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Bitcoin is becoming even more famous now which is definitely a good thing since this gives people freedom from the banks. It uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.
Bitcoin represents a tiny part of my portfolio but I’m intending to build the size of the stake a little bit. In my view, it is a suitable minor component of the left side (safe side) of The Black Swan Portfolio. Please note: Bitcoin is extremely volatile.
There are a few things coming together why I’m writing it up now:
1) We are getting ever closer to a bitcoin ETF
The SEC is gathering input on the Winklevoss Brothers initiative (Pending:COIN) and it looks like some kinks could use working out this appear doable. Even if they fail, I suspect we are going to witness an ETF or fund getting launched at some point. Here’s the latest SEC letter.
2) Funds are launching and there is great demand
HK, run by the FRMO Corp. (OTCPK:FRMO) team and a Black Swan Portfolio holding, started a fund for its clients (emphasis mine) and there was a lot of interest:
In 2016, Horizon Kinetics also established a fund that invests in bitcoin. Bitcoin is an example of a cryptocurrency. This asset class will be discussed more fully in the section pertaining to our investment in Digital Currency Group. This asset class did not exist several years ago; it is entirely new. The fund established an investment maximum of $50,000 per client. We are not aware of any other firm that so constrains client contributions. However, we believe it is the easiest and most obvious way to control risk. We simply limit the amount of money that can possibly be lost to an amount that is tolerable. Investment firms often complain about the short-term focus of clients. The short-term focus is more understandable if the investment in failure mode could quite negatively impact their lives. In any case, we rapidly sold essentially every available slot in the fund.
I’ve learned from the company they have two funds that are open to accredited investors only and limit investments to $50,000 for now.
3) Funds have started buying in
Ark Invest, an investment firm, read their white paper on bitcoins, holds bitcoin through the GBTC trust. It holds GBTC in its Next Generation Internet ETF (ARKW) and the ARK Innovation ETF (ARKK). Horizon Kinetics also invests in GBTC though its Kinetics Internet Fund No Load (WWWFX), Kinetics Paradigm Fund No Load (WWNPX) and Kinetics Market Opportunities (KMKAX). When fund buying starts ramping up this can have a profound effect on the valuation of bitcoin because 1) On a global basis there’s over $100 trillion in assets under management. Imagine only a 1/10th of 1% getting moved into bitcoin. 2) Institutions holding for diversification or long-term investment purposes may have much steadier hands than the current bitcoin traders, which could help stabilize bitcoin’s volatility, which would in turn make it more attractive to other investors and retailers.
4) Family offices are buying in
Perhaps by nature more interested in wealth preservation, family offices appear to be acquiring bitcoin. Murray Stahl on the FRMO Corp. Q3 earnings call:
Believe it or not, bitcoin is making progress. There are family offices, quite a few of them actually, that are buying bitcoin. The issues about safe custody and storage are technological problems that are being worked out.
The downside is admittedly quite large with bitcoin. It is conceivable it becomes worthless and it has been proclaimed dead no less than 112 times. The last time in Newsweek October 12th.
The upside is also large. Bitcoin is already 10x larger than Linden Coin (of the game Second Life) at its peak. What can bitcoin become? Could it become as important as gold? Can it replace all money? I don’t know but the visualization made by the money project in 2015 gives an idea of the relative size of the bitcoin “market cap” compared to other assets:
Source: The money project
My allocation is less than 1% and I prefer a basket of cryptocurrencies to any particular cryptocurrency, but I’ll talk about those in a future article. The ultimate value of some of these coins is very large and without any cap and therefore I prefer to diversify between them. Read my prior Bitcoin articles: 6 Reasons Why You Shouldn’t Invest In Bitcoin and 5 Reasons To Buy Bitcoin.
Good places to acquire Bitcoin and Ethereum are:
Coinbase (U.S.-based, if you use this link and buy $100 worth we both get $10 bitcoin free)
Kraken (U.S.-based, you can use this alternative)
I use the above-mentioned Coinbase for a cryptowallet. It is very user-friendly. No advanced tech knowledge required. In addition, you can also hold Ethereum which I find convenient.
Disclosure: I am/we are long FRMO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: A substantially similar article previously appeared on The Black Swan Portfolio.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Bitcoin is on the verge of becoming an investable “asset class.”
An ETF is close to getting launched.
Several small funds now offer exposure to bitcoin.
The most adventurous and independent of institutions have stuck their toe in the water.
Bitcoin is the currency of the Internet: a distributed, worldwide, decentralized digital money. Unlike traditional currencies such as dollars, bitcoins are issued and managed without any central authority whatsoever: there is no government, company, or bank in charge of bitcoin.
– Reddit definition of bitcoin
For a more comprehensive overview of what bitcoin is, its Wikipedia page is a great resource.
via Seeking Alpha