When to buy, how to invest, and what are the best strategies?
Written by Joe DiPasquale, CEO of crypto hedge fund BitBull Capital
Bitcoin's performance this year has validated its place in any forward-looking, diversified investment portfolio as we saw institutional investors (MicroStrategy MSTR, Square SQ, MassMutual) add the billions worth of digital assets to their treasuries.
⇒ To see and subscribe to our crypto investing newsletter, click here. Past research pieces include, for example, “Bitcoin at Major Buy Point” in Dec 2018 when BTC was at $3.5K.
While we have historically – throughout market highs and lows – remained bullish on Bitcoin and selected altcoins, the global economic situation today has made crypto assets even more attractive. Nearly 70% of the USD money supply was printed in 2020 alone, and the inflation that accompanies such mass printing is realized by few.
Source: BitBull Capital deck, page 40, available to investors
Meanwhile, Bitcoin’s market cap has risen rapidly since mid-December, and the recent price surge is attracting new investors seeking exposure to high-quality projects and deals. Today we are sharing the top 9 questions people ask our crypto hedge fund, BitBull Capital, before investing.
1. What gives Bitcoin (BTC) value?
Bitcoin is often likened to gold, but in reality, the two assets only share a few traits. Like gold, Bitcoin's value is largely drawn from its scarcity, limited supply, and mining difficulty. However, the similarities end here. Bitcoin's real value comes from its utility as a seamless, borderless, and permissionless medium of exchange. Its price is due to the desirability of a digital, decentralized, and finite asset.
Still, the moniker of “digital gold” is commonly-used for Bitcoin. There are many advantages of being digital and algorithmic, from having a more quantitatively-controlled supply, to ease and cost of custody and transfer, lack of physical risks, and even knowing the precise amount of the asset in existence.
In the decade or so of its existence, Bitcoin has produced unprecedented gains, with only two negative years, 2014 and 2018, as shown in the chart below.
While 2019 saw decent growth at about 92%, the 2020 surge in Bitcoin valuations came at the back of COVID-related financial policies and the global economic situation in the wake of rampant inflation and devaluation of currencies by governments printing stimulus funds. Given how Bitcoin is deflationary in nature, and not controlled by governmental entities and other centralized bodies, the digital asset has become more attractive as an alternative investment.
2. Is it the right time to invest in Bitcoin?
Bitcoin’s volatility will continue for the foreseeable future. While there are certain times in the past that have been major buy points, as we wrote about in Dec 2018, the most intelligent investors we know do not try to time the market, but rather average over time.
3. How do I buy Bitcoin or Crypto?
While the simplest way to invest in Bitcoin is to buy it and hold it on-exchange, it is not the safest way. Bitcoin, due to being decentralized, has immutable transactions and needs to be kept secure. It is a bearer asset; owned by whoever holds it. If you are starting small, then it’s perfectly acceptable to start with a purchase kept on a reputable exchange such as Coinbase, Gemini, Kraken, or Binance. Depending on the amount being invested, various custody solutions need to be explored.
Moreover, security requirements aside, Bitcoin, due to its unique nature, is extremely volatile and requires some measure of active management for maximum returns. Given the needs of various types of investors, the crypto space offers numerous channels for investing, including spot buying, derivatives, investment trusts (Grayscale Bitcoin Trust GBTC), and crypto funds, like BitBull Capital.
If you’re considering investing in Bitcoin, blockchain, or cryptocurrency, check out our Hackernoon guide on ways to invest in digital currencies.
Different ways to invest in blockchain, Bitcoin, and crypto:
1. Passive Investing
- Buy and Hold: Crypto
- The easiest way to invest is simply to buy and hold certain assets that you think are strong, such as Bitcoin or Ethereum. Coinmarketcap is one site that can show you various crypto assets and information about each, as well as their relative size. There’s nothing wrong with keeping it simple and simply buying Bitcoin, or Bitcoin and Ethereum, the two most popular.
- Consider averaging over time to reduce the effects of volatility on your purchase price
- Buy and Hold: Equity representations of crypto (Investment Trusts)
- While certain brokerages, such as TD Ameritrade and RobinHood, allow you to purchase crypto directly; others such as Schwab do not.
- In this case, you can buy an equity representation of crypto, such as Grayscale’s publicly-listed crypto investment trusts on the OTC markets including BTC, ETHE, GDLC, or even Bitwise’s Index Funds (BITX is currently publicly-listed, and others like BITW20, BITW70, and BITW100, are coming).
- Pro tip 1: these investment trusts often come with both management fees, such a 2% per year, and at a premium to the amount of crypto you are actually purchasing, such as a 15% premium. If you are buying a larger amount, such as $25K or $50K, you can approach the entity directly to buy in their private placement. This will come with a lock-up of 6 months to a year.
- Pro tip 2: the number of outlets with which you can buy crypto directly continues to expand. PayPal is now allowing its users to buy not only Bitcoin but also Ethereum, Bitcoin Cash, and Litecoin.
2. Active Investing
- Crypto Hedge Funds
- Crypto hedge funds aim to reduce volatility, protect downside, maximize upside, and manage different strategies than are available publicly, such as arbitrage, pre-ICO investment, equity investments, and repeatedly buying at lows and selling at highs. These strategies aim to lead to a higher Sharpe ratio, a measure of performance that factors in volatility.
- Disclaimer: I have been a proponent of this type of active management in order to perform consistently in a very volatile asset class. This is where the bulk of my investments in crypto fall, and why I started BitBull Capital.
- Blockchain Venture Funds
- These are different than hedge funds in that they mostly invest in equity, while crypto hedge funds mostly invest in liquid crypto assets. If you prefer private equity investing to crypto investing, this may be for you.
- Note that Venture Funds have time-to-liquidity of on average 7 years
We have done a survey of many family offices, institutions and endowments, including universities and pension funds. We find that they usually prefer not to buy crypto directly, but via a fund of some type. This can be a buy-and-hold fund, or an actively managed fund.
4. Why invest in Bitcoin and cryptocurrencies via a hedge fund?
Crypto hedge funds have historically outperformed crypto indexes, mainly due to active management and a variety of investment and trading strategies (per EurekaHedge and HFR analysis). Often, investors seek active management like hedge funds and venture capital for some of the reasons mentioned above: downside protection, alternative strategies such as arbitrage, or access to exclusive deals (as with the best venture funds).
Additionally, a hedge fund professionalizes the process of investing in crypto. For instance, BitBull Fund offers regulatory compliance (SEC and IRS compliance) alongside auditing, monthly reports, and tax support, all of which are invaluable when dealing with crypto assets.
Finally, investing in cryptocurrencies via a hedge fund opens up the prospect of value investing, which can realize outsized gains with downside protection. For example, our fund investments include not only liquid crypto assets but also pre-launch crypto assets, such as projects like Polkadot, Filecoin, and Dfinity in 2017 and 2018 that are now launching and have quickly become some of the top crypto assets in the industry, valued at multi-$B each.
Funds may provide a more convenient and secure alternative for investors seeking crypto exposure. But: how do you select a crypto fund? Please refer to our crypto hedge fund selection guide to conduct initial vetting and prepare the diligence questions.
5. How can you beat Bitcoin? What is crypto value investing?
Value investing is traditionally known as buying assets that appear to be trading for less than their intrinsic value. How does this apply to crypto? Because there are ways to get major crypto assets like Bitcoin and Ethereum at a discount or to sell them at a premium. Value investing in crypto is one of the strategies our fund focuses on.
As a crypto hedge fund, part of our job is to have a strong deal flow of opportunites within crypto. What are some examples of this value investing? In 2018, we had an opportunity via our network to acquire shares in Coinbase at the 2017 valuation of around $1.6 billion. Within months, Coinbase did a follow-on round valued at around $8 billion by the fall of 2018 and is a Silicon Valley unicorn preparing for an IPO soon.
We also have access to locked-up investments sold by investors seeking urgent liquidation, and can often acquire these at discounted valuations. Similarly, bankruptcy shares of crypto exchanges and other temporarily illiquid investments can prove very profitable over time. Lastly, we have been able to leverage similar strategies with our early-stage investments in companies and projects like Cosmos, Dfinity, Filecoin, and Polkadot.
6. What is the difference between actively managed crypto investments and passively held assets?
Bitcoin touched $20,000 in December of 2017, following which it continued to drop, and fell below $4,000 before rising again to $20,000 this month, three years later. Investors who bought Bitcoin during the 2017 highs and held on are only now marginally in profit (around 20%), while those who actively managed their investments have benefited significantly more from Bitcoin's volatility (Bitcoin is more than 220% up this year alone).
We give diversified exposure to many active management strategies in crypto, from market-neutral strategies that aim to take advantage of inefficiencies, such as arbitrage, to strategies like equity investments:
Further, as we deploy additional capital, we are most often deploying that into direct deals that we do, instead of other funds. That means that you are getting active management for 1/10, vs 2/20 at other funds and that our blended rate will continue to decrease.
7. What is the eligibility to invest in Bitcoin and crypto via BitBull Capital?
We only accept accredited investors, qualified clients, or qualified purchases. We have worked with both individual/retail investors and institutional investors. Accredited investors are defined below:
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
- A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such persons
8. What's next for Bitcoin and the crypto space?
Bitcoin, having crossed its previous all-time-high, is now poised to explore new price levels. It’s currently at an all-time high. Institutional investments are ongoing and Bitcoin's value proposition appears more promising by the day, given the state of the global economy, inflation, and destabilization. The decentralized finance market is expected to grow rapidly and may set the course for mass adoption and widespread usage of crypto assets.
To keep our investors updated, we post regular market commentary and price analyses, and are frequently quoted in top financial media, such as Forbes and Business Insider.
Additionally, through our investor calls, we disseminate the knowledge of our leg work from diligence on these funds and investments that we've seen as well as happenings and education in crypto.
9. How to invest in Bitcoin via an IRA?
While you can't directly invest in Bitcoin from an IRA, you can invest in some crypto funds, including BitBull Capital, that is set up with IRA providers such as Millennium Trust, Pensco/Pacific Premier Trust, and Entrust. We also offer set up with other IRA providers.
After ensuring your IRA provider accepts BitBull, the steps to investing are:
- As a hedge fund, we have a Private Placement Memorandum (PPM) that we can send along and can also walk you through signing it if needed (we use DocuSign)
- Our 3rd-party administrator will then request certain documents from you to meet 'know your customer' (KYC) requirements. These may include identification and proof of address
- The signed PPM and KYC documents are typically reviewed within 2 business days
- We can then start accepting your investments. We accept new investments monthly and prefer to complete them 3 business days before the end of each month
If you have any other questions about investing in Bitcoin and crypto via BitBull Capital and are an accredited investor seeking crypto exposure, schedule a call with one of our representatives
Joe DiPasquale is the CEO of BitBull Capital. Previously, he worked in investment management, investment banking, technology, and strategy consulting at Deutsche Bank, Bain, and McKinsey. Joe completed his BA at Harvard University and MBA at Stanford University.
BitBull Capital is a crypto hedge fund offering diversified, actively-managed investment strategies. These strategies range from quantitative and market-neutral strategies such as arbitrage, to event-driven trading, to equity in companies in crypto and blockchain such as Coinbase.
BitBull also runs BitBull Research, which regularly publishes the Crypto Investing Newsletter, available for a free subscription at www.bitbullcapital.com, as well as an Opportunistic Deals Memo, available only to investors.
Units and data sources:
- Bitcoin: USD, CoinMarketCap https://coinmarketcap.com/currencies/bitcoin/historical-data/
- Top 10 Index: USD, Bitwise 10: https://s3.amazonaws.com/static.bitwiseinvestments.com/IndexPerformance/indexReturns-BITX.csv
- Top 20 Index: USD, Bitwise 20: https://s3.amazonaws.com/static.bitwiseinvestments.com/IndexPerformance/indexReturns-BITW20.csv
- Top 30 Index: USD, CCi30: https://cci30.com/
- Total Crypto Market Cap, USD (billions). CoinMarket Cap: https://coinmarketcap.com/charts/
- S&P 500: https://www.macrotrends.net/2526/sp-500-historical-annual-returns
- Nasdaq: USD, NASDAQ Composite: https://www.macrotrends.net/1320/nasdaq-historical-chart
- Bitcoin, and Ethereum, and Crypto Market Cap numbers for Dec 31, 2018, are exact, taken on Jan 1, 2018.
- Index numbers for Dec 31, 2018, are precisely approximated based on returns of crypto assets as of Jan 1, 2018
Disclaimers:
- Performance of an index is not illustrative of any particular investment.
- It is not possible to invest directly in an index.
- Performance prior to the inception date of each index represents a hypothetical, back-tested, and unaudited return-stream that does not represent the returns of an actual account.
- Index performance does not include the fees and expenses that may be charged by funds.
- Actual returns may differ materially from hypothetical, back-tested returns.
- Back-testing is calculated by retroactively applying a financial model or Index-weighting methodology to the historical data to obtain returns.
Joe DiPasquale and BitBull Capital is a Graduate of VC Lab, a 14 week intensive program to help New Managers start accelerators, pre-seed, seed or Series A venture capital firms globally.
VC Lab is a free VC Accelerator program run by the Founder Institute, the world's largest pre-seed startup accelerator. The Founder Institute has over 7,500 portfolio companies worth an estimated $20BN in value.
Learn more about the Founder Institute at FI.co or VC Lab at FI.co/vc.
