Bitcoin and Related Investments Performance

For this week's  post, I wanted to cover the relative performance of Bitcoin and a few popular Bitcoin-related investments over a one year timeframe and a shorter (one month) timeframe.  Many of these investments I have written about previously in past posts.  My overall thesis is that investing in Bitcoin directly in a self-custody hardware wallet is the best way to invest in Bitcoin.  While you may get slightly higher returns from some of the Bitcoin-related investments, such as investing in Bitcoin miners, crypto exchanges and ETF's, you will face counterparty risk in all cases and management fees in cases of ETF's/Funds as well as other issues.  

What I mean by counterparty risk really relates to two factors:  1) the risk that the custodian of your account in which you hold your securities fails to perform (for example if the government asks that your account be frozen like we saw recently in Canada due to the trucker protests or is hacked) or 2) in the case of operating companies, the risk that the company you are invested in has some kind of operating problem that diminishes its value, independent of the market price of Bitcoin.    

Management fees are usually charged by ETF's (in the case of GBTC and BITO) and can be significant.  One advantage of owning MSTR, for example, is that it is basically a leveraged Bitcoin investment fund that doesn't charge a fee and uses the positive cash flow of its software business to continue to build its Bitcoin holdings.  As such, in many ways given the choice between the three, MSTR might be the better choice for low (no) fees.

In the table below, I outlined some of the most popular Bitcoin-related investments to review performance and other factors (this is not an exhaustive list and also not a recommendation to invest in any of these):

As you can see, for the past year every Bitcoin-related investment listed above underperformed Bitcoin.  For the past month, some investments outperformed Bitcoin as to be expected (for example, MSTR, MARA) since these are leveraged plays, but you only get about 200 Bps of outperformance relative to Bitcoin, at least for this period.  Of course performance could be quite different over a longer period of time.  The question you have to ask yourself is whether the added risks outlined above are worth the potential reward.  What's surprising is that GBTC actually underperformed in both periods badly.  That may have to do with the significant discount to net asset value that it trades at, which has been persistent - currently at 26%.  Some feel like that it's advantageous to buy GBTC because you are getting more asset for your money with the discount.  Many people expect this situation to reverse when / if GBTC is approved by the SEC as an ETF, but you could be waiting a long time for that to happen as the SEC continues to resist approving any physical Bitcoin ETF's.  COIN also underperformed both timeframes but that's probably a lot to do with general selling in technology stocks over the past year or so.  It's also getting pressure from low or no fee exchanges like Strike who offer similar services at a lower price.  Also, BITO performed slightly better but it's not a great investment for long term holders due to pricing differences between spot and futures which can result in losses when futures prices are higher than spot prices (a technical term called "contango").

Maybe you can only invest in a brokerage account and so you are limited to what your broker offers.  In that case, you may not have any choice but to get exposure to Bitcoin through Bitcoin-related investments.  I remember a year or two ago, the only investment option I had in my Roth IRA at JP Morgan was MSTR.  At the time, you couldn't invest in GBTC although that changed recently.  Same was true at Morgan Stanley (they would sell GBTC but not let you buy it).  Now there are several other options offered by brokers due to customer demand, but all are custodial and have the limitations discussed above.  Not only that, but many brokerages will limit Bitcoin investments to only their highest net worth customers and even then, limit the percentage of your portfolio invested in Bitcoin to a very small percentage.  

As I mentioned above, I feel like the approach to buy, hold and self-custody Bitcoin is the safest way to build wealth in the current economic and political environment.  For more information on how to do this yourself, check out my post from last week and also my related podcast episode.

Not financial advice, only for information and entertainment, do your own homework.  I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2022.  To see all my books on investing and leadership, click here.  

Always remember: freedom, health and positivity!  

Please also check out my new Podcast now on YouTube here.