My Bitcoin Investment Journey — Part Two


Date: 22.02.2018

In my last column about my bitcoin investment journey, I discussed my view that investing in bitcoins could be part an effective part of the asset allocation process for one’s portfolio.  The allocation or class that I feel it fits is that of an alternative investment. 

Most investment firms and advisers recommend using alternative investments for diversification in a portfolio because they are considered “noncorrelated” assets.

That means that they provide diversification and protection against market risk because their returns aren’t correlated directly to the market, like equities are.  However, these alternative investments can often be comprised of thinly traded, less transparent and highly complex vehicles that can provide high return, but at the risk of significant losses as well. 

Because of this, the current "rule" of asset allocation calls for having about 5% -10% of your overall investment portfolio to be in "alternative investments" as a compliment to other assets such as stocks and bonds.

Currently, the "average" investor can add "alternative investments" as a small part of their investment portfolio through investments in exchange-traded funds (ETFs) that invest in such things as REITs and commodities. These "liquid" alternatives give the average investor the ability to gain more access to "hedge fund type" managers and investment styles than they had in the past, when it was primarily reserved for the wealthy investor.

Since I was looking specifically for a bitcoin investment that would fit into the alternative investment sleeve of my retirement portfolio, I was also adding additional levels of complexity and availability into my search. Could I actually find such an investment, and then put it into a "qualified" retirement plan?

The easiest option for me was to simply buy bitcoins and “designate” the account that I was holding them in as my “retirement account.” (one person did do this and you can see his journey here. However, this was not currently possible to do in a “qualified” retirement account where I would achieve tax advantages in retirement accounts such as an IRA, SEP or 401(k).

What I also found was that my options to find any type of bitcoin based investment, similar to those “liquid” alternatives that invest in commodities, REITs and other investments was also very limited.  In fact, it was so limited that my research led me to only one option.

At the time, there was much talk about a bitcoin-based ETF that was being created by the Winklevoss twins.  However, it was not yet available.  My only option for making a bitcoin investment in my retirement account was to be an accredited investor, have a "self-directed" retirement account and utilize a brand new "non-traded" investment called the Bitcoin Investment Trust (BIT). 

So I went through the process of setting up the "self-directed" retirement account and filled out the necessary, and lengthy, paperwork that acknowledges that I'm an accredited investor and have decided that I'll be making the minimum investment into the Bitcoin Investment Trust (BIT) and placing that into my retirement account.

At the time, the Bitcoin Investment Trust was a private, open-ended trust that invests solely in bitcoins. What that means is that it's an investment that is not currently available on an open market or traded on an exchange, but must be subscribed to through a private placement memorandum and exclusively by accredited investors. The disclaimer information for the investment should be enough to frighten away the most prudent investor: "The BIT is a private, unregistered investment vehicle and NOT subject to the same regulatory requirements as exchange-traded funds or mutual funds, including the requirement to provide certain periodic and standardized pricing and valuation information to investors. There are substantial risks in investing in the BIT."

The investment simply buys bitcoins and places them into this "trust.” It's modeled on the SPDR Gold Fund, which takes a similar approach with their gold portfolio, which is available to any investor, in any type of account and is traded on the NYSE.

As an accredited investor in BIT, your investment in this trust gains you a "slice" of this portfolio of bitcoins. If the price of bitcoins increases, your holding increases. If they drop, your investment drops.

So in the middle of 2014, I placed my $25,000 SEP contribution into the Bitcoin Investment Trust when bitcoin was priced at around $600.  Six months later, bitcoin was less than half that price!

Come back and read what happened to my portfolio and my bitcoin investment journey!

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