Illustration by Bill Butcher
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By 2013, a common way to buy Bitcoin was to go to a public space like Union Square in Lower Manhattan. There, buyers brought cash and sellers brought their phones to key in codes that would transfer the digital money. Sometimes they shouted what they were willing to pay or accept, like a trading pit.
These were called Buttonwood meet-ups, after the buttonwood boom under which 24 stock brokers gathered in 1792 to found what would become the New York Stock Exchange.
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I am very frustrated that the SEC has not yet approved a Bitcoin ETF.
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Today you can still meet a man in a park (socially aloof, of course), or go to a Bitcoin ATM, but there are other ways to get hold of cryptocurrencies. Bitcoin trades 24 hours a day, seven days a week on liquid exchanges – some exchanges are even regulated now. Smartphone apps give users access at the touch of a button. The demand for Bitcoin is on the rise along with its price, which has more than tripled this year to a recent $ 23,000.
But for investors looking to buy directly through a more traditional brokerage account, the options are still limited. Most importantly, there is no Bitcoin exchange-traded fund, and it may not have been for years.
“I am very frustrated that the SEC [Securities and Exchange Commission] has not yet approved a Bitcoin ETF, ”said Ric Edelman, founder of Edelman Financial Engines. His company manages more than $ 200 billion for 1.27 million investors who are generally wealthy but not wealthy.
Without an ETF, Edelman cannot invest in Bitcoin for clients, even though he believes it is a critical part of a modern investment portfolio. (Edelman Financial only invests in ETFs and mutual funds.) He started buying Bitcoin for himself in 2014 and now has more than 1% of his net worth in cryptocurrencies.
For its clients, an ETF will “change everything,” he adds.
As a result, most Americans today buy and sell Bitcoin in apps like Robinhood, Coinbase, and
Square‘s
Cash app.
The largest group of potential buyers has run out
PayPal
(ticker: PYPL), which began rolling out crypto procurement to its US clients in October, and plans to add the service in other countries next year. There are no special requirements; users simply sign up for the service and start trading. From next year, however, there will be costs based on transaction size that could exceed 2%.
Square (SQ) also makes it easy to buy. It charges various fees that can reportedly go up to 1.76%. The company did not respond to questions about the average and maximum benefits.
Robinhood offers free Bitcoin trading and makes money by leading customer transactions through market makers and narrowing the spread between the bid and offer prices.
Every company has different rules about what to do with your crypto once you buy it. Square allows buyers to move their Bitcoin to an unaffiliated “wallet” that they can use to trade with other people, but PayPal and Robinhood allow users to keep their crypto on the platform and sell it out in cash.
“The advantages of this are that they are shop-friendly and intuitive; some of the drawbacks are that they can receive significant fees, ”said Matt Hougan, chief investment officer of Bitwise Asset Management, a provider of cryptocurrency funds. “And then the big disadvantage is security. If your phone is hacked or your password stolen, you could lose your belongings. “
The largest app that focuses entirely on crypto is Coinbase, which has just been submitted confidentially to go public. Coinbase offers dozens of cryptocurrencies and services, such as loans, that are not available from simpler services. It charges a 0.5% spread on trades, as well as fees from 1.5% depending on the source that customers use to purchase.
There are also a few ways that investors can trade cryptocurrencies in their securities accounts. The
Grayscale Bitcoin Trust
is a security created by Grayscale Investments that consists entirely of Bitcoin and is structured as a private placement. SEC rules allow investors to sell the trust in public markets six months after purchase. It trades under the GBTC ticker and can be bought on most traditional brokerage accounts.
However, there is a big difference between the trust and an exchange traded fund. GBTC trades at a significant premium to its intrinsic value, meaning buyers aren’t just taking a risk on Bitcoin; they can also lose money if the premium falls. Grayscale has taken advantage of the scarcity of other options – it is now the largest crypto asset manager in the world, with $ 13 billion in assets under management. GBTC is up 240% this year. Bitwise also has a publicly traded crypto security called Bitwise 10 Crypto Index Fund (BITW), which tracks 10 digital coins and trades similarly at a high premium – more than 200% recently.
There are also several crypto-focused hedge funds for high net worth investors. Pantera Funds started the Pantera Bitcoin fund in 2013 and has since returned more than 27,000% – probably the best performing hedge fund in history. There is a minimum investment of $ 100,000 and a management fee of 75 basis points, but no performance fee. Dan Morehead, Pantera’s CEO, calls it “the most efficient way for wealthy individuals or institutions to gain exposure to Bitcoin – it is structured like an ETF in the sense that it has daily liquidity.” Pantera also offers funds that invest in early coins and companies.
Like others, Morehead sees an ETF as the holy grail for the industry, but he’s unwilling to speculate on when it might come. In the meantime, investors have to settle for products that feel a bit strange or expensive. If Bitcoin continues to rise, spending will of course not be a problem.
Write to Avi Salzman at [email protected]