Many early Bitcoin adopters sought a means to take control of their wealth without the need for a third party. These individuals have benefited greatly from their early conviction and technical know-how for securely storing their funds. A lot of interest is now coming from higher net worth individuals who do not have the time to learn, or the technical skills to store their own bitcoin. For those who do not plan on storing their own bitcoin, luckily there is another option. If one has access to a traditional or Roth IRA, they can purchase shares of companies that are already holding Bitcoin and take advantage of tax incentives. For example, when you sell your bitcoin in return for US dollars, you will be taxed immediately on your capital gains. However, when you sell your stocks in a registered account like an IRA, you may be entitled to certain tax benefits or exemptions. With continued talks of stimulus among the new administration, increasing institutional demand, and verified scarcity, Bitcoin is becoming more accepted as a viable alternative investment. It is now easier than ever to gain exposure to Bitcoin returns through an IRA or brokerage account, which most people already have access to.
What is GBTC?
Similar to a stock (owning a share in a company) that one would buy in their Roth accounts, Grayscale Bitcoin Trust (GBTC) owns bitcoin on behalf of its investors. Grayscale offers an easy way for customers to purchase shares of the Bitcoin Trust and gain exposure to Bitcoin’s price movements. Customers can also enjoy the convenience of having Grayscale manage the security and storage of their Bitcoin at a premium, which varies based on market conditions and demand. GBTC is similar to a stock, except no profit is generated from the fund. Price is directly correlated to the price of Bitcoin. Additionally, the performance of the executive team does not directly affect the price of Bitcoin. Only the security and storage methods of the fund’s bitcoin are their responsibility.
What do stocks offer that GBTC does not?
For individuals who are more comfortable investing in stocks, they may find it easier to compare metrics between companies competing within the same industries. If they consider a company to be a bargain based on their balance sheet, while holding a percentage of their reserves in Bitcoin, it may make more sense to purchase shares in that company rather than paying a premium to own GBTC. Another important piece to consider is the volatility that comes with owning direct exposure to Bitcoin through GBTC. Bitcoin’s swings are much more volatile than most traditional assets and it is important to remember that Bitcoin is not a stock. Additionally, cash flow is an important metric to consider when investing in companies with Bitcoin exposure. Cash flow is the transfer of cash in and out of a business where positive cash flow refers to the cash that a business is able to keep after all expenses are paid. If a company has a consistent track record of positive cash flow and they already hold Bitcoin on their balance sheet, there is a greater likelihood that they will continue to buy more Bitcoin in the future. The more they increase their exposure to the digital asset, the more their stock price will track the returns of Bitcoin.
Where can I buy Bitcoin stocks?
If you currently reside in the US and have access to an IRA, brokerage account, or company 401k, you can purchase shares in companies with Bitcoin exposure. Using an IRA or 401k also provides tax incentives for contributions. Depending on your age and access to a company 401k, you may be able to contribute $6,000 - $7,000 each year to an IRA. A traditional IRA allows for pre-tax dollars to be contributed and no taxes are taken until retirement age. For a Roth IRA, after-tax funds may be contributed and will not be taxed during withdrawals at retirement age. If you do have access to a 401k, be sure to research what the fee structures are and determine if they offer individual stocks. Some company plans allow a limited selection of mutual funds. In contrast with an IRA, the process is more self-directed and customers have a much wider selection of investment products to choose from.
Largest IRA providers in the US
- Bank of America
- Charles Schwab
- Fidelity Investments
Market capitalization (market cap) is the total market value (what the market decides) of how much a company is worth. One can calculate this by multiplying the share price by the number of outstanding shares that are publicly traded. A quick example of this would be if Apple has 100 shares and each share is worth $1, the market cap of Apple would be worth $100. One way to determine if this is a fair price is to compare Apple’s market cap to a similar company in their industry. If Microsoft shares are trading at $2 but they only have 50 outstanding shares, they would have the same market cap as Apple. At first glance, it may seem that Microsoft is more “expensive” than Apple by only looking at the share price. In reality, the market has determined that both companies are worth $100. One must always check the market cap before determining whether a stock is overvalued or undervalued. There are other metrics to consider, but for our purposes we will use the market cap to determine how much Bitcoin exposure we want in our portfolios. For instance, if a company like Microstrategy has a market cap of 5 billion dollars and has 2.5 billion dollars worth of bitcoin, this means that by purchasing shares in Microstrategy, an investor has 50% exposure to Bitcoin. Please be aware that determining whether or not Microstrategy is currently trading at a fair price also requires the investor to fairly evaluate the company without their Bitcoin holdings. If a company like Microstrategy holds 2.5 billion dollars worth of bitcoin but also trades at a market cap of 2.5 billion dollars, an investor will essentially pay fair value for the bitcoin holdings and buy the operating business for free. This type of opportunity will be rare but it is important to think in terms of how much value the business brings for the market. The opposite scenario is also possible: the company is overvalued and the investor ends up paying a premium on their Bitcoin holdings. If Microstrategy has 2.5 billion dollars worth of bitcoin but the company has a market cap of 10 billion dollars, does it make sense that their operating business is trading for 7.5 billion dollars? It is fairly easy to determine the value of Bitcoin by checking the current price it trades, but determining the value of a company that holds bitcoin will require more research on the investor’s end.
Depending on which provider you are using to invest in stocks for your IRA, investors also have access to OTC markets. Over the counter (OTC) markets are used for investment products to be traded directly between two parties. These markets do not have brokers to execute deals and are more opaque than traditional exchanges like the New York Stock Exchange or the Nasdaq Stock Market. Prices are determined between the buyer and seller rather than having a broker do so.
Stay tuned for Part 2 of this blog series where we will examine some of the key Bitcoin stocks for 2021...