Antique

Investing vs Trading

More and more Forex brokers are offering trading in Bitcoin, and a few are also offering other crypto-currencies. This means a possible solution is to open an account with one such broker and simply buy some Bitcoin and sit tight while your investment hopefully appreciates. Opening an account with a Forex broker is usually a relatively painless process and you don’t have to worry about owning the Bitcoins or other crypto-currency. You just have a position with the broker, and many brokers will allow you to open an account with a minimum deposit of $100 or less. They also offer leverage, which means that you can take a position bigger than your deposit. This brokerage route sounds like a simple solution, but there are two problems that probably make it a potentially poor proposition.



Bitcoin Mining

Experts typically estimate that it will be possible to mine Bitcoins until approximately 2040, leaving plenty of time for prospecting. Bitcoin mining is the process of using specialized computer equipment to create your own Bitcoins over the internet. Unfortunately, effective mining is now out of reach of the hobbyist, as it now requires a very large cash investment in a lot of equipment. There are some websites offering investment in collective mining operations. These are technically feasible, and there are legitimate mining consortiums which pool the costs, but this again is a risky idea, particularly if you do not have perfect due diligence on the offering.



Shares in a Crypto-Currency ETF

Some assets are problematic to own as they incur storage costs and other issues, commodities such as crude oil, natural gas, and gold bullion being good examples. So why not buy shares in a fund which owns crypto-currency, giving you an exchangeable and easily ownable asset derived from the value of the crypto-currency you wish to invest in? The main reason why it might not be a good idea is that shares in these crypto-currency funds tend to trade at strong premiums to their underlying value because there is such heavy demand for the shares. For example, a fund owning $100 million of Bitcoin valued at the current market price might have 1 million paid-up shares trading at $150 each. If you buy one of these shares, you are paying 50% over their true value, and if the market were to cool off suddenly, you would find yourself down by 33% on your investment very quickly. Another concern with investing in a fund is the question of regulation and fraud, similar to the issue concerning Forex brokers.

Outright Purchase

For most investors today, the cheapest method is simply to buy the crypto-currency directly and store it, hoping to sell it later at a profit. This leaves you with the legal ownership of the asset and the responsibility of storing and protecting it. The worry is in protecting the code, as Bitcoin ownership is like a bearer share: anyone with access to the code can “spend” the Bitcoin. If you have the code on a piece of paper, and receive and store it by email, it is just as vulnerable to hacking as your email is. An alternative storage and protection method is to use a digital wallet and/or vault. These can be a third party’s server, a smartphone app, or a program you store on your computer. You can keep it in a flash drive or other device too.

Conclusion

Before making any investment in a crypto-currency, please do your own thorough research into whether it is an attractive investment that can meet your long-term financial goals. Take care not to be panicked into buying in a hurry before you have thought it through. Investments that have enjoyed enormous price increases have historically shown some tendency to suffer disproportionately from huge falls in value. If you do wish to go ahead, outright purchase is probably the best idea, although a very well-regulated and insured fund trading at a modest premium could also be a good option.

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