There are many individuals and investors across the globe who are understandably still not ready to invest in cryptocurrencies, such as Bitcoin, but would like to get some exposure to this market.
There are several reasons as to why investors wish to avoid owning Bitcoin. These can range from not understanding the market, to understanding the market but wary of the volatility swings or being an owner of Bitcoin but looking for a more diverse crypto investment basket.
Despite the volatility, Bitcoin has doubled in price in 2021, so how does one gain exposure without buying Bitcoin?
There are a few options that are available for those wanting exposure to Bitcoin without going through the rigmarole of opening a cryptocurrency account and becoming an owner of Bitcoin.
For those not aware, an Exchange Traded Fund is a type of security that tracks tradeable assets such as commodities, shares (FTSE 100), bonds or a mixture/basket of investment types. The ETF can be bought and sold on various exchanges, and the investor does not have to purchase individual commodities or shares etc.
In the case of a Bitcoin ETF, this fund will track the price of Bitcoin, and allows investors to bet on the future of Bitcoin, without having to purchase Bitcoin themselves. These funds have been available in Europe and Canada for some time, but since October 2021 are now available In the United States.
Briefly, US Bitcoin ETfs invest in Bitcoin futures, and they indirectly track the spot price of Bitcoin via contracts that are traded and overseen on the Chicago Mercantile Exchange. The regulators suggest that this is a safer way to invest in Bitcoin, (more investor protection), rather than through regular Bitcoin ETFs.
These funds are not available in the United Kingdom as regulators (the FCA), refuse to authorise a crypto fund until they are satisfied the underlying market has the proper integrity.
Many investors are used to investing in companies that have a board of directors that are accountable to shareholders, the regulatory authorities and produce annual financial results. Therefore, investors may find it easier to invest in Bitcoin related companies.
An example is Coinbase Global Inc (known as Coinbase), which is a Nasdaq traded company that operates a crypto exchange, which is currently the largest US crypto exchange by volume traded. As filed with the SEC, (the US Securities and Exchange Commission), their main income is derived from the users of the exchange who deposit and trade funds. The valuation of the exchange will fluctuate in accordance with the price of Bitcoin.
Investors may choose to invest in those companies that have an exceptionally large exposure to Bitcoin. An example will be Tesla Inc, who currently hold roughly USD1.26 billion in crypto assets on their balance sheet. There are other companies who also hold sizable assets in Bitcoin, but investors will have to due diligence the sectors they are trading in, to ensure a worthwhile investment.
How is Bitcoin Created? A Bitcoin is known as a digital currency and each coin or unit is encrypted then stored on a digital public ledger known as a blockchain. The creation and storage of these coins is known as mining. Originally, individuals used advanced computing systems to solve extraordinarily complex mathematical equations to verify Bitcoin transactions. Their payment or reward being Bitcoins.
This has morphed into companies who now used highly advanced computer systems to “mine” Bitcoins from scratch. Some of these companies have seen their share price go through the roof. The USA’s largest crypto miner was bought in April 2021 for USD 650 million cash and stock trade.
As shown above, there are many ways to invest in Bitcoin without having to purchase this sometimes-volatile digital currency. As with all investments, it is always prudent to diversify risk, so alternative bitcoin investment may well be the way to go for the more risk averse investor.