Investing in Bitcoin (and Cryptocurrencies and Blockchain)

Originally invented as a new currency for the global, digital age, Bitcoin is a complete reimagination of the traditional currency and banking system. Since Bitcoin’s creation in 2009, cryptocurrency has become:

One of the hottest assets to trade on the planet

A forerunner of transformative crypto technologies in finance, logistics, healthcare, and more

The answer is, of course, "All of the above." Since it was made available to the public, Bitcoin has become the most popular and well-known cryptocurrency (also called coin), as well as the most valuable, with alt-coins (alternatives to Bitcoins) Ethereum and Tether coming in second and third.

Since Bitcoin’s genesis, more than 21,000 cryptocurrencies have been created with a combined value of about $804 billion—Bitcoin makes up $320 billion of that value (1). Investors interested in cryptocurrency might be put off by stories of sketchy business practices, but Bitcoin, cryptocurrencies, and blockchain technology offer plenty of investing opportunities, whether in adventurous startups or the crypto sector as a whole.

Bitcoin shook up business-as-usual, traditional financial systems. Most countries have a distinct currency that is government-controlled and that generally cannot be spent elsewhere. The process of transferring money between people in different countries can be quite complex as the funds need to pass through intermediary banks along the way. This complexity takes time and adds a cost to the transfer in the form of fees. That’s why an ingenious new digital currency known as Bitcoin was launched.

An unknown person (or group of people) going by the name Satoshi Nakamoto invented 

 (and the underlying blockchain technology) in 2009. Instead of relying on the “trust-based model” of third parties like financial institutions processing electronic payments, Bitcoin relies on what Nakamoto referred to as “cryptographic proof” (hence, cryptocurrency). This proof comes in the form of Bitcoin’s blockchain ledger, which unlike the ledger of a traditional bank, is open to and shared among users in the Bitcoin network. Like most other decentralized cryptocurrencies Bitcoin is neither backed by a government nor issued by a central bank, and its value relative to local currency moves with the forces of supply and demand.

The “block” in blockchain describes the data that is entered into the network, while the “chain” in blockchain refers to the chronological sequence in which blocks are entered. Data is approved for entry via consensus of other network participants, and once entered it cannot be changed. In this way, there is a complete, sequential, and verifiable record-keeping of the network’s data that is available to all participants.

The decentralized nature of blockchain has far-reaching applications beyond Bitcoin and cryptocurrency, especially for problems associated with data storage and security. These applications make use of digital “tokens,” that can be used to grant access, verify identity, or track products. Logistics firms, health care, and data are three sectors that are already turning to blockchain technology.

Although Bitcoin is typically used as an investment and exchange platform, it was created to help with digital payments, and there are a few major retailers, like Microsoft and Overstock, that accept cryptocurrency.

There is a fixed amount of 21 million Bitcoin available, known as the hard cap. As of January 2022, 18.9 million bitcoins had been issued; about 2.1 billion bitcoins were still to be released (2). New Bitcoins enter circulation through “mining,” in which people using powerful computers (“miners”) compete to solve complex mathematical problems in a race to verify a new set of Bitcoin transactions. The first miner to do this correctly is rewarded with a certain number of Bitcoins. Mining is a costly, energy-intensive endeavor, but it is not the only way to acquire Bitcoins—you can simply buy them.

Most people buy fractional shares, or portions of Bitcoins with fiat (like US dollars). You can use cash transfer services like Cash App or PayPal to buy Bitcoin or cryptocurrency exchanges and some traditional brokerages. You have to create a digital wallet, which stores the purchased Bitcoins and your payment information, but many exchanges and brokerages will guide you through the process—note that wallets’ security and flexibility vary, so it’s worth researching the best one for you. Decide how much Bitcoin to buy, and after the transaction is verified by miners, and you will be the proud owner of shiny new Bitcoin.

In addition, many mutual funds and ETFs can expose investors to Bitcoin stock without having to put all one’s investing eggs into one Bitcoin basket (3).

See crypto in the news? It’s always worth checking how this could affect investments you are interested in.

" on Magnifi will bring up mutual funds and ETFs that have exposure to Bitcoin and related technologies. Clicking on the name of the fund will take you to a chart of its returns—so you can see for yourself how the fund is doing, and whether its returns and risks fit your goals.

Pros and cons of Bitcoin and cryptocurrencies

 No central entity verifies buyers and sellers. Rather, the blockchain allows the ledger to be peer-to-peer, with no one entity maintaining ownership or control over the ledger.

 Most cryptocurrency transactions have low fees and lots of flexibility. Imagine: no more waiting two business days for a transaction to clear.

An alternative to the traditional banking system.

 As a decentralized digital currency, Bitcoin can be bought and sold anywhere where there is an internet connection, unlike traditional banking, which simply does not adequately function in many places across the world.

 Mining consumes a huge amount of energy.

 As a relatively newly minted asset, cryptocurrency’s unpredictable market highs and lows are swayed by inflation, supply and demand, regulations, and public confidence.

 Cryptocurrency’s anonymity and decentralization can be exploited.

As an investment, Bitcoin is undeniably in high-risk territory. But a potential for high upside comes with the risk of big downsides. For example, a single Bitcoin cost about $1,000 at the beginning of 2017, and by November 2021, Bitcoin hit a peak price of about $68,990 (4). Alas, the party was not to last! Prices fell sharply in 2022 amidst collapsing hype, high inflation, and fraudulent activity with the implosion of cryptocurrency exchange FTX Trading Ltd. and the arrest of its founder, Sam Bankman-Fried, on fraud charges.

However, Bitcoin itself has been around long enough to potentially work through many of the challenges that have arisen. Volatility aside, it’s hard to deny Bitcoin’s outstanding performance when looking at the entire price history. In 2019, Bitcoin posted gains of more than 9,000,000 percent since July 2010. In comparison, the S&P 500 and Dow Jones each roughly tripled during the same period (5). Interest in Bitcoin is likely to remain high for the foreseeable future, and it and other cryptocurrencies like Ethereum could continue to be a highly lucrative, if risky, investment option for adventurous investors.

Which brings us to the silver lining: In 

an interview with Magnifi’s Nicole Lapin,  Eric Peters,

 the founder, CEO, and CIO of One River Asset Management and its subsidiary, One River Digital Asset Management, pointed out that even with a plummeting crypto market, Bitcoin and digital assets have gotten “big enough and real enough to finally push institutions to invest in blockchain technology.” This means a potential new infrastructure in finance, he says, with stocks, bonds, commodities, mutual funds, and even ETFs eventually traded as tokens. This could be good news for investors who want to continue to shake up tradition with innovation.

The cryptocurrency market has yet to mature, but offers exciting possibilities for people who want to be on the ground floor of emerging technologies. People interested in investing in the technology without buying Bitcoin directly can invest in a mutual fund or ETF that offers exposure to the Bitcoin market and its underlying technologies, like blockchain, which can be a way to temper some of cryptocurrency’s volatility. A search on Magnifi surfaces a number of funds available today:

Royal, James, “Cryptocurrency statistics 2023: Investing in crypto,” January 5, 2023, https://www.bankrate.com/investing/cryptocurrency-statistics/.

Abrol, Ayushi, “How Many Bitcoins Are There And How Many Are Left To Mine?,” September 8, 2022, Blockchain Council, https://www.blockchain-council.org/cryptocurrency/how-many-bitcoins-are-left/.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Browne, Ryan, “New Year, new rally: Why bitcoin is up 28% this month after a tumultuous 2022,” January 16, 2023, https://www.cnbc.com/2023/01/16/why-is-bitcoin-btc-rallying-in-january.html. 

Hajric, Vildana, “Bitcoin’s 9,000,000% Rise This Decade Leaves the Skeptics Aghast,” December 31, 2019, Crypto, Bloomberg.com, https://www.bloomberg.com/news/articles/2019-12-31/bitcoin-s-9-000-000-rise-this-decade-leaves-the-skeptics-aghast.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency. 

Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

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