Bitcoin recently rose to a recordand many investors are once again considering cryptocurrencies as a investment vehicle. While the long-term prospects for cryptocurrencies remain unclear, it appears they are here to stay in one form or another. One challenge when investing in this space is the sheer variety available: should you invest in cryptocurrencies themselves, in companies involved in them, or both? Two obvious options are Bitcoin and the cryptocurrency exchange Coinbase. Here's a look at which is the best option.
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Apples and oranges
It is difficult to compare them directly because they are in different asset classes. Bitcoin is a digital asset; in theory, a currency, although data has shown that very few people still use it that way. Coinbase is a cryptocurrency-focused company whose primary goal is to operate an exchange where market participants can buy and sell Bitcoin and other cryptocurrencies.
During a gold rush, sell shovels
The distinction between the Bitcoin asset and the Coinbase business is crucial to understanding which is the best investment. During the California Gold Rush, it was usually not the miners who got rich, but the merchants and bankers who sold them equipment and bought their gold.
The problem with a physical asset like gold, or a digital one like Bitcoin, is that it is unproductive: it just sits there. It cannot create any value, although it may serve other purposes in a portfolio, such as serving as a hedge against inflation. That means you can only get a return on your Bitcoin investment if the price of Bitcoin rises, and that's far from certain.
Coinbase, on the other hand, operates more like the gold rush traders and bankers. As an exchange, they make money from cryptocurrency-related trading activity. Your trading results do not depend on the performance of any cryptocurrency. If Bitcoin goes up and people start buying, that's good for Coinbase. If Bitcoin goes down and people start selling, that can be good for Coinbase too. They also have the ability to expand into other business segments or even innovate into new ones.
The winner: Coinbase
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If you want cryptocurrency exposure in your portfolio, the smart choice is to invest in a business that can generate real returns, rather than an unproductive asset that will never be able to generate cash flow. No one remembers the miners who tried to find gold in the hills of Northern California, but the companies that emerged from the gold rush, like Levi Strauss and Bank of America, have made investors rich for decades and are still around. strong today.
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This article originally appeared on GOBankingRates.com: Coinbase Stock vs. Bitcoin: Which Should You Invest In?
