Can you buy Bitcoin without a wallet, the electronic or physical “container” the holds your investment?
The answer is yes, you can, but there are nuances to consider.
Bitcoin emerged after the banking meltdown of 2008-2009. It didn’t gain widespread attention until around 2011, though. Today, many investors and consumers have a basic understanding that digital currencies could be used for purchasing products and services.
Most cryptocurrencies work with a dual key mechanism that is generated using cryptography. This architecture is how cryptocurrencies got their name.
In a transaction, one key is used by the buyer, and the other by the seller. Buyers use a private key, while sellers use one that is public.
Private keys should be safeguarded as there are no provisions for loss or theft. Since public keys are used to receive money, people can only use them for that purpose.
Digital wallets are used in various types of financial transactions. They can also be used for managing cryptocurrency keys. The goal of these wallets is to keep sensitive financial information safe but available for use.
Normally, to invest in Bitcoin users must sign up for a cryptocurrency exchange and purchase coins. This is similar to signing up for a brokerage account for stocks or other financial instruments.
It is possible to keep your funds on the exchange. This option may seem like you don’t have a wallet associated with the account. However, the exchanges usually creates one for you.
Perhaps the best way to invest in Bitcoin without a wallet is via a trust, which is traded like a stock. The choices for this financial product have been limited, but that is changing.
The government has been reluctant to endorse cryptocurrency financial products, likely due to the crime associated with them. Further, the U.S. government sees Bitcoin (and others) as direct competition with the dollar.
An investment vehicle that is gaining popularity is one from Grayscale Bitcoin Trust (GBTC). For investors who want exposure to bitcoin but without the hassles associated with wallets, GBTC can be a good alternative.
However, the fees associated with the instrument are high. Management charges a 2% fee. This fee will eat into the profits of the investment. GBTC is not an ETF, but the company says it operates similarly to an ETF.
For ETFs, 2% is a very high fee indeed.
Unlike ETF trusts that often borrow assets, GTBC claims it invests directly in Bitcoin. Due to this, the company believes that counterparty risk is minimal. However, most trusts work with banks as custodians. Investors are at the mercy of these custodians to serve the interests of the fund.
Most GBTC investors will not have the same rights as trust holders. This advantage is reserved for high net worth individuals. Average investors should consider investing in GBTC as participating in the price of Bitcoin, less any fees.
To date, GBTC is not an optionable ETF. Some investors like the flexibility of options to help manage risks. That choice is not available for GBTC.