Have you thought about investing in Bitcoin, but not sure where to start? Cryptocurrency investing can be quite daunting for the new investor. Tax complications, how and where to store it and even where to buy & sell it can be complicated. What you may not know is that you don’t have to actually buy Bitcoin to expose yourself to this new asset class. Grayscale Bitcoin Trust, or GBTC, allows one to invest in Bitcoin without actually owning the “coin” itself.
- Grayscale allows one to invest in Bitcoin without actually buying the crypto
- Any investor can expose his or her holdings to Bitcoin
- Investing with retirement funds is a tax-friendly way to get started
What is Grayscale?
Launched in 2013, Grayscale Bitcoin Trust allows you to trade in shares of a trust that holds the most popular cryptocurrency, Bitcoin. Grayscale is the largest such trust, holding about 70% of all Bitcoin held by publicly traded companies. Essentially, Grayscale investors buy the crypto and sells shares in the trust at a premium. Each share of GBTC holds 0.00095 Bitcoin. That might not seem like a lot, but as of this writing, one Bitcoin is worth around $37,000.
The private pool of investors pledge money to the fund to buy large sums of Bitcoin. The fund is listed on public stock exchanges, meaning anyone can trade shares in it, just like a publicly traded stock. Generally, the fund can trade at a premium or a discount to the real price of Bitcoin. However, it is mostly traded at a premium because of the increasing price and demand of the digital currency.
Currently, there is no exchange traded fund, or ETF, for Bitcoin. The SEC has yet to approve one because it thinks the price of Bitcoin can be manipulated. For now, the trust, especially Grayscale, is the only way to invest without actually purchasing Bitcoin outright.
Advantages of Using the Trust
If you want to expose yourself to this new type of asset, there are few advantages of doing so with a trust. There have been stories of investors losing their private keys, forgetting the password and, in some case, being hacked. All those present difficult roadblocks for storing the Bitcoin. Further, there are complicated rules and tax implications surrounding crypto investments. When you invest with Grayscale, there’s no need to worry about these things, since they are reported to the SEC.
Next, traditional investors can now invest in Bitcoin and other cryptos all in once place. Normally, you cannot trade Bitcoin for stock in another company. Traditional and crypto investments remained separate. However, when the Bitcoin is publicly traded in a trust, the average investor can get involved in the crypto space, all in one place.
Most importantly, you can now fully receive the tax advantages of investing with an IRA, since they Bitcoin is being traded through a trust. Many IRS providers and investor accounts wouldn’t give tax breaks on crypto investments. Since they are in a trust, there’s no stopping anyone from taking full advantage of the tax breaks offered by these accounts.
Of course, since the trust has been trading at a premium, Grayscale and its private investors make a killing. The average investor spends a little more to get on board. With all the advantages Grayscale offers investors, paying a little extra might not seem so bad. On the other hand, if you don’t want to pay that premium, you can invest directly in the crypto yourself.
The Best Way to Invest in Grayscale
Although IRA Financial does not curb the tax advantages of investing in Bitcoin outright, investors may want to consider (or add) GBTC to their portfolios. We believe the best way to do this is through your retirement account. If you are self-employed, you can open a Solo 401(k) plan and have the best retirement plan around. However, if you do not have self-employment income, you can utilize the Self-Directed IRA to invest in Grayscale, Bitcoin, or any other asset, including stocks, mutual funds and real estate.
As mentioned above, the taxation of cryptos can be quite cumbersome. Every time you buy and sell a crypto, you need to pay attention to the price you paid for each one and how long you hold it. You then have to pay capital gains for every transaction. When using a retirement plan to invest, there are no annual tax implications, since the taxes are deferred. You only pay taxes once you withdraw the investment from the plan. In fact, if you have a Roth account, all qualified withdrawals are tax free.
IRA Financial has partnered with Gemini Exchange for the best Bitcoin IRA experience around. There will never be any tax reporting issues, as the IRA owns the crypto account on Gemini. It’s just one of the benefits of investing in Bitcoin with IRA Financial.
Of course, if you don’t want to invest in the actual asset, you can invest in Grayscale and combine those investments with other publicly-traded companies and trusts. No matter if you trade directly on an exchange, use Grayscale or a brokerage account, all your profits are tax-advantaged.
The Future is Now
Grayscale Bitcoin Trust is a great starting point to expose your holdings to Bitcoin. Further, there are trusts for other cryptos, such as Etherium and XRP. If you are just getting started in crypto investing, it’s a great way to dip your toe. Moreover, using a Self-Directed IRA or Solo 401(k) plan (if you qualify) is arguably the best way to invest. Put those retirement funds to work!
Please keep in mind that we are not financial advisors. It’s up to you, as the investor, to do your due diligence to decide if Grayscale, Bitcoin and cryptos in general are the right investment for you. Speak to a professional before proceeding. Cryptos are still high risk/high reward investments.