In an economic environment dominated by negative interest rates, the possibility of growing your wealth by 50% or even 100% per annum without having to invest time and effort sound too good to be true.
But the value of cryptocurrency bitcoin grew from mere centimes in 2009 to more than 2500 Swiss francs just 8 years later in 2017. If you had invested 10,000 Swiss francs in 10,000 bitcoins at 1 franc a piece back in 2010, you could have sold those 10,000 bitcoins for around 25 million francs in 2017.
The downside of bitcoin
Because the growth of bitcoin has been fueled almost entirely by speculation, with no underlying assets or securities backing the virtual currency, rates are subject to radical fluctuations. The fact that cryptocurrencies are a recent development means there is still a long way to go in passing adequate legislation and creating a reliable infrastructure on which they can be transacted.
Another hurdle is the somewhat complex process of purchasing bitcoins on the open market and redeeming them for goods and services. Safely storing bitcoins is another facet which many investors are uncertain about.
Investors which have the risk capacity to invest in an asset class which has not been tried and tested can potentially earn high profits by investing in bitcoin. However, options for investing in bitcoin are still limited.
1. Direct purchase
Buying your own bitcoin is the most straightforward way to invest in the currency – and the cheapest over the long term – but it requires a fair amount of knowledge and effort. Investors should research and understand how bitcoin works, which brokers are completely reliable, which bitcoin wallets are the most secure and how to safely store bitcoin keys.
Small-time Swiss investors can purchase bitcoin though the automated ticket vending machines available at most SBB / CFF railways stations. You can also purchase bitcoins through Swiss bitcoin brokers like Bitcoin Suisse AG and Bity SA. If you choose to work with foreign brokers, stick with reliable and regulated brokers.
When buying bitcoins, pay careful attention to the commissions charged and the exchange spreads used. The SBB / CFF charges a 6% commission. ATMs run by Bitcoin Suisse AG charge a 5% commission. Commissions on exchanges made through brokers vary based on the size of transactions. Note that brokerage fees are also applied when you sell your bitcoin, although these are normally lower than purchase commissions.
In addition to brokerage fees, you may also have to pay for a secure bitcoin wallet. If you hold large amounts of bitcoins, you may prefer storing your bitcoin keys physically in a safe deposit box or using a secure storage service (such as that offered by bitcoin service Xapo) rather than on a digital device where they are vulnerable to data theft. In that case, you should consider the cost of the safe deposit box as well. All of these costs cut directly into your investment returns.
2. Bitcoin certificates
If you want to benefit from growth in bitcoin rates but prefer not to own any bitcoins yourself, you can consider investing in a bitcoin certificate. These certificates track the performance of bitcoin against another currency – such as the U.S. dollar.
Bitcoin certificates are not yet widely offered. Swiss bank Vontobel issues a bitcoin certificate (SSPA: 1300) which is listed on the SIX Swiss exchange.
3. Bitcoin ETFs and ETNs
Exchange traded funds (ETFs) which track bitcoin performance are still in their fledgling stages. A number of ETFs include bitcoin investments in their portfolios, although they are not devoted entirely to bitcoin. Examples of these are the Web x.0 ETF (NYSEARCA: ARKW) and the ARK Innovation ETF (NYSEARCA: ARKK), both from U.S. firm Ark Invest. The as-yet-unapproved Winklevoss bitcoin ETF (COIN) is a fully bitcoin-based ETF.
NASDAQ Stockolm lists an exchange traded note (ETN). The “bitcoin Tracker One XBT” is issued by XBT Provider.
4. Bitcoin mutual funds
In addition to exchange traded funds, conventional mutual funds have also begun adding bitcoin to their portfolios. The Bitcoin Investment Trust (OTCQX: GBTC) is one example of a mutual fund which invests in bitcoin. Jersey-based Global Advisors Bitcoin Investment Fund (GABI) is another.
Because the market for bitcoin funds is not yet competitive, the total expense ratio (TER) of mutual funds tends to be high. The Bitcoin Investment Trust, for example, has a 2% total expense ratio (TER) although it is a passively managed fund.
5. Hedge funds
Experienced investors may consider investing in hedge funds with bitcoin-based portfolios. Bitcoin hedge funds are in their fledgling stages, with a handful operating out of fringe financial centers. The Bitcoin Fund, issued by Maltese firm Exante, is one such fund.
6. Shares in the stocks of bitcoin service providers
The value of bitcoins themselves is subject to fluctuation like other commodities and currencies. But if more merchants choose to accept bitcoin in the future and if consumers choose to adopt it as a means of payment, the value of some bitcoin service providers is likely to grow in a big way. Investing in these service providers (by buying stock, for example) provides an alternative to investing directly in bitcoin.
Although it is impossible to accurately predict future trends, it is likely that the number of bitcoin-based investment products available will multiply in the near future. Bitcoin derivatives like ETFs, funds, certificates and notes make it easier for investors to take advantage of bitcoin's volatility without buying and holding bitcoin themselves.
If you invest in bitcoin-based ETFs, mutual funds, stocks or hedge funds, make sure to choose a broker which charges low brokerage fees. You can compare Swiss online brokers using the interactive online broker comparison on moneyland.ch.