And now there is a way for stock market investors like you to participate in this crazy market without leaving the comfort of your existing broker.
Once thought of as the province of hackers, cyber-pirates, and radical libertarians, cybercurrencies are quickly moving into the mainstream. Names like Bitcoin, Etherium, and Ripple are being bandied about, not only on the internet and financial press, but by major banks and financial institutions as they explore ways of utilizing these borderless forms of money.
What Is Cryptocurrency?
Cryptocurrency is a catchall term that refers to digital or virtual means of exchanging or storing money. Cryptocurrency functions under a decentralized model, meaning that it does not require a central bank or government entity to create or regulate it.
Instead, it is self-governing via a system known as the blockchain, which is a public ledger of every transaction ever conducted in chronological order. Every user downloads the ledger, creating full transparency that helps to reduce fraud. Transfers are carried out via private and public keys for security.
Wait A Minute, How Is Fraud Avoided?
Sounds like a hacker’s delight, right? Well, the truth is that it is challenging to defraud a block chain.
The way it works is that each block’s hash (line of seemingly random numbers and letters) is created from the hash of the prior block, thereby confirming the block and every subsequent block. If someone tried to fake a transaction, everyone would know since the block’s hash would change and be instantly recognizable as fake. Simply put, any currency that does not follow the rules will be rejected by the network.
Transactions via blockchain can be conducted with a large degree of efficiency, which means minimal fees for users. Prices are based purely on supply and demand, leading to the extreme volatility in each cryptocurrency’s price against other currencies.
The Most Popular Cryptocurrency
The most popular cryptocurrency is Bitcoin. Bitcoin was first launched in 2009 with a near-zero value. It quickly gained a following and a value of a few cents. These days, its price has soared into the $3000 per coin zone.
Today there are around 15 million Bitcoin in existence with a total value of around $3.5 billion. Bitcoin are created in a process known as mining. Miners use computers to solve increasingly complex math problems and are awarded Bitcoin for their effort.
The total number of bitcoin is capped at 21 million and mining them becomes increasingly difficult over time. It’s this stroke of genius that assures the value of the currency, rather than a central authority controlling the supply.
How Can Stock Investors Participate?
An attempt by the Winklevoss twins of Facebook fame to launch a Bitcoin ETF ( COIN ) was shot down by the SEC last month. However, a second attempt at approval has been started and is pending with the SEC. I strongly think that COIN or a similar ETF will eventually be approved for trading in the United States. It’s just a matter of time.
While we wait for the ETF, a company known as Grayscale has successfully launched a Bitcoin Investment Trust (OTCMKTS: GBTC) on the QTCQX exchange, the top-tier OTC exchange.
Instead of setting up a separate Bitcoin account, investors can participate in the volatile world of Bitcoin via GBTC. The shares track the Bitcoin market price minus fees and expenses via the TradeBlock XBX Index 24-Hour VWAP.
In case you are concerned about the security of the underlying assets of the shares, the Bitcoin Investment Trust’s assets are stored with Xapo, Inc., in deep cold storage vaults. Bitcoin stored in the Xapo Vaults reside on multi-signature addresses, the private keys for which are protected by intense cryptographic, physical, and process security.
Each share of GBTC represents 0.09289 of a Bitcoin, and the trust manages assets of about $389 million. It’s important for investors to note that there is a 2% annual fee assessed by the trust.
Bitcoin represents a great way for stock traders to diversify their holdings with the potential of monster gains over time.
Risks To Consider: Bitcoin and the other cryptocurrencies are extremely volatile and trade in an unproven market. Multiple unknown factors create an outsized risk that is only suitable for those willing to lose their entire investment.
Action To Take: A great opportunity is inherent within the high risk of Bitcoin and the other cryptocurrencies. Stock traders should explore diversifying a small amount of their portfolio in the sector via GBTC and the pending COIN ETF.