How to Invest in Cryptocurrency Without Buying Bitcoin
“Digital gold” can occasionally feel as difficult to obtain as actual gold. You might not be able to invest directly in bitcoin through tax-sheltered accounts or some banks, and government insurance is not provided for cryptocurrency exchange accounts or exchange order books. However, there are other alternatives to purchasing bitcoin directly.
Conventional financial instruments with derivatives
Don’t be alarmed if words like exchange-traded funds (ETFs), trusts, options, and futures sound confusing or intimidating. Shares or contracts can be settled in cash (cash-settled) or physically delivered. The price of a tradable contract or share that tracks the cost of an underlying asset, in this example, bitcoin, is known as a derivative. So you can effectively trade the paper that symbolizes cryptocurrency rather than purchasing it directly on an uncontrolled cryptocurrency exchange.
Because these financial instruments are regulated, various consumer protections protect investors. Not to mention, there is no need to set up a wallet or negotiate with an unregulated exchange, and tax guidance on regulated products is much clearer than when dealing directly with cryptocurrency.
A bitcoin ETF is a stock market-tradable investment product. ETFs closely follow the price of an underlying asset and have low costs. The price of bitcoin, which the ETF’s managers buy and sell, is directly correlated with the value of the ETF’s shares. The problem is that just a few nations, including Canada and Brazil, provide “spot” ETFs that track the current price of bitcoin. Although several applications are pending, the U.S. Securities and Exchange Commission (SEC) has repeatedly rejected requests for spot ETFs because the market is inherently manipulable.
However, the SEC has approved several futures exchange-traded funds (ETFs), which track the value of short-term wagers on the future price of bitcoin. Gary Gensler, the chairman of the Securities and Exchange Commission, stated that the main benefit of futures-based ETFs over spot ETFs is that the former can be organized using the Investment Company Act of 1940, which provides investors with more protection.
Closed-end funds or trusts for bitcoin
A closed-end trust like the Grayscale Trust, which represents shares in a publicly traded fund, is the next best thing since bitcoin spot ETFs are illegal in the United States. (The trust is managed by Grayscale Investments, a division of Digital Currency Group, which also owns CoinDesk.) Or it was the next best thing until SEC fees made redemptions challenging to execute in 2016, and shares began trading at a discount. Until a spot ETF is approved by the SEC, trusts like this might only exist; Grayscale is one of many applicants.
Options and futures for bitcoin
Instead of purchasing bitcoin outright, you can exchange claims on its price using derivative instruments. For instance, a futures contract enables you to buy or sell at a price you choose today in the future. In essence, it is a wager on the cost of the future. If your bet wins, you might be able to buy crypto at a discount or sell it for a profit. When the contract ends, you might sell your crypto at a loss or pay much more for it if things go wrong.
Some futures contracts, such as those on the Chicago Mercantile Exchange (CME), are settled in cash, but others, such as those on Deribit, are paid in bitcoin. Perpetual swap contracts, or PSPs, are futures contracts that don’t expire and let you wager on the price indefinitely.
Another alternative is to trade options, which give you a choice but not the obligation to purchase or sell bitcoin within a specified time frame at a set price (referred to as the “strike price”). Investors must make a one-time payment known as a “premium” to have this right to buy or sell. Both futures and options contracts are complex financial instruments, and buying calls or puts in the U.S. requires additional permits and conditions.
Alternatives to investing in bitcoin
Invest in businesses that manage or deal in bitcoin. Most of Coinbase’s revenue comes from trading commissions, and when bitcoin is performing well, customers tend to trade more frequently. Buying shares of publicly traded companies whose performance is correlated with the price of BTC is another option to get exposure to the cost of bitcoin.
Because MicroStrategy has crypto worth billions of dollars in its treasury, some experts compare it to a fictitious ETF. Tesla is the most well-known business in its books, but others do the same. Here is a comprehensive list of companies with reserves.
Many Bitcoin miners are now turning their rigs off.
Bitcoin’s electrical cost has just been breached for the 2nd time only in 5 years. The electrical bill for the average miner is now greater than the income earnt. pic.twitter.com/0yG3pmrGKO
— Charles Edwards (@caprioleio) November 9, 2022
Hut 8 Mining and Riot Blockchain, two mining companies, also experience ups and downs with the value of bitcoin. This is because many mining companies keep their bitcoin instead of selling it or using it to make investments.
Invest in businesses that provide the infrastructure for Bitcoin.
Investing in businesses that produce the chips and other essential parts that mining operations require to succeed is a step further, but it is still something to think about. You can research where the chips are created and how the mining is powered and invest in those firms because Bitcoin depends on ASIC mining equipment and cloud computing power.
Trading fictitious bitcoin
One of its limitations is that bitcoin is built on the blockchain, which cannot be used with other blockchains. For instance, you cannot immediately trade bitcoin on any other blockchain, like Ethereum or Solana. But in recent years, trading synthetic bitcoin on these blockchains has been feasible. These tokens are issued on a different blockchain and linked to a price.
Wrapped bitcoin is the most common variation of this. It’s an ERC-20 token linked to bitcoin that is kept in BitGo cryptocurrency custody provider-secured vaults. The ticket, abbreviated to “wBTC,” can be staked into Ethereum-based decentralized finance (DeFi) protocols. Similar fake assets, such as renBTC or Sollet’s wrapped for Solana, are available for various blockchains.
Nothing prevents you from earning crypto, even if you can’t exchange it directly. Installing mining equipment is one approach to making money using bitcoin. While it may take some time to recoup your investment, and you may be subject to the ability during that time, if you invest a lot of money in mining equipment, this is far more likely to be profitable. There are more straightforward solutions for less tech-savvy people, such as joining a mining pool.
Still, the value of a few mining companies on the stock market is in the billions of dollars. Find out here how to determine whether mining is profitable.