Bitcoin is not a stock, a bond or even a legal entity. Created and held exclusively in cyberspace, the currency isn’t tied to, managed or regulated by any bank or government agency.
The digital currency may wind up as brilliant an innovation as the personal computer and Internet. But Bitcoin’s role as an investment has yet to be defined, leaving many investors intrigued — but wondering whether it has a place in their portfolio.
To invest or not to invest? It’s a billion-dollar debate. Advocates think the digital currency—unhinged to the dollar—can act as a hedge against economic collapse and provide growth, much like gold. Skeptics sees it as a volatile, speculative, tulip-like bubble waiting to burst.
Is Bitcoin right for your portfolio?
Bitcoin, only four years old, has crowned a new class of millionaires who bought the digital coins for pennies early on, then watched their value rise 9,000% in 2013.
So far in 2014, Bitcoin has suffered a steady stream of negative headlines and a 50% selloff.
- Cyberattacks Force Bitcoin Exchanges to Halt Withdrawals
- Bitcoin Millionaire Arrested for Alleged Money Laundering
- China Forbids Companies from Accepting Bitcoin
As some bitcoin holders cash in, others wonder whether the dramatic drop creates stellar buying opportunity.
If you’re wondering the same thing, take to heart this advice from Gary Gordon, president of Pacific Park Financial and CFP, with $120 million under management:
“At the present, it is more appropriate for active traders than it is for mom-and-pop investors. If mom-and-pop feel the need to participate, they should probably keep it to 1% or 2% of a total portfolio, whereby ‘virtually’ nothing that happens to bitcoin could permanently harm their portfolio,” suggests the financial advisor and avid proponent of ETFs.
Your mantra, should you choose to invest, is this: If you can’t afford to lose it, don’t bet it.
Proceed with caution. Here are four ways to gain a stake, both for those thinking about getting in, and for those of us who are just curious about how it works:
Purchase coins directly from an exchange
This is easiest, most direct way to invest in bitcoin. Choose Coinbase as your exchange. Backed by Silicon Valley royalty, Coinbase combines the two things you need to start collecting bitcoin: a wallet (a digital place to receive, send, and/or store your bitcoin), and an exchange (to buy the bitcoin with U.S. dollars).
At the time of this writing, one whole bitcoin will cost you about $660. But there’s no need to buy a whole one because the currency can be divided into tiny fractions, up to eight decimal places.
Once you create a Coinbase account, you’ll need to link a bank account and verify your phone number. At this point, you can buy bitcoin, but you will have to wait a few days for the transaction to go through while Coinbase verifies all your details. The price will be locked in when you make your purchase, so if the exchange rate jumps or dives, your cost remains the same.
Since the object of your purchase is not to spend but to save bitcoin, just leave them in your wallet, or transfer them onto a USB drive, as one investor suggests.
While a new penny stock out to cash in on the bitcoin craze doesn’t give you direct exposure to the currency’s price, it does allow you to reap the rewards of growing popularity.
But buyer beware: Bitcoin Shop (OTC:TUCND) went public on Feb. 6 and shot from $0 to $4.57/share the next day then promptly declined 53% over the past five.
As the first company with “bitcoin” in its name to be publicly traded, Bitcoin Shop is an online retailer that sells everything from appliances to gourmet goods and accepts the digital currency as payment.
While volume averaged 1.2 million since going public, the frenzy has slowed to just over 111,000. If you choose to invest in TUCND, buy very small increments and use disposable money.
Bitcoin Investment Trust: Non-wealthy need not apply
SecondMarket, a platform for investing in private assets, launched a fund called the Bitcoin Investment Trust (BIT) on Sept. 25. You can make bitcoin part of your retirement account by investing in it, but there’s a $25,000 minimum, lots of fees, and you need to be an accredited investor. This means you must earn more than $200,000 a year and own at least $1 million in assets, excluding your primary home.
BIT has actually amassed $51.1 million in assets and performed quite favorably since its inception, up $386%. Like all bitcoin- related investments lately, it has fallen 25% in the last month.
If you can swing this type of investment, advisors say stick to the minimum and make sure it doesn’t account for more than 2% of your total portfolio.
A Bitcoin ETF on the horizon
The Winklevoss Bitcoin ETF, named after brothers Cameron and Tyler who are known for filing a lawsuit against Facebook founder Mark Zuckerberg, is currently under review by the SEC and may be available by the end of 2014.
It would basically legitimize bitcoin investing and make it as simple and straightforward as commodity-based ETFs are for gold and silver. The Trust buys the bitcoins to back the ETF shares, and daily transactions would go through a regulated trading desk.
Is it worth monitoring the Bitcoin ETF’s potential approval?
Yes, says Gordon of Pacific Park Financial. “In the same way that a wildly popular IPO comes to market, the ability for everyday Joes and Joans to invest in the virtual currency may send prices soaring. By the same token, it may give hedge funds — “the big money” — an opportunity to short the heck out of it, sending the price plummeting.”
Whatever you choose to do, be safe out there.