Understanding the Risks and Rewards of Bitcoin Investment Options

As Bitcoin matures as an asset class, investors have multiple ways to gain exposure. From direct purchases stored in self-custody wallets to investing in leveraged ETFs and company shares, each option comes with unique risks and rewards. This article compares the pros and cons of various ways to invest in Bitcoin and provides a comprehensive resource for Bitcoin-related funds, including MicroStrategy and leveraged ETFs.

1. Bitcoin in Self-Storage
2. Bitcoin in Online Wallets (e.g., CashApp or Coinbase)
3. Bitcoin ETFs
4. Leveraged Bitcoin ETFs
5. MicroStrategy (MSTR) Stock
6. Leveraged MicroStrategy ETFs
7. MSTY (MicroStrategy ETF)

1. Bitcoin in Self-Storage

Description: Purchasing Bitcoin outright and securing it in a hardware wallet like Trezor or Ledger, or even through paper wallets.

• Pros:
  • Complete Ownership: No intermediaries. You truly own your Bitcoin, with no counterparty risk.
  • Security: If stored properly (e.g., offline hardware wallet), it's immune to hacks.
  • Privacy: Allows for greater privacy compared to centralized platforms.
• Cons:
  • Self-Custody Risk: Losing your private key means losing your Bitcoin forever.
  • Complexity: Requires technical know-how to set up and manage securely.
  • No Yield: Unlike ETFs or stocks, Bitcoin in storage doesn’t generate dividends or interest.

Best For: Long-term investors who prioritize sovereignty and security.

2. Bitcoin in Online Wallets (e.g., CashApp or Coinbase)

Description: Buying Bitcoin on platforms like CashApp or Coinbase and storing it there.

• Pros:
  • User-Friendly: Simplifies Bitcoin purchase and storage for beginners.
  • Instant Liquidity: Quick access to buy, sell, or transfer Bitcoin.
  • Additional Services: Many platforms offer staking or interest programs.
• Cons:
  • Custodial Risk: If the platform is hacked or goes bankrupt, you could lose your funds.
  • Fees: High transaction and storage fees on some platforms.
  • Limited Control: The platform holds your private keys.

Best For: Beginners or those who prioritize convenience over security.

3. Bitcoin ETFs

Description: Investing in exchange-traded funds (ETFs) that track Bitcoin’s price. These include options like:

• BITO (ProShares Bitcoin Strategy ETF): Offers futures-based Bitcoin exposure.
• GBTC (Grayscale Bitcoin Trust): A popular institutional option, often trading at a premium or discount.
• XBTF (VanEck Bitcoin Strategy ETF): A futures-based ETF with slightly lower fees compared to peers.
• Pros:
  • Ease of Access: Can be purchased like a stock through traditional brokerage accounts.
  • No Self-Custody Hassles: Eliminates the risk of losing private keys.
  • Regulated: Operates under traditional financial regulations, offering investor protections.
• Cons:
  • Fees: Management fees eat into returns over time.
  • No Direct Ownership: You don’t actually own Bitcoin and can’t use it for transactions.
  • Counterparty Risk: Dependence on the ETF issuer and custodians.

Best For: Traditional investors seeking simplicity and regulatory oversight.

4. Leveraged Bitcoin ETFs

Description: Leveraged ETFs amplify Bitcoin’s price movements. These include options like:

• BTCL (2x Leveraged ETF): Provides double the daily return of Bitcoin.
• BITI (ProShares Short Bitcoin ETF): Designed to profit from Bitcoin price declines.
• Pros:
  • High Potential Gains: Amplifies Bitcoin’s price movements.
  • Ease of Access: Traded on traditional stock exchanges.
  • No Custody Risk: No need to manage private keys or secure hardware wallets.
• Cons:
  • High Volatility: Losses are amplified during market downturns.
  • Not for Long-Term Holding: Daily rebalancing leads to decay over time.
  • High Fees: Leveraged ETFs often have steep management fees.

Best For: Experienced investors with a high risk tolerance looking for short-term gains.

5. MicroStrategy (MSTR) Stock

Description: Investing in a company holding a significant portion of Bitcoin on its balance sheet.

• Pros:
  • Indirect Exposure: Combines Bitcoin’s potential with traditional equity returns.
  • Company Growth: Offers exposure to MicroStrategy’s core business operations.
  • Regulated Environment: Stocks are traded in traditional financial markets.
• Cons:
  • Limited Diversification: Performance is heavily tied to Bitcoin’s price.
  • Company Risk: Subject to MicroStrategy’s management decisions and financial health.
  • Valuation Risks: May trade at a premium or discount to Bitcoin’s value.
  • Regulatory Risks: Subject to potential government regulations targeting Bitcoin-related assets or companies heavily invested in Bitcoin.
  • Government Attacks: Possible intervention through taxation, restrictions, or legal challenges that could impact MicroStrategy’s operations or Bitcoin holdings.

Performance Insight: If Bitcoin moves up by 5%, MicroStrategy (MSTR) is expected to move approximately 11.3% in the same direction based on historical data. This suggests that MSTR behaves similarly to a leveraged fund with a multiplier of about 2.26x relative to Bitcoin.

Best For: Investors seeking Bitcoin exposure in a traditional equity format with some diversification.

6. Leveraged MicroStrategy ETFs

Description: ETFs that amplify exposure to MicroStrategy, providing indirect leveraged exposure to Bitcoin. Examples include:

• MicroStrategy T-Rex 2x Leveraged ETF: Provides double the exposure to MicroStrategy’s stock performance.
• Pros:
  • Leveraged Returns: Potential for significant short-term profits.
  • No Direct Bitcoin Management: Avoids the complexities of Bitcoin custody.
  • Access to Traditional Markets: Can be purchased through any brokerage.
• Cons:
  • Exponential Risk: Losses are magnified during downturns.
  • Complexity: High volatility and decay risks make it unsuitable for most investors.
  • High Fees: Higher management costs than standard ETFs.

Best For: Traders and speculators seeking extreme exposure to Bitcoin’s performance.

7. MSTY (MicroStrategy ETF)

Description: MSTY provides exposure to MicroStrategy’s stock performance in an ETF format, catering to investors who prefer ETFs over direct stock purchases. Additionally, MSTY may offer yield-earning opportunities depending on its structure and holdings.

• Pros:
  • Diversified Exposure: Allows indirect investment in Bitcoin through MicroStrategy without directly purchasing MSTR.
  • Convenience: Available through traditional brokerage accounts.
  • Yield Potential: Certain versions of MSTY may include dividend-like returns based on MicroStrategy’s performance or related holdings.
  • No Direct Bitcoin Custody Required: Simplifies Bitcoin investment for traditional investors.
• Cons:
  • Stock Correlation: Heavily dependent on both MicroStrategy’s operational performance and Bitcoin’s price movements.
  • ETF Fees: Management fees may slightly reduce net returns.

Best For: Investors seeking an ETF-based approach to gain exposure to Bitcoin and MicroStrategy’s performance, with potential for yield generation.

Risk/Reward Comparison Chart

Conclusion

Each investment option for Bitcoin presents unique advantages and risks. Self-storage is the most secure for those prioritizing sovereignty, while ETFs and stocks provide regulated and simpler avenues for exposure. Leveraged ETFs like BTCL and MicroStrategy’s T-Rex ETF offer amplified returns but are only suitable for experienced traders. Understanding your financial goals, risk tolerance, and investment horizon is crucial when selecting the best Bitcoin investment strategy.

Remember, all investments carry risk, and it’s vital to diversify your portfolio to balance potential rewards with manageable risks.

Listen to the Podcast

Bitcoin Investment Strategies

0:00

/1735.412971

1×