If you think the 11-month rally in the three major stock market indexes is impressive, you probably haven’t been paying close enough attention to Bitcoin (CRYPTO:BTC). The world’s largest cryptocurrency by market cap has tripled over the past three months, is up more than 480% over the trailing year, and has vaulted higher by 12,710% on a trailing five-year basis. For context, the benchmark S&P 500 is up 104% over the trailing five-year period.
Bitcoin has had the usual array of tailwinds in its sails during its latest bull run. These catalysts include the perception of scarcity — i.e., its 21 million token limit will be a store of value against a growing U.S. and global money supply — and the growing acceptance of Bitcoin by businesses as a form of payment.
The world’s first trillion-dollar crypto token has also been buoyed by bullish tweets from Tesla CEO Elon Musk. Tesla is one of a handful of companies, including The Motley Fool, to have purchased Bitcoin to hold on their balance sheets.
Investing in Bitcoin comes with varying degrees of risk and reward
Investors have many ways to invest in Bitcoin, some safer than others.
I suspect the vast majority of folks have chosen to buy Bitcoin directly from one of many cryptocurrency exchanges or brokerages. Doing so often comes with a nominal fee, but gives users direct ownership in the highly volatile but surprisingly liquid Bitcoin. Of course, the risk of direct ownership is the history of huge swings lower in Bitcoin, as well as the potential for hackers to swindle you out of your crypto assets. Don’t forget that cryptocurrency assets aren’t federally insured.
If using a cryptocurrency exchange isn’t for you, there are a small number of over-the-counter-listed securities that act like tracking funds, which can be purchased in most traditional brokerage accounts. Both the Grayscale Bitcoin Trust (OTC:GBTC) and Osprey Bitcoin Trust (OTC:OBTC) acquire and hold Bitcoin tokens.
Since these trusts regularly update their owned assets and outstanding share count, it’s easy to calculate the net asset value (NAV) of their portfolios. Unfortunately, both the Grayscale Bitcoin Trust and Osprey Bitcoin Trust trade at sizable premiums to their NAVs. In other words, in exchange for avoiding the hassles of investing on a cryptocurrency exchange, Grayscale Bitcoin Trust and Osprey Bitcoin Trust buyers are forking over a premium and paying annual management fees of 2% and 0.49%, respectively, just to have Bitcoin exposure.
A third way to invest in Bitcoin — and my personal favorite — is to buy into ancillary cryptocurrency stocks. These are businesses that aren’t reliant on the price of Bitcoin, but nevertheless benefit from heightened trading, transfer, and exchange activity or crypto mining equipment purchases. For example, PayPal (NASDAQ:PYPL) is allowing its 377 million consumer and merchant accounts…