Welcome to Part 2 on how to invest in Bitcoin. It has been more than three years since I published my first blog article on Bitcoin. Before I provide you with my thoughts on the new investment products such as the World’s first Bitcoin ETFs, I would like to stress out that many financial experts are still skeptical of Bitcoin.
Tulip Mania vs. Bitcoin
Among others, Felix Zulauf (age 71), Owner and President of Switzerland-based Zulauf Asset Management, who commented recently on what he makes of Bitcoin “I don’t believe that Bitcoin will ever make it as money used in daily payments. It is too complicated, the price is too volatile, and “mining” it requires too much energy. But as long as people think of Bitcoin as a safe store of value, the price could go higher, and it could become a mania. At the peak of the tulip-bulb mania [in the 1630s], the most expensive tulip bulb cost as much as a house. That suggests Bitcoin could reach $1 million someday. But tulip bulbs trade today at only $10 a dozen.” (Barron’s, Interview by Lauren R. Rublin, Felix Zulauf’s Guide to ‘Crazy’ Policies, Investment Bargains, and Bitcoin Mania).
Concerns over Regulatory Scrutiny
Furthermore, JPMorgan Chase boss Jamie Dimon (age 64) reiterated in an interview during a DealBook Online Summit by New York Times on November 18, 2020 that “Bitcoin is not his cup of tea” (Video at 32:02). The banker has a long history of Bitcoin skepticism. Previously, he made statements such as “there will be no real, non-controlled currency in the world. There is no government that’s going to put up with it for long. It’s kinda cute now”(Fortune: November 5, 2015).
Below are the world’s largest assets per market cap as of February 27, 2021 and you will see that from being described as cute back in 2015, Bitcoin has become the world’s 8th most valuable asset.
Less than two years ago, Jamie Dimon was part of a group of CEOs of the largest US banks that testified on Capitol Hill on cryptocurrencies and among others he explained his view on the JPM Coin that was launched in 2019. Charlie W. Scharf at that time CEO of BNY Mellon also pointed out the lack of regulatory clarity on digital assets. If you watch the statements made just two years ago (see video), it becomes obvious that in the meantime digital asset innovation has outpaced the regulatory frameworks.
The idea of Bitcoin and decentralized finance (DeFi) is to create an experimental form of finance that does not rely on central financial intermediaries. However, crypto-assets have created new financial intermediaries that today are less accountable than the big banks. New crypto exchanges and trading platforms such as Binance, Coinbase, Kraken are not subject to the traditional standards required of securities and derivatives market intermediaries. As a result, investor protection is weak and allegations of fraud and conflicts of interest are frequent.
A recent interview with the 78th United States Secretary of the Treasury, Janet Yellen (age 74) illustrates this very well too:
On cryptocurrency: Ms. Yellen doubled down on a “buyer, beware” message to investors in Bitcoin. “I don’t think that Bitcoin — I’ve said this before — is widely used as a transaction mechanism. To the extent it’s used, I fear it’s often for illicit finance,” she said. “It’s an extremely inefficient way of conducting transactions. And the amount of energy that’s consumed in processing those transactions is staggering. But it is a highly speculative asset, and I think people should beware. It can be extremely volatile, and I do worry about potential losses that investors in it could suffer.” Ms. Yellen is more interested in the prospect that the Federal Reserve could develop a so-called digital dollar, the first time she appears to have made public comments about that prospect. Crypto supporters may interpret this as an endorsement of the idea — Ms. Yellen’s immediate predecessor, Steven Mnuchin, seemed less interested in it — which shares some of the technologies that underpin Bitcoin and other cryptocurrencies. “It makes sense for central banks to be looking at it,” she said. “We do have a problem with financial inclusion. Too many Americans really don’t have access to easy payment systems and to banking accounts, and I think this is something that a digital dollar — a central bank digital currency — could help with. I think it could result in faster, safer and cheaper payments.” There are a number of “issues” to be resolved before central banks get into digital currencies, she said. “What would be the impact on the banking system? Would it cause a huge movement of deposits out of banks and into the Fed? Would the Fed deal with retail customers or try to do this at a wholesale level? Are there financial stability concerns? How would we manage money laundering and illicit finance issues? There’s a lot to consider here, but it’s absolutely worth looking at.”
(New York Times, Dealbook Reading Between the Lines: A Conversation With Janet Yellen, 23.2. 2021)
New Investment Products
The best way to invest into Bitcoin is to buy it directly (on an exchange) and store it offline in a secure cold wallet as written in Part 1. You may find it however more convenient to go through your existing bank or broker which saves you from setting up wallets, dealing with the risks of getting hacked, transferring your funds to the wrong address, or losing your private keys.
Swissquote was the first online bank in Europe to offer digital assets trading and up to now, it still offers Switzerland’s most complete digital assets platform available to retail and institutional customers. Meanwhile at the more traditional Swiss banks such as UBS and Credit Suisse or many other Private Banks, it is still not possible to buy directly crypto currencies. There may be good reasons as hackers this year may shift their focus from crypto exchanges to commercial banks that have started with handling crypto. “Hackers will try to exploit the “learning curve” that banks will inevitably go though as they enter a new domain that requires very different security protocols and technology that those currently employed in banks’ IT infrastructure”. (Lior Lamesh, CEO of GK8, JAN 19, 2021).
Often investment managers are not even allowed to include crypto currencies in their portfolio. For instance, the Financial Conduct Authority (FCA) in UK has banned investment advisors from selling Bitcoin to retail clients.
Switzerland has no regulations yet regarding the buying and selling of virtual currency units or their use as a means of paying for goods and services. Therefore, if you wish to pursue an investment in Bitcoin through your bank or broker, you can buy a fully collateralized investment product such as Exchange Traded Products (ETPs) or since February 2021 also two Exchange Traded Funds (ETFs) that seek to track the investment results of Bitcoin. The assets are held in cold storage except for transitory purchases. This means that only when the ETF is buying or selling Bitcoin, online or “hot” wallets are used. But be aware again of the saying in the cryptocurrency world: if you do not control the wallet, you do not own the asset.
Comparison of the 2 new ETFs launched in February 2021 with an existing ETP
|ISIN/Ticker||Fee p.a.||Fund Size||Security||Type||Regulations||Remarks|
|CH0454664001||1.49%||USD 240m||These assets are held in cold storage equal to 100%||ETP / Debt securities issued by a Special Purpose Vehicle (SPV)||These products are not subject to the Collective Investment Schemes Act (CISA) and as such, are not supervised by FINMA. ETPs are governed by SER (SIX Exchange Regulation)||Not rated and depend on creditor / sponsor’s credit rating (with direct credit / default risk)|
|CA09175J1167||0.75%||USD 40m||Held in cold storage by a regulated and licensed custodian of bitcoin||ETF / Fund||Approved by Ontario Securities Commission, usually further requirements apply in terms of managing exposures and for disclosures||Segregated in issuer bankruptcy-remote accounts|
|CA74642C3003||1%||USD 453m||Held in cold storage by a regulated and licensed custodian of bitcoin||ETF / Fund||Approved by Ontario Securities Commission, usually further requirements apply in terms of managing exposures and for disclosures||Segregated in issuer bankruptcy-remote accounts|
Own Research 27.2.2021
The three above mentioned investment products are listed on stock exchanges such as SIX Swiss Exchange, Deutsche Boerse Xetra or Toronto Stock Exchange and can be traded during the normal trading hours. While cryptocurrencies can be traded 24 hours a day and 7 days a week, the straight lines in below graph reflect when the markets are closed for the investment products. You may have heard that other popular products such as the Grayscale Bitcoin Trust (GBTC) sometime had a premium which sometimes surpassed 40%, meaning a huge difference between the value of the holdings of the trust vs. the market price of the holdings (Bitcoin) existed. When this article was published, the GBTC no longer had a premium to net asset value (NAV) and Bitcoin could be purchased at a discount of -3.77% (February 2021) through purchases of the instrument (GBTC). The world’s largest Bitcoin fund thus was selling off faster than the cryptocurrency itself as investors rushed to exit.
Source: Refinitiv Eikon 27.2.2021
Cryptocurrencies as part of a portfolio
There are over four thousand cryptocurrencies. New cryptocurrencies come and go but Bitcoin has remained its leading position (more than 60 % dominance). Dogecoin, the 14th largest cryptocurrency according to its market cap of USD 6.5bn was originally created as a joke and took the Co-Founder Billy Markus just a few hours to code. There is currently no implemented hard cap on the total supply of Dogecoin, unlike the supply of Bitcoin which is currently capped at 21 million. Below table shows the 15 largest cryptocurrencies.
Source: Crypto Research, Data, and Tools (messari.io) 27.2.2021
Volatility is extremely high with cryptocurrencies and it is difficult to find an entry for investors. Gary Gensler (age 63), US President Joe Biden’s nominee to be the next chair of the Securities and Exchange Commission is shortly expected to draw up crypto rules on an industry that from a regulatory perspective no longer looks very cute. Gary Gensler is considered as crypto savvy as he has taught courses on blockchain and digital currencies at M.I.T. Even as cryptocurrencies enthusiasts, we would be a bit cautious. In the long run we however advise our clients to allocate a small proportion (between 0.5 to 5%) of their capital to cryptocurrencies, similar to alternative assets such as commodities, precious metals and real estate.
Feel free to call us or send us an email if you need guidance.
Disclaimer: Forecasts are often wrong. See below research of a Private Bank on Bitcoin at the beginning of 2017.