The past year has made it clear: there is rising demand from investors searching for how to buy bitcoin in the UAE, and ample evidence that cryptocurrency can now provide a valuable diversification tool.
These new investment opportunities are at a momentous point in the life of bitcoin.
Financial analysts now increasingly liken bitcoin to a gold-like asset (a kind of “digital gold”, if you will), which can help investors diversify their portfolio due to its near-zero correlation with stocks and bonds.
While bitcoin has not been tried and tested for the long term like gold, many financial analysts, including our own Dr Jiro Kondo, who is also Associate Professor of Finance at McGill University, believes at this moment in time that its gold-like status could potentially persist.
Because of bitcoin’s built-in finite supply, the cryptocurrency could have the potential to provide a hedge against inflation, just like gold. However, the only problem is that the inflation rate has been low since 2015, so analysts cannot yet prove that bitcoin provides this hedge since we lack historical data.
What is for sure is that as of 2021, bitcoin has generated higher risk-adjusted returns (as evidenced by its Sharpe ratio) than gold in the past, and some financial analysts, as we’ll see, believe it will continue to do so.
If you believe that bitcoin will continue to be advantageous and are now ready to learn how to further diversify your portfolio using this cryptocurrency, then this article is for you.
[Curious about how to buy bitcoin in the UAE using Sarwa? Schedule a free call with a Sarwa Wealth Advisor and we’ll get you started.]
In this article, we’ll not only show you how to buy and get exposure to bitcoin in the UAE, but also how to best utilise this fascinating new asset to smartly build your wealth. (However, if you already know about bitcoin, just click on the section 3 link below to go directly to learning about how to buy bitcoin int he UAE.)
We’ll consider the following:
- What is bitcoin?
- Should you invest in bitcoin?
- How to buy bitcoin in the UAE: The smart, low-cost option
- Introducing Grayscale Bitcoin Trust
- How to diversify your portfolio with bitcoin
1. What is bitcoin?
Bitcoin is a digital currency that uses blockchain technology to facilitate exchange in a secure and encrypted way.
Created in 2009 by Satoshi Nakamato, it has revolutionised the financial industry by combining cryptography and blockchain technology.
As a digital currency, everyone around the world can use bitcoin as a payment system to facilitate transactions without the control of a central authority.
That is, you can buy and sell without the intermediary of a commercial bank or the supervision of a central bank.
However, the absence of a central governing authority means there is no recourse if your bitcoin wallet has been hacked or you are a victim of any nefarious activities. Even a bug on the system can wipe out your money, and there won’t be any authority to help you.
There are some advantages of having no international regulation, however. Through its use of cryptography, bitcoin protects the identity of buyers and sellers in every transaction. Users are represented through a string of codes (public key) rather than their names (or any such identifiers).
While this anonymity has its positives, it has also been a resource for people to facilitate illegal transactions in the dark net markets — including illegal criminal activities.
Furthermore, bitcoin transactions are immutable and decentralised. This means bitcoin transactions are updated on ledgers that are locked into “blocks”, which are in turn added to a longer chain of transactions — thus, the blockchain — by computers scattered across the world. Consequently, no one person can manipulate bitcoin records.
Because of this decentralised nature, bitcoin transactions can be verified by anyone and the ownership of every bitcoin can be confirmed on the blockchain. This further reduces the risk of fraud.
Bitcoin as an investment asset
While bitcoin came onto the scene as a digital currency, it has developed into an investment asset.
This happened because bitcoin acts as a store of value.
An asset is considered a store of value if it can be held for a long time without a loss of value.
Bitcoin is a store of value because it’s limited in supply. Only 21 million bitcoins can be mined. No central authority can increase its supply — unlike fiat money that governments can print at will.
When a central government increases the supply of fiat money, relative to its demand, inflation occurs and the currency loses value.
But bitcoin has a fixed supply, which has the potential to make it an appealing store of value, mostly because the value of bitcoin rests primarily on its demand.
If the demand for bitcoin increases, its value will keep increasing without any central government to create more bitcoin and devalue it.
One effect of the above is that investors can buy bitcoin, hold it for a long time, and if its demand increases over that period, make money from the increase in price.
Because of its quality as a store of value, some investors have seen bitcoin as a good investment asset; investors can make money by buying it low and selling it high.
However, bitcoin is a very volatile asset. While its fixed supply means governments cannot reduce its value, the rapid demand-induced change in price (due to speculation by buyers and sellers) can wipe out your money in a matter of days or weeks.
Within a month (January 6, 2018 to February 6, 2018), the price of a bitcoin fell by 65%. More recently, between May 1, 2021 and May 31, 2021, the price of bitcoin fell by 36%. Such rapid falls are common throughout the cryptocurrency market.
While many have become millionaires from bitcoin, many have also lost millions. So while the returns have been good, the risk is also high.
Ultimately, bitcoin’s function as a store of value comes down to its fate: Bitcoin will only provide good value if it is still here after the next 5 years to a decade, and, while financial analysts believe that this is likely, no one truly knows for sure.
[To learn more about what bitcoin is, its origin, and how it functions, read “What is Cryptocurrency? A Beginner’s Complete Guide]
2. Should you invest in bitcoin?
The popularity of bitcoin among investors is not due only to the fact that it can grow in value.
Bitcoin investors and enthusiasts see three qualities in bitcoin — arising from its current gold-like status — that they believe are crucial to an investment portfolio.
Research suggests that bitcoin, like gold, has so far shown a near-zero correlation to stocks (0.01 correlation from 2012-2020) and bonds (0.02 correlation from 2012-2020). This means that its price is unaffected by the stock and bond market. Consequently, when the stock or bond market is down, bitcoin does not go down with it.
By diversifying your portfolio with bitcoin, some analysts now argue, you can further minimise your risk and maximise your returns by using strategies such as the Modern Portfolio Theory.
So far, the data has supported this belief. But it remains to be seen what exactly will happen in the future.
Secondly, because of its finite supply, bitcoin, like gold, should be able to provide a hedge for investments in inflationary events.
However, the low inflation environment since 2015 has made it difficult to prove this one way or the other. There simply isn’t enough historical data to truly understand bitcoin’s relation to inflation yet.
Thirdly, bitcoin, even after adjusting for volatility, has so far earned higher returns than gold. A study by Merrasi showed that bitcoin had a Sharpe Ratio of 1.25 between 2012 and 2019, while gold’s Sharpe Ratio was 0.29 in the same period — meaning that bitcoin generated much higher risk-adjusted returns.
However, it remains to be seen what will happen in the future, especially when bitcoin supply reaches 21 million.
Despite all these factors to consider, bitcoin still remains a volatile asset and its purported advantages have not been well proven by time.
[To learn more about the investment advantages of bitcoin and why it is attaining gold-like status, read, “Why Invest in Bitcoin: Understanding the Value of “Digital Gold”]
3. How to buy bitcoin in the UAE: The smart, low-cost option
Traditionally, to buy bitcoin, you would need to open an account with a crypto exchange, create a bitcoin wallet, and make a purchase. After buying bitcoin, you would then need to safeguard it.
The above processes can be tedious, especially the last one. Stefan Thomas, an early bitcoin investor could not access his $255 million worth of bitcoin because he lost his password (private key).
Shocked? You should be.
But you will be more shocked by the fact that he bought bitcoin when it was $2 per coin. At the time of reporting, it was $35,000 per coin.
Imagine you were in Stefan’s shoes. Horrible, right?
But losing your password is not the only risk of storing your bitcoin online. Hackers are now finding ways to steal bitcoin from people’s online wallets. And since bitcoin is decentralised, you can’t appeal to any government or centralised authority to help reclaim it.
The stress of opening an account with an exchange (where you will need to input personal information and submit identification documents), creating a wallet (with the task of protecting your wallet from hackers or password loss), and buying bitcoin on an exchange (the high fees, in some cases, and the need to convert your fiat money to crypto) can become overwhelming.
To take away all the above stress, Grayscale created a bitcoin trust that allows you to invest in bitcoin like you are investing in a stock.
So, instead of creating an account on an exchange and a wallet, you can now access it as a publicly traded trust.
Introducing Grayscale Bitcoin Trust (GBTC)
To understand GBTC, first a few words about investment trusts are necessary.
An investment trust gathers the funds of various investors and invests them in an asset or portfolio of assets on their behalf.
Instead of owning the asset or portfolio of assets directly, the investors own a portion of the investment trust, which corresponds to a particular value of the underlying asset or portfolio of assets.
GBTC is an investment trust that invests in bitcoin. So, instead of you buying bitcoin directly, you can buy it indirectly by purchasing shares of GBTC. Every share of GBTC you buy corresponds to the value of bitcoin.
GBTC is similar to the SPDR Gold Trust (GLD), which is an investment trust that invests in gold. For a share of GLD, the investor has a corresponding value of gold.
Let’s make this more practical to understand, shall we?
At the time of writing, a share of GBTC is $30.78. When you buy a share, it corresponds to 0.000941726 BTC. Instead of going to the crypto exchange, creating a wallet, and purchasing 0.000941726 BTC, you can simply purchase a share of GBTC as a security via the US-based OTC Markets Group and save yourself from all the stress.
GBTC provides a simple, affordable, and secure way to get exposure to bitcoin without the common challenges of buying, storing, and safe keeping it.
What are the benefits of GBTC over the traditional way of buying bitcoin in the UAE?
The most obvious advantage is the elimination of stress. By purchasing the shares of an investment trust, you eliminate all the stress associated with buying, storing, and safeguarding bitcoin.
You don’t want to be in Stefan Thomas’ shoes, right? Neither do you want to lose your bitcoin to hackers or computer failure.
The best way to safeguard bitcoin is through offline or “cold storage.” And that’s what GBTC provides.
The bitcoins owned by GBTC are stored in an offline or “cold” storage with Coinbase Custody Trust Company as the custodian, a firm that is also qualified under New York State Banking Law.
You incur transaction fees when you buy or sell bitcoin on crypto exchanges, such as Coinbase. The more transactions you make, the higher the expenses you incur.
However, with GBTC, you are only charged a 2% annual expense fee, which can greatly reduce the cost of trading bitcoin compared to crypto exchanges.
GBTC owns 46% of all the bitcoin held by publicly traded companies.
Also, it has a trade volume of about 12 million shares per day, with a market cap of over $20 billion and 638,906,600 outstanding shares.
That high liquidity means it’s easy and fast to buy and sell shares of GBTC (and the bitcoin value they represent).
No buying limit
Many crypto exchanges have buying limits — you can’t buy beyond a certain amount of money per day.
However, with GBTC, buying limits don’t apply to you since you are purchasing the shares of a publicly traded trust rather than buying bitcoin directly.
Premiums that can become profitable
One challenge with GBTC is that due to high demand, the market price of a share can become higher than the corresponding value of the underlying bitcoin.
Said simply, the price of GBTC can increase due to the demand and supply interaction of GBTC itself without any change in the value of BTC.
Bitcoin’s price can remain the same while the price of GBTC changes because of increased demand relative to supply, and vice versa.
This is referred to as a premium in the investment trust world.
Therefore, at times, the price you pay for a share of GBTC can be higher than the actual value of the bitcoin you get (even after adjusting for annual fees).
However, this premium can also become profitable. How so?
If the premium at the time you sell the shares is higher than the premium at the time you bought the shares, you will make money from the underlying bitcoin, as well as from the share price of the trust.
If you are a long term investor, the probability that you will make money from premium is higher than the probability that you will lose money since over the long-term, the market grows more than it declines (74%-26%).
4. How to diversify your portfolio with bitcoin
There remains one more crucial consideration when it comes to how to buy bitcoin in the UAE: the importance of portfolio diversification.
As an investor, you should think about your investments in a connected and coordinated rather than disjointed way.
Instead of buying individual assets at random, you should have a plan that guides your overall investment decisions in a diversified portfolio. That plan will need to consider your risk tolerance and time horizon — all while ensuring you are getting the best value for your money.
An investment portfolio is a collection of all your investment assets, and it should be managed in a way that is in tune with your risk tolerance and time horizon, with the main goal of minimising your risk and maximising your returns.
For example, if you are closer to retirement, you want to ensure you have a good level of fixed-income assets like bonds, compared to someone who is in their 30s.
Without a portfolio where you can manage all your investments allocations clearly, you won’t know if you have enough bonds or too many stocks.
Also, if you are a conservative investor, you want to ensure you don’t have too many risky assets. Without a well-managed investment portfolio, this is impossible.
Apart from keeping your investments organised, a portfolio also helps you get the best out of your investments through diversification.
Portfolio diversification occurs when your portfolio contains assets that are uncorrelated or negatively correlated such that the fall in one asset does not cause another asset to fall. In this way, you minimise your risk and maximise your returns.
Investing in bitcoin as part of a diversified portfolio is, according to financial analysts, a recommendable strategy because, despite the returns it has earned, bitcoin remains a very volatile asset (more volatile than stocks, bonds, and gold).
Instead, including bitcoin within a portfolio with other low-risk assets like bonds will help to minimise your risk exposure.
Therefore, if you choose to invest in bitcoin, you should buy it as part of a diversified portfolio.
[To learn more about portfolio diversification, read, “The Importance of Portfolio Diversification”]
Introducing Sarwa Bitcoin
This is exactly what Sarwa seeks to do with Sarwa Bitcoin.
In essence, as a Sarwa investor with the Sarwa X account, Sarwa Bitcoin allows you to include bitcoin as part of your Sarwa Portfolio.
Every Sarwa Portfolio already contains ETFs of stocks, bonds, and REITs, diversified in a way that maximises returns and minimises risk for your risk tolerance level and time horizon.
With Sarwa Bitcoin, Sarwa now allows investors to include bitcoin in their Sarwa Portfolio. Below is an investment portfolio example that includes a 5% allocation of bitcoin.
As always, we ensure that your portfolio allocation is designed to maximise your returns and minimise your risks according to your unique risk tolerance level.
However, due to the high volatility of bitcoin, we currently advise investors to consider a bitcoin investment amounting to a 5% allocation of your portfolio. [To learn about the do’s and don’t’s of bitcoin investing, read, “Bitcoin Trading Advice: The Do’s and Don’ts of Trading Bitcoin“].
To provide this service, we use the Grayscale Bitcoin Trust (GBTC) rather than purchasing bitcoin directly. As explained above, this means less stress, less risk, less fees, high liquidity, absence of spending limit, and an opportunity to earn more money from premiums.
This service is currently available for conventional investors and socially responsible investors (however, it’s not yet available for Halal investors).
So with the Sarwa app, all you need to invest in bitcoin is to put money into your account and tick bitcoin as one of your investment assets. We use the Modern Portfolio Theory to construct a diversified portfolio of stock ETFs, bond ETFs, REITs ETFs, and, now, if you choose, GBTC.
The Sarwa App uses bank-level 256-bit SSL encryption to secure your data. And your funds are held in a custodian account at the Denmark-domiciled Saxo Capital Markets.
Also, we are regulated by the Financial Services Regulatory Authority of Abu Dhabi (FSRA), which ensures that we comply with every existing regulation.
Getting started on Sarwa is very simple and easy. Just answer a few personal questions about your financial lifestyle and you will be ready to make your money work for you in a diversified portfolio that includes bitcoin.
Sarwa also provides periodic smart rebalancing to ensure that your portfolio allocation does not get offset.
In addition, you can always talk with a Sarwa Wealth Advisor to get more information or advice on anything that concerns your investments.
[To learn more about how Sarwa uses smart technology to provide low-cost and accessible investment solutions, read, “Digital Financial Advisor in Dubai: How Smart Tech Makes Investing Low-Cost and Accessible“]
Now that you know how to invest in bitcoin in the UAE, it is time to take the next step.
Schedule a free call with a Sarwa Wealth Advisor and we will help you start that journey.
- Bitcoin is a digital currency that facilitates transactions between people all over the world in a decentralised manner that protects the identities of buyers and sellers.
- Because bitcoin is a store of value, it has become popular as an investment asset. But the true long-term value of bitcoin is yet to be seen as it is still considered a very volatile asset.
- Bitcoin is now considered a smart investment asset because it can help diversify your portfolio, providing a possible hedge against inflation and high risk-adjusted returns.
- You can get exposure to bitcoin in the UAE through the Sarwa Bitcoin Portfolio that includes a 5% allocation into the Grayscale Bitcoin Trust (GBTC).