The question of how best to incorporate bitcoin into an investment portfolio is becoming increasingly relevant. As the digital currency gains mainstream acceptance, investors grapple with the practical considerations: should you buy crypto directly, or opt for traditional financial instruments?
The answer is more complex than it appears, and the choice has far-reaching implications for your returns and risk profile.
The direct route: pure bitcoin exposure
The most straightforward way is, of course, to buy bitcoin directly through a crypto exchange. This approach offers pure exposure: if bitcoin rises ten percent, your investment rises ten percent. No management fees, no premiums, no intermediaries. For individual investors, this route is now more accessible than ever. Platforms like Bitvavo, Coinbase, or Kraken make buying bitcoin relatively easy. You can also decide exactly how much to invest—from a few dollars to whole bitcoins.
However, this approach has its downsides. You’re responsible for secure storage (custody), which requires some technical know-how. Lose your private keys, and your bitcoin is gone for good. Moreover, crypto doesn’t always integrate well into traditional investment accounts, complicating portfolio management.
The ETF route: institutional access
Bitcoin ETFs, such as the popular IBIT by Blackrock, offer an elegant solution to these problems. They trade on regular stock exchanges, fit into any brokerage account, and eliminate custody concerns. Costs are limited—typically around 0.25 percent per year—and the price closely tracks bitcoin’s value.
For institutional investors and pension funds, ETFs are often the only practical way to gain bitcoin exposure. They meet regulatory requirements and align with existing compliance frameworks. No surprise then that bitcoin ETFs have attracted billions since their launch. The downside? You don’t own actual bitcoin, just a claim on the underlying assets. In extreme market conditions, that distinction could become significant. Also, ETFs are not yet available in every jurisdiction.
The proxy route: leverage or trap?
Enter companies like Japan’s Metaplanet and the US-based MicroStrategy. These “bitcoin proxies” offer a third route: investing indirectly via companies that hold bitcoin on their balance sheets. On paper, this sounds attractive. Why settle for one-to-one bitcoin exposure if you can potentially get more?
The numbers are indeed spectacular. Metaplanet, once a struggling hotel chain worth 13 million dollars, is now a bitcoin holding company valued at 5.5 billion dollars. The firm owns 8,888 bitcoins (933 million dollars), yet trades at a market cap five times higher. MicroStrategy has outperformed bitcoin for years, partly due to clever financing strategies.
But here’s the crux: this outperformance doesn’t come free. As a Metaplanet investor, you’re effectively paying 596,154 dollars per bitcoin, while the market price is around 109,000 dollars. That equates to a 447 percent premium. MicroStrategy’s premium is slightly more modest, with investors paying 174,100 dollars per bitcoin versus the 109,000 dollar market price, but it’s still significant.
The mechanics behind the premium
Why would investors pay such a steep premium? Partly due to ignorance about the true Net Asset Value (NAV), and partly due to expectations of further outperformance. These companies have a unique trait: they can convert bitcoin volatility into cheap financing. For example, MicroStrategy raised 3 billion dollars via convertible bonds at zero percent interest.
Investors accept the low interest rate because they benefit from the stock’s high volatility through the embedded options in the convertible. The company uses this cheap capital to buy bitcoin at market prices, while new shareholders effectively pay much more. These firms are essentially pulling themselves out of the mud by their own hair. More bitcoin leads to more volatility, which leads to better financing terms to buy even more bitcoin. As long as this cycle remains intact, these companies can outperform bitcoin itself.
Risks of the proxy approach
For portfolio managers, however, this strategy carries significant risks. At Metaplanet, all gains evaporate if bitcoin drops just 15 percent, due to its high average purchase price of 91,343 dollars per bitcoin. In a crash, these companies may be forced to sell bitcoin at unfavorable prices to cover debts. MicroStrategy, for example, has billions in convertible bonds outstanding while generating little operational cash flow.
As bitcoin ETFs become more widely available, the justification for paying extreme premiums fades. Why pay a 447 percent premium when you can buy bitcoin at market price through an ETF?
Conclusion: tailored bitcoin exposure
There is no universal answer to the question of how bitcoin best fits into a portfolio. Each route comes with its own pros and cons that must be weighed against personal circumstances, risk tolerance, and investment goals. What is clear, however, is that anyone seeking bitcoin exposure must understand the available options. The spectacular gains from companies like Metaplanet are tempting, but the underlying risks are substantial. For most investors, direct bitcoin purchases or ETFs offer a better balance between return and risk.
Bitcoin has now joined the ranks of mainstream investment assets. It remains an asset worth whatever someone is willing to pay for it. In that sense, bitcoin is quite comparable to gold. Strangely enough, that comparison to gold often increases acceptance rather than aversion.
Han Dieperink is Chief Investment Officer at Auréus Vermogensbeheer. He previously served as CIO at Rabobank and Schretlen & Co.