and cons.
Stock in companies with Bitcoin holdings
Some publicly traded companies hold significant amounts of Bitcoin on their balance sheets. In some cases, this choice makes a lot of sense.
Bitcoin miners Marathon Digital (MARA -3.97%) and Riot Blockchain (RIOT -2.04%), for example, currently own roughly 11,300 and 6,800 Bitcoins, respectively. Marathon mined 615 Bitcoins in October, and Riot generated 509 coins in the same period. This is what these companies do for a living, so of course they own a lot of Bitcoin.
But you should be careful with Bitcoin miners. Ideally, they get to generate new Bitcoins whose value exceeds the cost of doing all that math. Bitcoin prices rise in the long run and so does the miner’s stash of homemade cryptocurrency tokens. The growth potential of this dual-layered business idea is tremendous.
That doesn’t always happen, though. When electricity prices are high and Bitcoin prices run low, pure crypto-mining companies may find it hard to keep the lights on. Selling some of those hard-earned Bitcoins just to pay the bills is a last-ditch option, especially when the cryptocurrency is cheap. Plus, the miners have to deal with various real-world problems that have nothing to do with the crypto market. In the second quarter of 2022, for instance, Marathon faced bad weather in Montana and a production delay based on a dispute over wind-power tax credits in Texas. These headaches can add up to serious financial trouble, so crypto miners add a meaningful layer of additional risk to the already unpredictable crypto market. That’s why these stocks are far more volatile than Bitcoin itself:
Other Bitcoin holders are less obvious. Financial technology giant Block (SQ -3.90%) doesn’t mine Bitcoin, but CEO Jack Dorsey sees great value in the largest crypto token and Block has invested $220 million in Bitcoin so far. That’s a drop in the bucket next to Block’s $4.3 billion of cash equivalents and $1.1 billion in short-term debt securities, but this collection of approximately 8,000 Bitcoins is still respectable. Investing in Block gives you a little exposure to Bitcoin and cryptocurrencies, supported by a larger financial services business. That’s one of the safest ways to dip your toes in the digital currency waters.
At the other end of the spectrum, you’ll find business intelligence expert MicroStrategy (MSTR -2.16%). Under ex-CEO and current Executive Chairman Michael Saylor, this company has amassed 130,000 Bitcoins. MicroStrategy invested most of its cash reserves into the cryptocurrency and kept financing more of them through the software operation’s free cash flow. MicroStrategy is also willing to take out loans and sell additional shares of stock in order to buy more Bitcoin. In a recent twist, the company secured a $205 million loan from Silvergate Capital (SI -10.66%), where the collateral for the loan consists of MicroStrategy’s Bitcoin holdings. Of course, the Silvergate loan was immediately invested in more Bitcoin.
MicroStrategy’s Bitcoin is worth approximately $2.14 billion at current prices. That’s 35% more than the stock’s market cap of $1.58 billion. The software business provides a safety net in case the Bitcoin investment doesn’t work out, but in many ways, MicroStrategy looks like a Bitcoin miner without the mining business. This stock is a high-risk, high-return path into the crypto market, with a risk profile closer to Marathon’s and Riot’s than to Block’s.
Funds and trusts
Many financial firms want to introduce exchange-traded funds (ETF) that mirror the price of Bitcoin but are traded just like regular stocks. However, the Securities and Exchange Commission (SEC) keeps rejecting these proposals, arguing that they don’t provide enough protection against fraud and money laundering issues. If and when the steady stream of rejections ends, an ETF based on Bitcoin could become a solid combination of familiar trading rules and a direct link to Bitcoin’s price.
But we’re not there yet. In the meantime, investment management experts have come up with few close-but-not-quite alternatives.
- Grayscale Bitcoin Trust (GBTC -3.37%) is almost an ETF. The trust holds 633,600 Bitcoins worth $10.5 billion at today’s prices. The Grayscale fund trades at a 40% discount to that Bitcoin value, mostly because the fund structure lacks many investor-friendly features. Investors expect that discount to disappear once Grayscale is allowed to convert this security into a proper ETF.
- ETFs like the ProShares Bitcoin Strategy ETF (BITO 0.05%) provide the desired ETF structure, but the fund’s market value isn’t backed by a Bitcoin stash. Instead, fund managers attempt to mirror the actual Bitcoin price by trading U.S. Treasury bills and Bitcoin futures contracts. This idea works, but the price match is rarely perfect and the intense management effort adds overhead costs that reduce investor returns.
Both the Grayscale Trust and futures-based ETFs like the ProShares fund above tend to underperform Bitcoin in the long run. Until investors can get their hands on full-featured Bitcoin ETFs that wrap the currency’s performance in regulated safeguards, you’re probably better off just owning Bitcoin directly. The exception to that rule of thumb is that the Grayscale trust comes with a built-in upside that should be triggered whenever the SEC gets around to creating Bitcoin-based ETF securities. The massive discount indicates that many investors don’t expect it to happen.