As the world’s largest, longest-standing, and most legitimate cryptocurrency, Bitcoin is here to stay. Thought leaders in the investment banking and private equity space, including Paul Tudor Jones and David Rubenstein, agree and have been actively allocating to this new asset class.
The question is, how should professional investors buy into this attractive institutional asset class? As you’ll see in this article, different pitfalls arise every step of the way, from buying to holding to selling to bequeathing Bitcoin.
We’ll explain what pitfalls lie ahead, and how professional investors can invest safely and efficiently despite an ecosystem fraught with challenges.
1. Buying Bitcoin: inefficiencies in a chaotic marketplace
On the surface, buying Bitcoin seems easy. After all, there are hundreds of cryptocurrency exchanges on the internet, and the barrier to entry is typically very low.
However, crypto exchanges are by and large unregulated and that can be risky for investors due to the prevalence of scams and security risks.
There is also precious little oversight and standardisation across exchanges. Among the 1,000+ crypto exchanges out there, there are huge variations in exchange fees, liquidity levels, trading amounts, deposit and withdrawal limits. There are also huge variations in security standards and financial stability.
Unlike a casual crypto dabbler, a professional investor looking to invest and allocate larger amounts to this new asset class cannot simply pick an exchange at random. You would need to compare a large number of exchanges for the best prices, highest liquidity, and lowest risk. Given the opacity of such details, this is not a simple task.
As many crypto exchanges operate on a peer-to-peer basis, there are also counterparty risks to consider — for example, the risk of receiving Bitcoin “tainted” by money laundering or other unsavoury practices.
Finally, the digital (online or app-based) nature of crypto exchanges makes them appealing to dabblers, but unsuitable for professional investors. With little to no customer service available, it can be frustrating for investors to make enquiries or get updates on transactions.
2. Keeping Bitcoin: hacking & security risks
For investors who buy Bitcoin through an exchange, there are generally two options for storing your cryptocurrency: either online (in the exchange’s e-wallet, sometimes known as a hot wallet) or offline (also known as a cold wallet, or cold storage).
Neither is ideal. Whichever you choose, there are significant trade-offs in either security or liquidity.
Storing your Bitcoin in a hot wallet on the crypto exchange platform is a high-risk option. Due to the always-online nature of these wallets, Bitcoin holdings are extremely susceptible to hacking and theft. To date, hackers have stolen an estimated US$109 trillion of cryptocurrency from crypto exchanges which have been compromised.
Investors holding larger amounts of Bitcoin typically store the bulk of their BTC offline, in what’s called a cold wallet (typically a USB stick-like device or an offline computer). These are not connected to the internet, hence much safer from theft.
That said, cold wallets are susceptible to all kinds of low-tech issues. The device can get lost, the hardware can fail, you can forget your password, or be susceptible to a $5 wrench attack (which in simple terms, refers to theft or robbery). It’s also not very practical, since you have to move your Bitcoin from a cold wallet into a hot one or vice versa every time you want to use, transfer or store it.
3. Selling Bitcoin: might look suspicious to banks
Many of the same pitfalls around buying Bitcoin apply to selling it, too. The chaotic nature of crypto exchanges makes it hard to find the lowest transaction fees and highest liquidity. But the biggest problems arise when selling Bitcoin for cash and withdrawing your funds into a bank account.
First, crypto exchanges impose withdrawal limits, typically US$2,000 to US$20,000 per day. This may be acceptable for small-time crypto dabblers, but professional investors will find these limits extremely restrictive and time consuming.
But that’s not all. Even if you get past the exchange’s withdrawal limits, the receiving bank may not accept the transfer! As an anti-money laundering safeguard, banks routinely reject or red-flag large transactions involving crypto exchanges.
Thus, professional investors who handle larger volumes of Bitcoin may raise suspicions even if their transactions are legitimate.
4. Bequeathing Bitcoin: uncertainties in future technology
Because BTC shares similar attributes to scarce commodities like gold, Bitcoin investors think of this asset class as a store of value to hold on to in the long run, possibly even across generations.
However, as it turns out, bequeathing Bitcoin to your loved ones is not quite as easy as bequeathing traditional assets like gold or stocks.
One challenge is that Bitcoin is a technologically dependent asset, and we do not know what cryptocurrency technology will be like in the years to come. Will our children, partner or spouse know what to do with a hardware wallet from 2021? Given the speed of technological advancement, we say it’s very unlikely. It might be as bewildering as inheriting a floppy disk today.
Putting aside such technological challenges, the next hurdle is how to legally transfer the assets from the deceased to the beneficiary.
Most exchanges and banks today will not allow the transfer or sale of assets from a deceased person. Even if the Bitcoin holdings are successfully transferred, there is the question of how to prove customer legitimacy, source of wealth, and source of funds when the original owner is deceased.
As of 2021, there is no consensus yet on how to facilitate intergenerational transfers for Bitcoin. This is despite it gaining widespread recognition as an asset class and even being recognised as legal tender in some countries.
Cryptocurrency, being a nascent technology, will need time for laws and practices around estate and legacy planning of this new asset class to be developed.
Fintonia’s Bitcoin Physical Fund: bringing order to chaos
As you can see, the current cryptocurrency ecosystem can be chaotic and inefficient at every stage, which is simply not ideal for professional investors (whether individual or institutional).
That’s why Fintonia Group decided to launch a Bitcoin Physical Fund for accredited investors, corporates and institutional investors alike to address these pitfalls and issues. Our Bitcoin Physical Fund is backed by physical Bitcoin which is stored offline with a licensed and insured custodian.
By connecting multiple exchanges and market makers to offer the best prices and highest liquidity for large investment amounts, Our Bitcoin Physical Fund allows investors to quickly, efficiently and securely invest in Bitcoin while avoiding the aforementioned pitfalls.
Being an institutional-grade Bitcoin fund managed by a regulated fund manager, it is also compliant with the high governance standards present across traditional asset classes.