Not many experts would recommend packing investment accounts like 401(k) retirement plans with bitcoin. The digital currency is just too volatile. But there's nothing wrong with setting a little aside — money you can afford to lose — for wild bets, like gambling a few bucks at a casino.
There are two ways to bet on bitcoin: via a specialized exchange, or through buying and selling futures contracts.
Mike Segar | Reuters
There are two ways to bet on bitcoin: via a specialized exchange, or through buying and selling futures contracts.
Bitcoin certainly offers an adrenaline rush. In 2017 the price of the cryptocurrency soared from less than $1,000 to nearly $20,000, then tumbled to a low of $6,647.33 over the weekend after a South Korean exchange said it was hacked. At press time on Monday it was trading at $6,768.00.
The investment signals remain mixed: Google search activity on bitcoin has declined by 75 percent as the price swooned from that $20,000 high, but major Wall Street firms are making investments that show they expect cryptocurrency to remain a part of the financial landscape.
There are two ways to bet on bitcoin: the "old-fashioned" way, through a specialized exchange; and, since late last year, buying or selling futures contracts.
Here's a look at what to consider in choosing one over the other.
Exchange-trading on the bitcoin spot market
New coins are awarded to "miners" for solving complex mathematical problems. Then the coins are bought and sold for dollars or other fiat currency in an account called a wallet, kept at a cryptocurrency exchange like Coinbase, Bitstamp or Kraken.
Trading on this spot market is a lot like trading a stock, with prices governed by supply and demand, and no role played by a central bank, like the Federal Reserve. Since bitcoin is not yet accepted by many merchants, its value depends on speculators' view on what others will pay in the future. To detractors, that encourages bubbles. Advocates see huge potential profits.
Most of the more than 100 bitcoin exchanges are only a few years old, and some have been victims of fraud, theft, hacks and growing pains, like halts during heavy trading.
A very cautious investor can buy on an exchange and then store the bitcoin code off the site or even on a piece of paper — that's what the Winklevoss twins and bitcoin early adopters have done, going so far as to cut up their code into pieces and store it in a vault using a system that only they understand to put the actual bitcoin code back together.
Bitcoin itself is full of risk, even if the trading and storage system is safe.
Unfortunately, bitcoin exchanges don't work as efficiently as the stock exchanges, said Param Vir Singh, professor of business technologies for the Tepper School of Business at Carnegie Mellon University.
"Bitcoin prices are volatile; the transaction speed is slow; the bitcoin trading platform is illiquid," he said, noting that, unlike stock exchanges, the bitcoin exchanges are generally not well regulated by the government.
The Nasdaq has expressed interest in offering cryptocurrency trading, while the NYSE has expressed interest in bitcoin ETF trading. The NYSE's parent company, ICE, is moving into bitcoin swaps and already offers a cryptocurrency data feed.
Trading in bitcoin futures contracts
Since late last year, bitcoin futures have been traded on two long-established futures markets, the Chicago Board Options Exchange (CBOE) and the CME Group exchange. These heavily regulated exchanges solve many of the problems found on the newer bitcoin exchanges, according to Singh.
"Because the future can be traded on regulated markets, it will attract investors, making the market liquid, stabilizing prices, and [it will] not suffer from low transaction speeds of bitcoin [exchanges]," he said, adding, "If prices stabilize, we may start seeing more companies accepting bitcoin as a mode of payment. This may further bring liquidity to the market."
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