Bitcoin, it seems, is everywhere. It’s in the news. It’s on phones. It’s even available at ATMs across the globe. Its fast rate of growth and adoption are attracting a lot of attention. And like any interesting, fast-growing business, it is attracting the interest of investors. All of which leads to the question, since Bitcoin is not a company and therefore does not have a publicly traded stock, how can you invest in it?
Perhaps the easiest way to invest in Bitcoin is to simply buy some. This strategy paid off handsomely for early adopters of the digital currency. In July of 2010 you could have bought a single Bitcoin for about $0.06. In December of 2013 you could have sold it for about $979.45, locking in a handsome profit. On the other hand, if you bought in December 2013, your nearly $1,000 investment would have been worth less than $240 by May 2015. If you are gambling person, you can bet that the price will rise again. If you are more the conservative type, you probably believe that the easy money in currency speculation has passed.
If you want to get your hands on some Bitcoins but don’t want to buy them, you can also mine them. In the early days of the cryptocurrency, mining was a relatively simple endeavor. Bitcoin works by using computing power to solve complex algorithms in order to verify transactions between Bitcoin users. To participate, you download some software and trade your computing power in exchange for bitcoins. This exchange is referred to as mining.
Today, the easy mining has already been done. Despite that, mining is still an option if you have either modest ambitions or a willingness to invest some serious cash in the hardware needed to keep up with dedicated, state-of-the-art mining operations conducted by tech geeks with deep pockets. If you just want a chance to give it try, you can do so inexpensively by downloading software, investing in some hardware, and joining a group of other miners who share resources and rewards. A simple search online will help you get started. Although this approach will not make you rich and may even cost you money, it does provide a way to learn more about digital currency and the associated technology. For a chance at serious mining money, you now need to have quite a bit of technological savvy and some serious funds to invest in heavy-duty hardware.
Sell Technology to the Miners
Bitcoin mining equipment is a hot commodity, which gives enterprising technology salespeople a chance to get in on the act. If you understand the hardware used in mining but don’t want to be a miner, there’s money to be made selling stuff to the miners. New advances in computing technology provide a direct incentive for miners to upgrade their equipment. In the race to mine coins (of which there are a limited quantity), the race truly does belong to the fastest miners. This will continue to be the case until all the coins have been mined.
Serious, deep-pocketed investors are putting money into digital currency infrastructure companies. Goldman Sachs put $50 million (a tiny drop from the ocean of Goldman money, so don’t read too much into it yet) into a start-up called Circle Internet Financial. The company is is hoping to use the decentralized Bitcoin network to help people make cheap and nearly instantaneous peer-to-peer payments, especially international payments. Customers will not have to actually have to own Bitcoins to do so. Rather, their accounts will be in dollars and only the transfer will be in Bitcoins. Goldman and other big investors are betting on the future of digital currency technology as a disruptive force in the banking and asset transfer business more than they are betting that any particular digital currency will replace the dollar, yen, franc, or sterling.
But short of starting a venture capital firm, how can you invest in a Bitcoin-related startup? As the industry advances, there may be an opportunity to invest in initial public offerings. You can also invest in the investors, as firms like Goldman Sachs (GS) are publicly traded. The fact the major players like Goldman are taking interest suggests that the technology, if not the digital currency, is here to stay. So, watching their moves could provide insight into future opportunities.
Securities and Such
If you don’t have deep enough pockets to be a venture capitalist or the patience to wait for the opportunities that may result after the technology takes hold, there are a few other ways to get in on the action. One is to trade bitcoin derivatives. (To learn more, see The Barnyard Basics of Derivatives and Derivatives 101.) Another is to participate in a private investment, such as http://www.bitcointrust.co/. Both of these choices are a bit off of the beaten path for most investors, so now may be a good time to focus on the risks associated with bitcoin investing.
Bitcoin investing is not a realm for the faint of heart. Its early days are tainted by its mysterious, anonymous founder, close association with illegal transactions such as the Silk Road drug market, and the theft of hundreds millions of dollars in bitcoins from the Mt. Gox Bitcoin exchange. Then, there’s the massive volatility associated with the currency (which, as noted earlier, has seen its value swing wildly) coupled with the fact that bitcoin is not a stock, not a bond, and not a recognized currency that any government issues or supports. It’s also completely unregulated and completely uninsured. If those are enough risks to make your worry, perhaps the complexity of the technology is also worth noting. Mt. Gox, once the largest Bitcoin exchange in the world claims to have been hacked. In a world where most people can’t even explain how a light bulb or cell phone works (much less a digital currency), the biggest player in Bitcoin didn’t even understand the technology well enough to protects itself from being robbed and going out of business.
On top of all of that, it is important to remember that all investment activity comes with the serious and very real possibility that you could lose some or all of the money that you invest.
The Bottom Line
With its secretive founding and shady clientele, it’s difficult to say whether Bitcoin itself will survive or remain the dominant cryptocurrency. Even so, Bitcoin represents a technological breakthrough that has the potential to change the way the world banks. Along the way, this technology is likely create some very successful investors. In the near future, investors can look for exchange-traded funds that focus on Bitcoin-related businesses (the Winklevoss twins of Facebook fame have been hyping their as-yet unlaunched Bitcoin ETF for years). The underlying value in cryptocurrencies may turn out be all about the movement of money (think Western Union (WU), checking accounts, Visa (V), PayPal, and Venmo rolled into one) resulting in vast investment opportunities for those in the know. After all, digital currency is indeed a new frontier and that frontier is in its infancy.