How to Invest In Bitcoin Indirectly
Nate: Alright, welcome back to the Dynamic Growth podcast. Derek there is a frenzy out there today and the frenzy has a name, it’s called Bitcoin. What are the things I wanted to talk about in today's episode is how we can potentially invest in Bitcoin indirectly. I know that you and I had a podcast a couple of months back that was a very popular podcast that we had basically Bitcoin 101 what is it how can you invest in it. Today I want to get into how you can invest in it indirectly so I hope you like today's episode if you do please share it with a friend, subscribe to it wherever you get your podcast and Derek let's get into it.
Derek: Last time we talked about Bitcoin it was $30,000 ago in the Bitcoin price. It's had some big swings since then.
Nate: What fascinates me about Bitcoin from a portfolio management point of view is looking at Bitcoin as an alternative asset and what I mean by that is an asset that we can add to our portfolios to further diversify our investments and what has a lot of people really excited about Bitcoin and one of them being Catherine Wood is the CEO of ARK Invest which is arguably the most popular ETF actively managed ETF out there today. She likes Bitcoin as an alternative investment for its ability to provide both outstanding returns but also not be directly correlated to the day to day trading that goes on with stocks or bonds or similar asset classes.
Derek: She was an early adopter too, she bought Bitcoin years ago and I think one of the biggest noticeable shifts this past year was the change in attitude around Bitcoin. You see a bunch of people that used to be Skeptics and now they are becoming adopters and obviously the most notable example with Elon Musk where he was against Bitcoin a couple of years back he said it was only used for illegal purchases on the dark web. If you read the news Tesla just announced that they had bought 1.5 billion dollars of Bitcoin and added it to their balance sheet in January. They didn't come out and say the price of which they bought it at but using the rough time frame from January you can do some math and it looks like that they made more money in Bitcoin year-to-date than they did selling cars in 2020 on that 1.5 billion dollar investment. Another example would be Bill Gates, he was against crypto and then just this past week he did an interview and he said he's neutral at it so, one step at a time.
Nate: That's a big move. The quote that I love from Elon Musk is, he said he believed that the purchase was less dumb than owning cash which as you just said it's totally paid off for him since that purchase now Bitcoin is a very volatile investment so we would expect it at some point time we're going to see it correct and pull back especially after the run it had. had but for sure this year to me stands out because we have seen some universal acceptance not only between retail traders but large corporations. we saw as you mentioned Tesla, we saw a Square make a large purchase into Bitcoin even though it pales in comparison to what Tesla did. There are even insurance companies out there that have bought Bitcoin and to me that is really remarkable because by nature an insurance company's balance sheet has to be pretty conservative so for them to purchase Bitcoin they have to jump through quite a bit of hoops in order to do that. Part of that is the ability of Bitcoin to appreciate and to add some diversification to the portfolio of something other than stocks or Bonds or bonds. We use gold in our portfolio as a hedge, a Hedge against stock loss. in many ways gold has an inverse relation to stocks when things get very scary for stocks a lot of time you'll see gold go up and with Bitcoin we've got about a 10 year history with Bitcoin but I don't know what to think that we have now with a positive or negative correlation with any other asset class out there.
Derek: it looks like there is somewhat of a market correlation because I mean back in 2020 when the market kind of sold out their Bitcoin had quite the corrections well that's actually when I opened my position in Bitcoin but I think that the skeptics of Bitcoin make a good point, I think the original thesis of Bitcoin has changed where I don't think it's a suitable currency because there is some bumps in the road I think the biggest one being the time it takes to transact it takes 10 minutes to clear I think that's a real hurdle cuz you're going to go to Starbucks and buy coffee with Bitcoin me at the stand at the register for 10 minutes to wait till it leaves your wallet and wait till they get the confirmation and I think going forward it's going to be more so used as the store of value. Similar to how gold is, gold is technically a currency by some metrics but nobody actually uses gold as a currency, you don't go into Starbucks and buy coffee with gold. I think it's similar to gold and not the US dollar, that's just my opinion as it becomes more widespread and improvements to the system and network that we could see a change but I think that's where we're headed.
Nate: the trouble I see with bitcoin as far as purchasing is the volatility to it. I have made a couple purchases with bitcoin and I have done it on two platforms. I did it on coinbase which was not the easiest because I had to fund it before they allowed me to send it somewhere for a purchase. It had to clear my bank, so it had to wait there for 3 days. Well during that period of time Bitcoin fell enough that I didn't have enough in the account to fund the purchase so I had to fund it again. Using the Cash App that wasn't the case as soon as it funds from Cash App you're able to it to send it to anybody that you want. you and I were talking earlier, I think we're still new in this process here, roughly 10 years, I think as Bitcoin Supply gets bought up, We believe it we're going to see a leveling out of that price so it's a little bit less volatile than what it is today
Derek: Absolutely. I think the market is still pricing what it is today. somebody has made a prediction I'm sure will turn out to be correct, but it's still early like you said there is only a 10 year track record. We didn't get to talk about the Ethereum and I think one of these days we'll probably do an episode on it. But I think that ends up being more so like a currency rather than Bitcoin where Bitcoin will remain as the store of value.
Nate: I would say no matter what side of the fence you're on if you are a believer in cryptocurrency that is here to stay and will be the future of either an asset class, a store of value, or a currency. I think the whole process is going to be fascinating to watch.
Derek: so let's get into it here so Nate I'll let you lead it up what's the first way you can invest in Bitcoin with that actually owning Bitcoin?
Nate: probably the most direct indirect way to do that is through the grayscale Bitcoin trust ticker symbol GBTC you can actually buy this just like you would a stock. And the fund's job is to track the underlying value of Bitcoin. That ETF is currently around $56 a share so way more affordable than buying one Bitcoin. But the nice thing about Bitcoin is you can buy partial coins. You can spend as little as a dollar if you want. I'm struggling with why I would own Bitcoin as an ETF and not just own Bitcoin. When I look at the grayscale Bitcoin trust the expense ratio on that ETF is 2% which seems extraordinarily high for something that does not pay you a dividend. so to me it would make more sense just to buy the bitcoin and hold it in my Cash App account or my wallet where, and we'll get a little bit into that here later the podcast maybe some wallets that you can use, some virtual wallet you can use to hold your Bitcoin which will give you a little incentive to do that.
Derek: We were talking the other day of why you would choose the ETF rather than just owning Bitcoin because it's the same volatility and you're just paying 2% for someone to manage it. The only thing we come up with is liquidity. if you try to sell your Bitcoin it would take 10 minutes. If you tried to sell an ETF, but you could only do it during market hours, it would be instantaneous.
Nate: Owning Bitcoin is not without fees itself. When you purchase the Bitcoin there's a transaction fee that takes place. Correct me if I'm wrong, once you buy it there shouldn't be an ongoing cost other than when you go to sell it?
Derek: You’re correct. We talked earlier about ARK Invest and the grayscale Bitcoin trust is one of the Holdings in ARKW..
Nate: which is the next Generation internet ETF. it's actively managed Grayscale Bitcoin Trust represents about 1.74, 1.75% of the portfolio.
Derek: and that fund also owns Tesla, we'll talk about Tesla later, that is sort of an indirect way to get exposure. With ARKW that would be a really indirect way to get some Bitcoin exposure but you would definitely have it there and it's a great fund with a great manager.
Nate: We are a big fan of Ark invest, they bring different ETF’s to the field that are not just the rank-and-file ETS out there that track the market there you can get into the themes with them. The thing that you have to be careful with their ETFs is their holdings. if I look at their Flagship which is ARKK, number one holding is Tesla, if I look at ARKW which is the next Generation internet ETF again number one holding is Tesla. We are potentially doubling down on that bitcoin play because Tesla owns 1.5 billion of Bitcoin and it being the number one holding of the ETF so we're getting a I would say that is a bunch of Bitcoin exposure because they own a lot of other things. Just something to pay attention to when you're building your portfolio.
Derek: Talking about Tesla, 10% of their cash Reserve is in Bitcoin, that’s a huge amount. if you're buying ARKK which is 10% Tesla, so got 10% Tesla and then 10% of their cash reserves is Bitcoin. It's still pretty indirect. Another way to invest in bitcoin is to invest in companies with large Bitcoin positions. Like we were saying, Tesla 10% of their cash reserves are in Bitcoin.
Nate: Square came out and said that they had made a splash into Bitcoin and they purchased $50 million worth of bitcoin when I saw that number, that's impressive, not an insignificant amount. And then Tesla’s purchase of 1.5 billion makes it look like small beans. It's important to know, going back to the Grayscale Bitcoin Trust, that is actually by far the largest holder of Bitcoin, it represents about 3% of the outstanding supply out there.
Derek: That's pretty crazy. Another one is the business technology company Microstrategy, they issued 1 billion dollars in debt to buy as much Bitcoin as humanly possible. and they have 71000 coins in reserve. The CEO Michael Saylor currently owns 17 thousand coins individually. That's a pretty big bet, he's a bigger bull that we are.
Nate: Square is building a lot of its services around Bitcoin through the Cash App. In my opinion, I tried a couple different ways to buy Bitcoin, and that is the easiest. If I want to be able to purchase it, hold it, send it or use it for purchasing - That's about as dummy proof an app as you can get.
Derek: Cash App, this isn't an ad they aren't a sponsor, but they're the number one finance app in the app store. Cash App is the easiest way to own it. if you listen to interviews with Jack Dorsey he's very vocal about his support of cryptocurrencies and I in particular - Etherium, he's a really big bull on Etherium. He’s had conversations with the creator of Etherium.
Nate: We both love Square as obviously part of that, the other staple is PayPal and PayPal's another company that should see its revenue increase as the cryptocurrencies become more ubiquitous and more used by retail investors. Part of that is because PayPal now allows users to buy, hold, and sell Bitcoin, Bitcoin Cash, Litecoin and Etherium on their platform. they charge a spread or margin which is the difference between the market price and The Exchange price. Part of the way they make money on that.
Derek: that's another good way to invest in bitcoin indirectly, to buy the platforms on which people transact them, PayPal, Square. I think in 2021 two companies are doing their IPOs and it's Robinhood and Coinbase and both of those are the platforms you can use to transact cryptocurrency. I would be more interested in Coinbase because Robinhood hasn't figured out their wallets yet. They said they're going to give the owners of Bitcoin access to their wallets. like right now if you buy Bitcoin on Robinhood you don't really own it you're just buying it as an investment but you can't really send it anywhere. Which is a big pain because I own most of my Bitcoin in Robinhood and it's kind of stuck there.
Nate: And the sale of it is going to create some tax consequences because you got into it pretty early.
Derek: Yeah I don't tell people my position or people will come find me in my one-bedroom apartment!
Nate: while we mentioned Grayscale earlier in this podcast I want it also to say that it's not the only ETF that they have that gives you exposure to Bitcoin. They actually have one that is called the digital large-cap Fund ticker symbol GDLC and this one along with Bitcoin owns Etherium, Bitcoin Cash and also Litecoin. again looking at that one I'm not rushing off to buy that one because the expense ratio is even higher at 2.5%. if you bought that and hold it long term I mean 2.5% compounded over years and years is taking quite a bit of your return from you.
Derek: The one thing about currency is it's only as good as the people that are using it so just a general rule of thumb I wouldn't buy a cryptocurrency that you've never heard of. If you wanted diversification just buy Bitcoin, and a quick note Bitcoin Cash is not Bitcoin those are two separate things. If you want Bitcoin do not buy Bitcoin Cash.
Nate: Derek we have talked about a couple companies here who have either used Bitcoin on their platform or have invested in Bitcoin directly. Can you get into maybe a company or two that may be used as the hardware tube to create the bitcoin?
Derek: I would say that's another really good way to invest in crypto indirectly is to invest in the companies that would benefit if crypto becomes more mainstream like in the companies that they make that the mining Hardware you would benefit. We talk about them a lot. They make the GPUs the Graphics processing unit, companies like Nvidia and AMD and there's actually a nationwide chip shortage due to Covid so there are actually other reasons why those stocks might be affected and we could see some government intervention with the chip Maker's. We have no idea what that legislation would look like, it's just some interesting stuff to to look out for in that space
Nate: this is a bad comparison but one of the benefits of owning a dividend paying stock is you have two ways to grow: you can grow through the dividend and you can also grow through the appreciation of the stock. In many ways I see companies like Tesla, Square and Paypal; these are companies that you could benefit from either the appreciation of Bitcoin success or the other endeavors that the company is in. I guess if you're looking for a more Diversified way to invest in Bitcoin or have Bitcoin exposure these might be a better way if you're not somebody who wants to go out and own Bitcoin. This is without a doubt the number one question I get as an adviser.. What do I think about Bitcoin? if I talk to somebody who isn't in Bitcoin or doesn't own Bitcoin the price makes them cringe a little bit at how much that has run up. I know many people are expecting this to run much further and Derek I believe you are in that crowd.
Derek: I think it has some room to run but that is not without some short-term volatility, you usually don't see a run of this kind without at least one major pullback. maybe like seven or eight percent pull back a couple weeks ago where it dipped below 30,000 and then it just blew past it. I think when it's all said and done my Bitcoin time horizon is over the next 5 years. Where I would look to reevaluate the situation. I am HODL-ing, as the crypto kids say, HODL which is I think it's “hold on for dear life.”
Nate: well we are long-term investors weather in stocks and bonds and Bitcoin, in real estate If you have faith in whatever your Investments are you shouldnt be sidetracked by the short-term volatility no matter how severe it gets. We were talking about indirect ways to invest in Bitcoin but you had brought something to my attention this week that fascinated me a little bit and I wanted you to kind of get a little bit more into that and you had mentioned a specific virtual wallet called blockfi. It does something our investors might be interested in t.
Derek: There's a couple other ones, but I think it's the big one and it's the one that was recommended to me. Basically what they do, it kind of works like a savings account, and I should be very clear here is definitely not a savings account is not fdic-insured or anything like that there's not significant risk I would say but there's as much risk as it comes with buying Bitcoin directly. you open up a wallet and they basically lend out your Bitcoin to institutions and they pay you high yields for allowing them to lend it out. You can do this with other cryptocurrencies too on that platform, but the yield on bitcoin is currently at 6%. The way I look at it is if Bitcoin paid a 6% dividend which is absolutely insane, and they pay it monthly.. Find me a savings account that pays 6% and also does capital appreciation and pays it monthly, it's the best of both worlds at the pretty crazy. It's a game-changer for sure.
Nate: but you have to warn people who maybe aren't familiar with this or aren't currently investing in Bitcoin you could buy Bitcoin and move into that Blockfi Wallet and earn 6% but there's nothing from stopping the value of your bitcoin from being cut in half at any point in time so it still has its volatility.
Derek: It's less liquid too, you can do one withdrawal a month. maybe a more accurate description is like a CD or something
Nate: obviously if they are lending your Bitcoin out they can't have you withdrawing it a hundred times a month. they have to have some idea of how much Bitcoin they have in there too.
Derek. We might as well just talk about buying Bitcoin directly since we talked about indirectly. I would say the easiest of these, if we're going to rank by platform, would be Cash App. The most advanced way to own it would be probably Blockfi.
Nate I want to be clear on this. I am not making a recommendation for anybody who is not invested in Bitcoin to go out and buy Bitcoin and I'm not making a recommendation to buy sell or that you should have Bitcoin in your portfolio. I will say my view of Bitcoin has changed over the past couple years, especially this year because I made money on it. When it first came out like a lot of people I didn't quite understand it, my question was how do I value it? I didn't quite understand. I can value a stock. I can look at the revenue of MasterCard or Apple and I can figure out what I'm paying for that stock and I can figure out if it's a fair price or not. I couldn't do that with Bitcoin and that was the thing that concerned me a little bit. but if you think about it you really can't do that with gold either right. I mean because gold and Bitcoin are supply-demand. personally if I were to go out make a bet I would say I do see Bitcoin becoming more accepted, even more accepted then it is now. I know somebody who owns a Paving business that is looking to be able to accept Bitcoin for his business. now what you think about a Paving business you wouldn't think of a fintech business and this is not a shot at paving or constructing I'm just saying that that's how that's how quickly this is growing. He wants to be able to accept Bitcoin as payment for doing a driveway for you and if that's the case now I'm seeing Bitcoin as that alternative investment that you could potentially add to your portfolio further diversify your portfolio - take in some growth when it happens - also be exposed to some volatility. Obviously he's got the loss that comes with it as well but if I look at the average portfolio that we construct you would have alternative Investments represent anywhere from one to 5% of the portfolio. If it takes off then you got a little bit of edge there and a little more than you would have gotten in a normal year and if the stocks or bond suffers potentially the alternative investment holds it up a little more. Like Catherine Wood, I see this as something that is going to change in investing because it gives us one more place that we can put money in to further diversify and gain exposure for growth.
Derek: Im bullish on Bitcoin, people ask me.. I have X amount of dollars. How much of that should I look to invest? How much of that should I put in Bitcoin and the first question I ask is what’s your time frame? If you're on a short time Horizon I would say don't buy any because it's so new and this is coming from somebody that is bullish and owns Bitcoin because I don't want to be responsible if somebody loses money. It deserves a place in my portfolio, it's a part of it, it's not the whole thing. You still want to own companies with good solid growth. This isn't Gamestop, there is an investing thesis behind this and I think I think the thesis makes sense so that's why I invested in it.
Nate: I think you hit the nail right on the head with the time frame. if you look at the portfolios that I would maybe add this to it would be more of the aggressive portfolio is it wouldn't be somebody who is in a conservative portfolio that is looking to use the money within the next year or year-and-a-half or something like. this would be more for somebody that's a long-term time horizon, they can withstand some volatility. That's my bet, I think going forward you're going to see it not only more commonly invested in the funds out there but also the publicly traded companies are going to own Bitcoin on their balance sheet. If I look at our portfolios now, our cash position has never been smaller than it is right now and that is just because the cash is not paying anything right and the money markets aren’t paying anything. So if I could move some of that to an asset that potentially has the ability to grow whether that is through a dividend or an interest or the appreciation I think at this point it makes sense to do that.
Derek: We talked about the microeconomic factors where individual firms have added it to their balance sheet but also talk about the macroeconomic where we see large-scale government programs that are just printing money like crazy and it doesn't take a rocket scientist or an economist to realize that eventually this is going to come back to bite us. You can't just print free money for free, I would think that there would be some inflation that we're going to have to deal with in the long-term or the short-term. I think the fact that Bitcoin can be a good store of value as a hedge against that inflation I think that's one of the most interesting aspects. That’s got to be one of the top three of the reasons I own it. I'm scared of things like this. You can't make money out of thin air, stuff actually has to accurately represent value. You can't play games with the monetary system and expect nothing to happen.
Nate: somebody who says I like keeping a lot of money in a money market because it's safe to me. I don't know if there's a more dangerous investment than that because long-term there's no chance the money market keeps pace with inflation.
Derek: It's a guarantee that you're losing at least 2%. That's a pretty safe bet. over the long-term you probably lose an average of 2% a year.
Nate: That is not saying don't own cash, we own cash.. we talked about emergency fund we talked about owning 6 to 12 months accessible cash but anything more than that your losing to inflation, you’ve got to keep it moving forward. I mean stocks, bonds, real estate, gold, Bitcoin whatever your investment is you've got to be in something that keeps out of inflation
Derek: as always if you guys like the episode rate and review us on Apple podcast Spotify everywhere you get your podcast and give us a follow on Instagram and Facebook at Dynamic growth pod and if you have comments or ideas for new episodes email us at Dynamic growth pod we would love to hear from you and we will see you guys next week
Nate: as always Crosby advisory is a registered investment advisor in the state of Ohio and at any time you can request our forms ADV 2A and 2B which go into the business practices and qualifications of Crosby Advisory. Today on this podcast, Derek and I mentioned specific stocks and we also mentioned specific cryptocurrencies that is not a recommendation for you to go out and buy them or sell them. Please do your own homework to make sure they are suitable for you. Crosby Advisory is also a licensed Insurance advisor. Insurance products are sold and serviced through Crosby Advisory.