You may not be able to invest directly in bitcoin through tax-sheltered accounts or some banks, and cryptocurrency trading accounts or trading order books do not offer government insurance. However, besides buying bitcoins directly, there are other options below.
Traditional Financial Instruments with Derivatives
If words like exchange-traded funds (ETFs), trusts, options, and futures sound confusing or scary, don’t panic. Shares or contracts can be settled in cash (cash settled) or physically delivered. The price of a tradable contract or stock that tracks the cost of an underlying asset (in this case, Bitcoin) is known as a derivative. Thus, you can effectively trade paper tokens for cryptocurrencies, rather than buying them directly on uncontrolled cryptocurrency exchanges.
As these financial instruments are regulated, various consumer protections protect investors. Not to mention, there is no need to set up a wallet or negotiate with an unregulated exchange, and the tax guidance for regulated products is much clearer than when dealing directly with cryptocurrencies.
Bitcoin Exchange Traded Fund (ETF)
A Bitcoin ETF is an investment product that can be traded on the stock market. ETFs closely track the price of the underlying asset and cost less. The price of bitcoin bought and sold by the ETF manager is directly related to the value of the ETF shares. The problem is that only a handful of countries, including Canada and Brazil, offer “spot” ETFs that track bitcoin’s current price. The Securities and Exchange Commission (SEC) has repeatedly rejected applications for spot ETFs, although several applications are pending.
However, the SEC has approved several futures exchange-traded funds (ETFs) that track the value of short-term bets on the future price of bitcoin. SEC Chairman Gary Gensler said the main advantage of futures-based ETFs over spot ETFs is that they can be organized using the Investment Company Act of 1940 for investors Provides more protection.
Bitcoin closed-end fund or trust
A closed-end trust like Grayscale Trust, which represents shares in publicly traded funds, is the next best option, since bitcoin spot ETFs are illegal in the US. (The trust was managed by Gray Investments, a unit of Digital Currency Group that also owns CoinDesk.) Or, it was the next best thing to doing until 2016 when SEC fees made redemptions difficult to enforce. , the stock starts trading at a discount. The trust will likely only exist until the SEC approves the spot ETF; Grayscale is one of many applicants.
Bitcoin Options and Futures
Instead of buying bitcoins outright, you can use derivatives to exchange rights to the price of bitcoins. For example, futures contracts enable you to buy or sell in the future at a price you choose today. Essentially, it’s a bet on future costs. If the bet wins, you may be able to buy or sell it at a discount for a profit. There may be a need to sell your cryptocurrency at a loss when the contract ends, or pay more money if things go wrong.
Additionally, some futures contracts, like those on the Chicago Mercantile Exchange (CME), are settled in cash, but others, like those on Deribit, are paid in Bitcoin. Perpetual swaps, or PSPs, are futures contracts that don’t expire and allow you to bet on prices indefinitely.
Another option is to trade options, which give you the option but not the obligation to buy or sell bitcoin at a set price (called a “strike price”) within a specified time frame. Investors must pay a one-time payment known as a “premium” to own the right to buy or sell. In summary, futures and options contracts are complex financial instruments.
Bitcoin, the largest cryptocurrency in the world, seems to be everywhere these days. It has a place in the mainstream. As an investment, its spectacular rise this year has cheered its advocates and sparked curiosity among non-beginners. The easiest way to bet on Bitcoin is of course to buy it. However, there are a number of reasons why you might not want to go this direct way. Maybe you know nothing about Bitcoin and want to get involved, but prefer to get familiar with more traditional types of investing. The above methods undoubtedly provide a different channel.
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