Bitcoin has captured the imagination of millions of investors hoping to cash in on the seemingly instant riches it's creating. You can't go anywhere without somebody talking about how much money they're making... including my taxi driver last Monday.
Yet, I still won't touch it for reasons we've talked about many times - limited liquidity, tulip-like pricing, or the fact that it's one of more than 900 cryptocurrencies available today.
However, that doesn't mean Bitcoin is a bust.
In fact, there are some great ways to play Bitcoin without buying Bitcoin.
How great?
I'm talking about big profits at a fraction of the risk and with a fraction of the capital it takes to buy a Bitcoin, especially now that it recently hit $11,000 a coin. And I'm talking about investments that you can buy right through your existing brokerage account that are totally liquid, which means you can get in and out any time you like.
Here's my thinking.
Buying Bitcoin today is a lot like mining for gold during the California Gold Rush of 1849.
More than 300,000 happy-go-lucky gold seekers, fortune hunters, and con artists made a beeline to the state following news of a massive gold strike at Sutter's Mill. The overwhelming majority died penniless in the hills, while others were forced to come crawling back to civilization... completely broke.
The irony is that so many people thought they were going to become rich but so few actually did that the very expression "gold rush" has become shorthand for "failure" in today's lexicon.
There was one group of people, though, who did actually become fabulously rich.
Merchants.
Levi Strauss made a fortune selling durable denim pants to miners.
Store owner Sam Brannan owned a general store on the route between San Francisco and Sutter's Mill and was smart enough to buy every shovel in San Francisco ahead of the gold rush and sell 'em to the miners heading into the hills. Later that year his first store was making $150,000 a month, or approximately $4 million in today's money.
Thomas Larkin financed ships carrying clothing and goods from all over the world using his own credit. At the same time, he purchased entire ships' cargoes when they arrived in San Francisco and sold his inventory at hugely inflated prices to folks hoping to strike it rich. He doubled his capital in months.
My point is that the economic foundation driving any "gold rush" is where you want to place your money when it comes to truly legendary and sustainable wealth.
Gold dust, or in this case, Bitcoin, may work for a while, but eventually the "miners" will move on and, in the process, crush the speculative dreams of countless investors.
And where are today's merchants?
Glad you asked.
Choice No. 1: CME Group Inc.
CME Group Inc. (Nasdaq: CME) is one of the world's leading derivatives and futures exchange operators. It handles more than 3 billion contracts with an aggregate value of more than $1 quadrillion a year via global platforms accessible in more than 150 countries.
An outgrowth of New York dairy merchants who founded the New York Mercantile Exchange in 1872 and butter-and-egg merchants who founded the Chicago Mercantile Exchange in 1898, the CME provides critical liquidity in every asset class you can think of, from agricultural commodities to interest rates and equities.
CME will begin offering Bitcoin futures contracts in mid-December based on the CME CF Bitcoin Reference Rate (BRR). That's significant because the BRR aggregates information in U.S. dollars per bitcoin, as drawn from the world's major Bitcoin spot exchanges daily at 4 p.m. London time.
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The thinking is that Bitcoin will be instantly accessible to a much broader range of traders who use the standardized futures contracts to hedge risk and maintain liquidity just as they use other contracts to offset the risks associated with owning stocks, bonds, gold, and other commodities.
The hope, of course, is that Bitcoin prices skyrocket, but I'm not so sure that will happen because more liquidity results in higher transparency which, in turn, usually results in lower prices.
Then again, I don't really care much either.
Investing in CME as a back door into Bitcoin is like investing in master limited partnerships operating oil pipelines. The price of oil doesn't matter as long as the toll associated with moving it from one place to another gets collected.
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Choice No. 2: NVIDIA Corp.
NVIDIA Corp.'s (Nasdaq: NVDA) been a favorite of mine for a long time because the company manufactures high-powered graphics processing units - or GPUs for short. These are usually combined with central processing units - CPUs for short - as a means of accelerating critical computing applications, boosting deep learning, and powering analytics.
The company supplies high-intensity computing to customers around the world, including Tesla Inc. (Nasdaq: TSLA), Toyota Motor Corp. (NYSE: TM) and, more recently, General Electric Co. (NYSE: GE).
The key here is that Bitcoin is an electric pig and a computational nightmare.
Motherboard estimates that the daily worldwide power demand associated with Bitcoin mining would power roughly 821,921 average American homes - and that's the minimum power demand with no leakage. That makes Bitcoin approximately 5,000 times more energy intensive than a single credit card transaction.
It's a problem that will not go away, either. In fact, it will get worse.
Every increase in Bitcoin prices creates an incentive to add additional computing power as a means of competing with other miners for each new bitcoin.
Computationally, Bitcoin is a joke.
Every entry in the Bitcoin payments ledger is capped - meaning it's size-limited. That slows down transactions dramatically. Estimates vary, but a single Bitcoin payment can take around 11 hours to process. So, not surprisingly, the incentive is to hoard it, which means that every Bitcoin owner is subjected to the possibility of a complete wipeout.
Bitcoin, for example, dropped more than 20% from $1,779.80 to $1,360 in only 90 minutes, and there wasn't a damn thing anybody could do about it. Trailing stops... useless. Limit orders... forget about it.
When you have a correction and no way out, investors "dump" at any price just to get clear. That, in turn, makes the problem worse because it accelerates the drop.
Like CME, the play with NVIDIA is price-insensitive.
It doesn't matter whether the price of Bitcoin hits $20,000 a coin or drops to $200 a coin. As long as NVIDIA's chips get used, the company makes money... as does every investor along for the ride.
In closing, I want you to do me a favor.
Don't let it ruin your day the next time you hear somebody tell you about all the wealth they're making with Bitcoin. The Iraqi dinar seemed like a good speculative bet once, too.
And don't buy Bitcoins unless you've got money to burn, because that's what's likely to happen when it collapses. The very things that make it appealing - a lack of oversight and the ability to get around conventional currency limitations - will be its undoing.
Instead, get on board with a solid investment like the two companies we've discussed today.
That way you'll be a merchant... not a miner.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.