The events of the past couple of weeks have shown exactly why some people have been wary of investing in Bitcoin. One tweet – one word even – from Elon Musk and the cryptocurrency has whipsawed thousands of dollars in either direction without warning.
Thankfully for some investors, there are other ways to make a bet on the future of cryptocurrency.
Maybe you know nothing about Bitcoin, but you’re interested in the rise of cryptocurrencies. Or perhaps you know a lot about Bitcoin – and you don’t want to touch it, cautious about seemingly random price dips. Or you own Bitcoin already, and you’re looking to invest more broadly in the future of cryptocurrencies. The number of ways to get exposure is growing.
This year, the US Securities and Exchange Commission is expected to decide whether to approve exchange-traded funds that track Bitcoin. At the same time, several crypto-related companies have gone public. Meanwhile, some companies are buying so much Bitcoin, their shares are affected by movements in the cryptocurrency’s price.
The expansion of the cryptocurrency financial ecosystem comes as the coins themselves – and the technology behind them – go mainstream. And Bitcoin itself still isn’t offered for purchase in many traditional brokerage accounts.
Here’s a rundown of the alternatives:
Buying traditional stock in a Bitcoin-related company
Companies have structures that might be more familiar to the average investor: executive teams that make decisions and financial results that have to be disclosed. That’s one reason some prefer this route to get indirect exposure to Bitcoin.
“It can be easier for people to get into industries that they already understand and who are adopting these technologies to make them more efficient,” Sweta Bhargav, principal financial adviser at Adviso Wealth in Philadelphia, says. “It can be a better place to start for investors.”
Coinbase Global's direct listing on the Nasdaq last month has been a test of this strategy. Because most of its revenue comes from fees it charges users to deposit and trade funds, the valuations of the crypto exchange fluctuates in close correlation with Bitcoin’s price.
In a filing to the SEC, the company laid it out: “Our net revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform.”
Alternately, investors could focus on companies that are bullish on Bitcoin and have substantial holdings. Tesla, for example, made a large purchase of more than $1.5 billion. Other public companies that have substantial holdings include MicroStrategy, an enterprise software firm that purchased billions; and Galaxy Digital Holdings, with hundreds of millions.
With companies that do things other than hold Bitcoin, you have to also evaluate their sector and individual product performance.
“The risk-return profile is not exactly the same, as you are also taking a position in the firms themselves and therefore take on exposure to their unique risks,” Michael Kelly of Switchback Financial, says.
Investing in the 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. By solving complex mathematical problems to verify transactions of the currency, individuals can be “rewarded” with new Bitcoin.
That opens the door for companies mining Bitcoin, using powerful computers to create units of the digital currency from scratch.
“You don’t have to be a computer geek anymore to mine,” Julius de Kempenaer, senior technical analyst at Stockcharts.com, says. “There are companies who can do it for you.”
Marathon Digital Holdings and Riot Blockchain are two of the largest firms in the sector. On Marathon’s website, the Las Vegas company states that owning a stake “helps you gain exposure to Bitcoin in your portfolio without having to deal with the complications of holding the asset directly”.
The Colorado-based Riot specialises in acquisitions of crypto-related businesses. In April, the company disclosed it was buying North America’s largest Bitcoin mining facility, Whinstone US, in a $651 million cash-and-stock deal.
Trusts
Grayscale Bitcoin Trust has been the go-to place to gain indirect exposure to Bitcoin since it was launched by Grayscale Investments, a US crypto investment firm, in 2013. The trust allows investors to hold the currency without having to create what’s known as a digital wallet, which stores records of crypto transactions.
You don't have to be a computer geek anymore to mine [Bitcoin]
The downside is that Grayscale charges a 2 per cent fee for its management of the fund. “There’s a lot more fees associated with it. If you own Bitcoin directly, you’re not paying any fees to hold it or trading fees for humans to work,” Ryan Cole, a private wealth adviser at Citrine Capital, says.
Moreover, the fund sometimes trades at a discount to the value of Bitcoin it holds.
Coming Up: ETFs
The Bitcoin boom has led to ETF issuers betting we will soon see a fund that tracks the digital coin.
Grayscale Investments says it will turn its Bitcoin trust into an ETF as soon as US regulators allow it. The SEC has yet to approve the structure and several issuers have filed applications in recent weeks after North America’s first Bitcoin ETFs began trading in Canada in February.
Investors argue that a Bitcoin ETF would let them buy and sell the cryptocurrency more easily, and take away the complexities around storage and portfolio integration.
Until then, investors can look at the Amplify Transformational Data Sharing fund, according to Luke Suddards, an analyst for Pepperstone Group. It tracks companies involved in cryptocurrencies and blockchain technology.
“Through this product, you’d be invested in names like PayPal, Square, Visa, listed Bitcoin mining companies and chipmakers such as Nvidia who make the chips used in crypto mining,” Mr Suddards says.
Altcoins
There’s also the option of buying one of the several alternative coins, or altcoins for short, that have been created since Bitcoin launched. Research from exchange platform Binance found that the prices for various currencies tend to be highly correlated, rising and falling together. Litecoin, created in 2011, has outperformed its older rival this year, gaining 178 per cent compared with 87 per cent for Bitcoin. Ethereum, the second-largest digital currency, has risen 440 per cent over the same time period.
Or just buy Bitcoin
It used to be a lot more complicated to own a piece of Bitcoin – either a whole coin or a fraction of one. There were wallets to open, keys to keep track of, and it often times meant dealing with new companies without track records or head offices you could call. Now, several firms – including exchanges such as Coinbase, money transfer apps like CashApp, Venmo or PayPal, brokerages such as Robinhood – have made it easy to buy Bitcoin and other cryptocurrencies, although fees and policies vary.
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In addition to the Emirates and Etihad programmes, there is the Air Miles Middle East card, which offers members the ability to choose any airline, has no black-out dates and no restrictions on seat availability. Air Miles is linked up to HSBC credit cards and can also be earned through retail partners such as Spinneys, Sharaf DG and The Toy Store.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
