How to invest in Bitcoin without buying Bitcoin

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Bitcoin, the world’s largest cryptocurrency, is seemingly everywhere these days. From fast food to sports and even the local Walmart, it finds its way into the mainstream. As an investment, its spectacular rally this year delighted its members while arousing the curiosity of the uninitiated. In 2021 alone, the price of Bitcoin has more than doubled. Is it time to invest?

The easiest way to bet on Bitcoin is, of course, to buy it. But there are plenty of reasons why you might not want to take such a direct route. Maybe you don’t know anything about Bitcoin and want to get involved, but prefer familiarity with more traditional types of investments. Or maybe you know a lot about Bitcoin and don’t want to touch it, beware of seemingly random price swings. Or you already own Bitcoin, and are looking to invest more broadly in the future of cryptocurrencies. The good news is that there are more ways than ever for US investors to gain exposure.

Here is an overview of the alternatives:

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While exchange-traded funds that track the price of Bitcoin have been available for some time in countries like Canada and Europe, it’s a different story in the United States, where they have long been blocked by regulators. That all changed in October, when the first Bitcoin-linked ETFs were allowed to debut.

Importantly, these products invest in Bitcoin futures contracts, which indirectly track the spot price of Bitcoin through the use of contracts overseen by the Chicago Mercantile Exchange. (The Securities and Exchange Commission argues that this version offers more protections to investors than a regular Bitcoin ETF.) Two have been launched to date: the (BITO) and the (BTF).

They each charge $ 9.50 for every $ 1,000 you invest and involve the complicated world of futures, which are tools traders use to bet on price movements. But these funds can be ideal for those new to the world of Bitcoin or those hoping to consolidate their holdings into a traditional brokerage account that doesn’t allow real cryptocurrency.

Some issuers such as Direxion Investments and Valkyrie Investments have sought to launch leveraged Bitcoin futures funds, which allow investors to make oversized bets that the price of Bitcoin will rise or fall. The two withdrew their SEC requests this week, likely after signals from U.S. regulators that they were unlikely to be approved, according to Bloomberg Intelligence. But it is something to watch out for in the future.

The ETF industry is also hoping to see a fund that actually owns Bitcoin – more than a dozen issuers are interested in launching the products – but the SEC’s reluctance means it’s likely far away.

Buy traditional shares in a Bitcoin-linked company

Companies have structures that might be more familiar to the average investor, such as management teams that make decisions and financial results that need to be disclosed. This is one of the reasons why some prefer this route to gain indirect exposure to Bitcoin.

“It may be easier for people to enter industries they already understand and which are embracing these technologies to make them more efficient,” said Sweta Bhargav, senior financial advisor at Adviso Wealth in Philadelphia. “It may be a better place to start for investors.”

Coinbase Global Inc. is a prime example. Since most of its income comes from the fees it charges users for depositing and trading funds, the crypto exchange’s valuation fluctuates closely with the price of Bitcoin. In a filing with the SEC, the company explained, “Our net income is primarily dependent on the prices of crypto assets and the volume of transactions made on our platform.”

Alternatively, investors could focus on companies that are bullish on Bitcoin and have substantial holdings. Tesla Inc. has approximately $ 1.26 billion in “digital assets” according to its latest financial statements.

Other public companies with significant holdings include MicroStrategy Inc., an enterprise software company that held 114,042 units of Bitcoin at the end of September; and Galaxy Digital Holdings Ltd., with hundreds of millions.

With companies doing something other than holding Bitcoin, you also need to assess the performance of their industry and each product. The performance of stocks will be influenced by a series of factors that individual companies face, not just the price of Bitcoin.

“The risk / reward profile is not exactly the same because you are also taking a position in the companies themselves and therefore exposing yourself to their unique risks,” said Michael Kelly of Switchback Financial in Madison, Connecticut.

Since the start of the year, Tesla has grown 73%, while MicroStrategy has gained 105% and Galaxy Digital has grown over 200%.

ETF stocks

To invest in multiple companies at once, there are multiple exchange traded funds that hold shares of companies involved in the Bitcoin ecosystem.

For example, the Bitwise Crypto Industry Innovators (BITQ) ETF lists Galaxy Digital, Coinbase, and MicroStrategy as its largest holdings. It costs $ 8.50 for every $ 1,000 you invest.

The Amplify Transformational Data Sharing (BLOK) fund has a similar focus, while the Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF (RIGZ) offers an ESG touch. And more to come: This week, Valkyrie filed a request to launch an actively managed fund that would invest in Bitcoin’s mining operations.

Invest in technology

Bitcoin is a digital currency: each unit is an encrypted record stored in a public ledger called a blockchain, as you probably know by now. (And if you don’t, watch this.) By solving complex math problems to verify currency transactions, individuals can be “rewarded” with new Bitcoins.

This opens the door for companies that mine Bitcoin, using powerful computers to create units of digital currency from scratch.

“You don’t have to be an IT geek anymore to operate,” said Julius de Kempenaer, senior technical analyst at Stockcharts.com. “There are companies that can do this for you.”

Two of the largest companies in the industry are Marathon Digital Holdings Inc. and Riot Blockchain Inc. On the Marathon website, the Las Vegas-based company states that owning a stake “helps you expose yourself to Bitcoin in your wallet without having to face the complications of directly holding the asset.” Riot, based in Castle Rock, Colo., Specializes in acquisitions of crypto-related businesses: In April, the company revealed it was buying North America’s largest Bitcoin mining facility, Whinstone US, in a $ 651 million cash and stock deal.

Old fashioned trusts

Before the early days of ETFs based on futures, trusts were the preferred place to gain interest exposure on Bitcoin. The best known is the Grayscale Bitcoin Trust launched by Grayscale Investments, an American crypto investment company, in 2013.

The downside is that Grayscale charges a 2% fee for its management of the fund. “There are a lot more fees associated with it. If you own Bitcoin directly, you pay no fees to hold it or any trading fees for humans to work,” said Ryan Cole, private wealth advisor. at Citrine Capital, a San Francisco. wealth management company.

In addition, the fund sometimes trades at a discount to the value of the Bitcoin it holds.

However, the company has filed a request to convert the trust into an ETF. This would help solve the discount problem, thanks to a feature of the ETF format that allows shares to be created and redeemed, keeping the price in line with that of the securities followed by the fund. The conversion authorization is still awaiting the green light from the SEC.

So there are always the AltCoins

There is also the option of purchasing one of the many alternative coins, or altcoins for short. Litecoin, created in 2011, has grown 60% this year, compared to around 110% for Bitcoin. Ethereum, the second digital currency, grew 510% over the same period.

Dogecoin and Shiba Inu have been causing a stir lately, but the basic reasons why someone would invest in either of these “memecoins” are obscure at best. Yet they have grown exponentially this year.

Or just buy Bitcoin

It used to be much more complicated to own a piece of Bitcoin – either a whole coin or a fraction of one. There were wallets to open, keys to follow and that often meant dealing with brand new businesses with no track record or head office you could call. Now, several companies – including exchanges like Coinbase, money transfer apps like CashApp, and brokerage houses like Robinhood – have made it easier to buy Bitcoin and other cryptocurrencies, albeit with the fees. and policies vary.

One of the latest is Venmo, which allows customers to buy, sell, and hold cryptocurrencies like Bitcoin and Ethereum. There is even a way for credit card holders to automatically purchase crypto from their Venmo account using the cash back they earned from their purchases.

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