There are at least three ways, though only one of them looks rational today. First, you could mine your own bitcoins. Second, you could buy some from an exchange. Third, you could buy shares in a fund that has invested in bitcoins.
Please note that answering your question is not a recommendation, and I am not qualified to give advice on investments. However, as electronic payments expert Dave Birch put it to me on Twitter: “one doesn’t invest in bitcoin, one gambles on bitcoin”.
The problem is that people can make money by buying things that are essentially worthless, such as used postage stamps, Beanie Babies, and (historically) tulip bulbs. Tulipmania operated on the “bigger fool” theory, also known among stock traders as “momentum investing”. For example, tulip bulb prices may be insane but they keep going up. I may be a fool to buy them, but I expect a bigger fool to buy them from me. Simply replace “buy low, sell high” with “buy high, sell higher”. This works until you run out of fools.
However, you can buy things that don’t depend on bigger fools appearing, such as land and gold. Their prices may vary dramatically, but over the long term, they retain real value. When tulip bulb prices were tumbling, everyone wanted to sell. When gold prices tumble, people with money look forward to an “investment opportunity”.
Does Bitcoin have value?
Bitcoin is a digital currency. If you want to buy a camera for £250, then you need a way to transfer £250 to the seller. In theory, it doesn’t matter if you pay cash, write a cheque, email the money via PayPal or use bitcoin. In reality, you have to balance a range of factors including convenience, security and transaction costs. I’d use a credit card, if possible, because bitcoin payments are not reversible and offer no consumer protection.
But if you are investing, does bitcoin have an intrinsic value, like gold? To me, bitcoins look more like tulip bulbs.
The price of a bitcoin may increase because, for example, it is attractive to technology enthusiasts, and because we are all reading stories about how people made – or failed to make – fortunes. But, like tulip bulbs, bitcoins could be worthless when the bubble bursts.
As Henry Blodget told CNBC: “Look, this is a perfect asset for a speculative bubble. There is a finite supply. There is no intrinsic value. If anybody is persuading you that it should somehow be related to some GDP or gold … put down the Kool-Aid and back away.”
You could argue that banknotes don’t have any intrinsic value either. However, banknotes are backed by governments that have a strong interest in keeping their value relatively stable. Governments don’t (yet) care what happens to bitcoins.
Mining for money
Bitcoins are “mined” by people solving problems with computers. In the beginning, the best way to make money from bitcoins was to mine them with a home PC. However, bitcoin mining becomes more difficult the more miners there are. Today, you need specialized hardware, and you need to join a “mining pool” where large numbers of miners work together and share the results. Coins are not pure profit because of the cost of the hardware and the electricity consumed when mining. Also, you don’t know what bitcoins will be worth when you start mining them.
However, there must be dozens of digital currencies besides bitcoin, and the CoinChoose website lists a Top 20. Well known alternatives include Ethereum, Litecoin, Dogecoin and Bytecoin. You might find one that is still worth mining, or that might represent a better gamble than bitcoin. CryptoCompare is another useful website.
Ethereum is interesting because it’s backed by an alliance that includes JP Morgan, Microsoft, Intel, Banco Santander, Credit Suisse Group, UBS and BP. It’s designed to perform transactions very much faster than bitcoin, and its hashing system is decentralised by design. It favours individuals, not mining pools.
You can buy bitcoins from a bitcoin exchange or online broker, directly from another individual, or from an ATM. Coin ATM Radar lists about 50 bitcoin ATMs in London, many of them in convenience stores. As when buying foreign currencies, there’s a fee, which can range from 3.1% to 17.6%. The website covers 56 countries and you can search for an ATM near you.
A bitcoin ATM usually takes cash from your bank card, though some only accept banknotes. It sends your digital currency (bitcoin, litecoin etc) to your wallet, which could be a smartphone app, or to your email address. Some ATMs can print “paper wallets” that you can scan later.
If you buy a digital currency from an exchange, it may well offer you an online wallet, but your money is at risk unless you have the keys. When the Mt Gox bitcoin exchange was hacked, around 850,000 bitcoins went missing. It was a $450m loss at the time, but at today’s exchange rate, it would be $2bn.
There are dozens of different wallets for different purposes, with “hot” wallets on smartphones and “cold storage” wallets held offline on paper, on hardware devices (cards, thumbdrives etc) or on separate PCs. These are equivalent to your spending money and your savings account respectively.
You will need to research wallets. However, We Use Coins has a decent guide, and it recommends BitPay’s Copay to beginners. It’s easy to use and it runs on iOS, Android, Windows and Windows Phone, MacOS and Linux. It can also handle shared accounts.
I used my Android phone to search for “bitcoin wallet” on Google Play, and gave up when it produced around 200 results. Copay was near the top. It only took two minutes to create a wallet, and it prompted me to make a backup: “Watch out! If this device is replaced or this app is deleted, neither you nor BitPay can recover your funds without a backup.”
It also warned me that “Anyone with your backup phrase can access or spend your bitcoin”. I dutifully wrote it down.
Once the wallet is set up, you can use the app to buy bitcoins from Coinbase in 33 countries, and from Glidera in the USA. It can take several days to buy or sell bitcoins via Coinbase.
Some investors – presumably ones who do not have teenage children – think bitcoin is “for the tech-savvy, difficult to buy and perhaps even harder to store safely”. This has given rise to funds that buy bitcoins or related assets such as mining companies. Last month, The Motley Fool described one ETF as The Worst Way to Buy Bitcoin. At the time, the story said, shares in the Bitcoin Investment Trust cost about twice as much as the bitcoins it owned, but typically they “have traded at an average premium of 39% to underlying value of the bitcoin”.
You could buy dollar bills for $1 each, so why would anyone pay $1.39 to invest in a $1 bill … which is actually worth less than $1, because of the 2% annual management fee? Answer: “the laws of supply and demand”.
Other American investors were conned by a Ponzi scheme that offered shares in bitcoin mining machinery.
Stories like that could be signs of a bubble market, but if so, when and how it will end is impossible to say.
They’re cheap, rallying and provide diversification.
After badly trailing U.S. stocks for most of the past decade, foreign stocks are suddenly on fire. Is now the time to load up on them, or is it already too late? And what portion of your stock money should you invest overseas?
Consider recent returns. Since the start of the year, the MSCI EAFE index of stocks in foreign developed markets rose 13.3%, and the MSCI Emerging Markets index soared 17.7%. Standard & Poor’s 500-stock index, though it had a not-too-shabby return of 9.5%, is running far behind. (All returns in this article are through July 7.)
But foreign stocks’ recent performance follows a truly abysmal decade, when they returned virtually nothing. Over the past 10 years, the MSCI developed market index returned an annualized 0.8%, and the emerging-markets index returned an annualized 1.4%—even with the recent rally. Many foreign bourses have yet to climb above their 2007 pre-bear-market highs. Over the same 10 years, the S&P 500 returned an annualized 7%.
Vanguard founder Jack Bogle is one of many observers who see little or no benefit to investing in foreign stocks. Roughly 45% of the revenues from stocks in the S&P are earned overseas. Why take the currency and political risks of investing in foreign countries? And in emerging markets, particularly, companies must deal with far more government meddling and corruption than in the U.S.
But over longer stretches, foreign stocks have provided close to the same results as U.S. stocks. Plus, foreign stocks and U.S. stocks don’t move in lock step. Says Ben Johnson, a Morningstar analyst: “If diversification is the only free lunch in investing, investors are leaving a lot on the lunch table.”
From the start of 1970 through June 30, 2017, the S&P returned an annualized 11.0% while foreign developed stocks returned an annualized 9.2%. The performance gap can be almost entirely explained by foreign stocks’ recent slump. From 1970 through 2010, foreign developed stocks trailed the S&P by an average of just one-half of one percentage point per year.
Even more intriguing: Since 1970, foreign stocks and U.S. stocks have taken turns leading each other for multiyear periods. I had Morningstar look at rolling five-year returns over the years since 1970. By this I mean Morningstar computed returns from the beginning of 1970 through 1974, from 1971 through 1975 and so on.
U.S. stocks led foreign stocks over trailing five-year periods from 2011 through the present, from 1991 through 2003 and from 1983 through 1985. Foreign stocks were the winners from 2004 through 2010, from 1986 through 1990 and from 1978 through 1982.
Next, consider valuations. Partly because foreign stocks have been such abysmal performers of late, they’re cheaper on virtually every measure of value you can find—price-earnings ratio, price-to-sales ratio, price-to-book-value ratio, dividend yield and so on.
The S&P currently trades at a lofty 18 times estimated earnings for the coming 12 months. But foreign developed stocks trade, on average, at 15 times earnings, which is right in line with long-term averages. And emerging-markets stocks change hands at a mere 12 times earnings.
I don’t expect stocks in foreign developed countries, emerging markets and the U.S. to trade at the same price-earnings ratios anytime soon. Europe and Asia both face more headwinds than the U.S. Nor do I think foreign stocks will hold up as well as U.S. stocks in the next bear market.
But I do expect that valuations will grow closer to one another over time. Why? Consider some of the largest holdings in the foreign developed stock index: Nestle, Novartis, Roche, Toyota, BP and British American Tobacco. These are not so much foreign stocks as they are global multinationals. Ditto for some of the largest holdings in the S&P: Apple, ExxonMobil, Facebook, Johnson & Johnson and General Electric.
How much should you invest in foreign stocks? About 47% of global stock market capitalization is outside the U.S. Vanguard’s target retirement funds allocate almost 40% of their stock investments to foreign stocks. In a letter to shareholders, Vanguard Chairman William McNabb criticized “home bias,” the tendency of investors worldwide, not just in the U.S., to overweight their own country’s shares. “In their aversion to the unknown, investors can end up increasing, rather than lessening, their risks,” he wrote. “That’s because they’re sacrificing broad global diversification—one of the best ways I know of to help control risk.”
In my view, 40% in foreign stocks is too much. After all, U.S. investors, for the most part, spend dollars, not euros or yen. I recommend that investors put 25% to 35% of their stock money in foreign stocks in the current climate—with younger and more risk-tolerant investors skewing more toward the higher number.
What’s emotionally difficult about owning foreign stocks is that it guarantees you’ll be out of sync with the U.S. market for lengthy periods. And most of the day-to-day investing news we digest is about the U.S. market. The combination would have made it easy to throw in the towel on foreign stocks at the end of last year—which would have been precisely the wrong time.
One of the major demands that the infrastructure bankers and advisors come across from the prospective clients is an investment policy with zero risks. Most people look for such an investment option and still reap high interest - which is practically an impossible demand in the first place.
Most individuals who are retired or would soon be retired have such queries, and some of the top options are the money market funds, certificates of deposit and much more. The first and the foremost thing to be kept in mind when you are going for investment is that do not expect unrealistically high returns. No type of investment plan can bring home such high returns anyway.
Dividend paying stocks
There are many different companies which yield dividend paying stocks that are way higher than many risk free investments. However, at the same time, they help you participate in any capital gain. If you are trying to opt for risk free options with consistent returns, this may appear potentially risky to you. However, at the same time, it is to be taken into consideration that such investment plans and never be entirely risk free, and if it is, the return would not be high enough. You can participate such investment options, but you must keep in mind the liabilities and whether you are ready to undertake those liabilities.
Broker and their services
To ensure that you have consistent returns from the investment plans which you are opting for, it is very important to choose the right broker. The broker would be able to give you a distinct picture about the investment plans and the advantages and disadvantages associated with them. If you are looking for the brokers who know the working of the financial world, it is very important that you opt for their services after interacting with them regarding the same. Talking and knowing our broker well is important to develop a trust about them and work with them quickly.
Study the policies well
There are different types of financial management and investment plans which you can opt for. If you are going for a particular investment option, then it is really essential for you to study the various terms and conditions and the clause associated with them. Only after that should you invest. The brokers would be able to guide you here. When you know the terms and conditions well you can easily decide which investment option is the best choice according to your requirements. The investors would also be able to know the policies well when they opt for studying them.
Consistent and high return is not always possible, and if you are opting for a comprehensive risk-free policy, this is even harder to opt for. However, with the right decisions, you can always make the most of the options you have at hand and reap a good amount of benefit from any investment plans that you are opting for your future.
Donavan Group offers personalized solutions which include client-directed service options and comprehensive company-directed alternatives to allow you the freedom to create a bespoke investment and service program that satisfies your circumstances while attaining your financial objectives.