The Little Guy's Guide To Bitcoin Investing

Bitcoin is a popular type of cryptocurrency that utilizes a large chain of interconnected computers to store and protect your digital assets. Due to its volatile nature, investing in Bitcoin can be risky. However, there are several ways to invest in Bitcoin without buying BTC directly. Here are some options:

- Investing in Bitcoin stocks and funds: Several publicly traded companies, such as MicroStrategy, Square, and Tesla, have heavily invested in Bitcoin. You can also invest in Bitcoin exchange-traded funds (ETFs), which hold a basket of stocks associated with Bitcoin, providing diversified exposure to the crypto industry.

- Investing in Bitcoin mining companies: Mining companies are responsible for validating transactions and adding them to the blockchain. By investing in these companies, you can indirectly benefit from Bitcoin's increasing value.

- Investing in Bitcoin futures: Bitcoin futures allow investors to bet on Bitcoin's future value without owning any BTC. Futures contracts enable investors to buy or sell BTC at a predetermined price at a future date, allowing them to hedge against potential losses or speculate on its future value.

- Investing in blockchain technology companies: Blockchain technology is the backbone of Bitcoin and other cryptocurrencies. By investing in companies that specialize in blockchain technology, you can indirectly invest in Bitcoin and gain exposure to its potential applications beyond cryptocurrency.

- Investing in Bitcoin derivatives: Derivatives are financial instruments that allow investors to place bets on Bitcoin's future price without owning any BTC. Derivatives include options, futures, and swaps, which can be used to hedge against losses or speculate on its future value.

- Investing in Bitcoin-related businesses: Many businesses, including online retailers, restaurants, and even real estate companies, accept Bitcoin as a form of payment. By investing in these businesses, you can indirectly benefit from the growth of Bitcoin.

It is important to note that all investment options carry risks, and regulatory changes or technological advancements can impact the profitability of these methods. Investors should carefully consider their financial goals and risk tolerance before making any investment decisions.

Invest in Bitcoin stocks and funds

There are several ways to invest in Bitcoin without buying it directly. These include investing in companies that hold or trade Bitcoin, or support Bitcoin infrastructure, as well as investing in Bitcoin derivatives, such as futures contracts or options.

Bitcoin Derivatives

Derivatives are financial products that track the price of an underlying asset, in this case, Bitcoin. They can be traded on regulated exchanges and offer investors consumer protection and clearer tax guidance.

Bitcoin Exchange-Traded Funds (ETFs)

An ETF is an investment vehicle that trades on the stock market. Shares in a Bitcoin ETF are proportional to the price of Bitcoin. ETFs charge low fees and closely track the price of the underlying asset.

However, "spot" ETFs, which track the current price of Bitcoin, are only available in a few countries, such as Canada and Brazil. In the US, the SEC has denied applications for spot Bitcoin ETFs but has approved several Bitcoin futures ETFs.

Bitcoin Closed-End Funds or Trusts

A closed-end trust, such as the Grayscale Bitcoin Trust, represents shares in a publicly traded fund. However, shares in these trusts may trade at a discount to Bitcoin and may only exist until the SEC approves a spot Bitcoin ETF.

Bitcoin Futures and Options

Futures and options are derivative products that allow you to trade claims on the price of Bitcoin, rather than buying it outright.

A futures contract lets you buy or sell Bitcoin in the future at a price you decide today. It is a bet on the future price of Bitcoin. If your bet is correct, you could buy or sell Bitcoin at a favourable price. If it goes wrong, you could end up paying more for your Bitcoin or selling it at a loss.

Options give you the right, but not the obligation, to buy or sell Bitcoin at a predetermined price within a certain time period. To gain this right, investors must pay an upfront cost known as a "premium".

Invest in Companies that Hold or Trade Bitcoin

Another way to gain exposure to Bitcoin is to invest in companies that hold Bitcoin in their treasury or facilitate Bitcoin trading. For example, the publicly traded crypto exchange Coinbase makes most of its money through trading fees, so its performance is tied to the price of Bitcoin.

Other well-known companies that hold Bitcoin include Tesla and MicroStrategy. You can find a full list of companies that hold Bitcoin here.

Invest in Companies that Support Bitcoin Infrastructure

You can also consider investing in companies that create the chips and other components required by Bitcoin mining operations. Bitcoin relies on ASIC mining machines and cloud computing power, so you can investigate where these are made and invest in those companies.

Invest in Bitcoin mining companies

If you're looking to invest in Bitcoin without spending thousands, consider investing in Bitcoin mining companies. These companies offer an opportunity to gain exposure to Bitcoin's performance without dealing directly with the cryptocurrency. Here are some options to consider:

Hut 8 Mining (TSX:HUT)

Hut 8 Mining is one of the largest Bitcoin and Ethereum mining companies globally, with over 884 megawatts of power capacity. As of March 2024, the company's self-mined Bitcoin holdings stood at 9,102, and it mined 716 Bitcoin in the first quarter of 2024, a 36.6% increase year-over-year. Hut 8 has a market cap of C$1.11 billion.

Marathon Digital Holdings (NASDAQ:MARA)

Marathon Digital Holdings is a digital assets company focused on building one of the largest and lowest-cost Bitcoin mining operations in North America. In Q1 2024, the company reported a 142% year-over-year increase in its hash rate and a 28% increase in Bitcoin production. Marathon Digital Holdings has a market cap of US$5.47 billion.

Riot Platforms (NASDAQ:RIOT)

Riot Platforms is a Bitcoin miner with multiple subsidiaries working in different aspects of the business, including hosting Bitcoin mining equipment for clients. In Q1 2024, Riot's Bitcoin production faced a 36% reduction due to network difficulties, but price gains in Bitcoin led to an increase in total revenues. Riot Platforms has a market cap of US$2.9 billion.

Cipher Mining (NASDAQ:CIFR)

Cipher Mining operates an industrial-scale ecosystem of Bitcoin mining data centres, offering its services worldwide. As of early May 2024, Cipher's total self-mining capacity was 7.7 EH/s across all sites, and it is on track to expand further. The company reported record net income and revenue of US$48 million in Q1 2024. Cipher Mining has a market cap of US$1.17 billion.

Bitfarms (TSX:BITF)

Bitfarms is a blockchain infrastructure firm and one of the largest cryptocurrency mining operators in the Americas, with 12 Bitcoin mining facilities across Canada, the US, Paraguay, and Argentina. In Q1 2024, Bitfarms reported total revenue of US$50 million, a 67% increase year-over-year. The company has a market cap of C$905.57 million.

Hive Digital Technologies (TSXV:HIVE)

Hive Digital Technologies is a crypto mining company that operates mining facilities in Sweden, Canada, and Iceland, mining digital assets such as Ethereum, Ethereum Classic, and Bitcoin. As of early May 2024, Hive's Bitcoin holdings stood at 2,400 BTC, and it had a 5.0 EH/s ASIC mining capacity. Hive Digital Technologies has a market cap of C$365.05 million.

Invest in Bitcoin futures

Bitcoin futures are a way to invest in Bitcoin without buying the cryptocurrency directly. They are a type of derivative financial instrument that allows investors to speculate on the future price of Bitcoin.

A futures contract is an agreement between a buyer and a seller to buy or sell an asset at a specified price at a future date. In the case of Bitcoin futures, the buyer is betting on the future price of Bitcoin. The buyer can bet that the price will go up (known as going long) or that the price will go down (known as shorting).

For example, if you take out a futures contract in March saying you will buy Bitcoin in November for $5,000 and someone agrees to sell Bitcoin at that price, you will make a profit if the seller has to sell their Bitcoin at that price. However, if you had said that Bitcoin would be worth $50,000 in January and someone met that bet, you would have to buy Bitcoin at the inflated price.

Benefits of Bitcoin futures

One of the main benefits of Bitcoin futures is that they allow investors to amplify their profits through leverage. Leverage allows investors to put down a small amount of money and gain access to a larger amount. For example, with 100x leverage, a 2% increase in the price of Bitcoin would yield a 200% profit.

Another benefit is that Bitcoin futures are regulated, meaning investors are protected by consumer protections and tax guidance is clearer than when dealing directly with cryptocurrencies.

Risks of Bitcoin futures

The main risk of Bitcoin futures is that they can be complex and it is easy to lose money if the market moves against your position. Liquidation in futures trading occurs when you incorrectly predict the movement of the market and the exchange terminates your contract, resulting in a loss of your initial investment.

Additionally, Bitcoin futures may not be available on all trading platforms, and they typically have high margin requirements.

How to get started with Bitcoin futures

To invest in Bitcoin futures, you will need to find a trading platform that offers them. Popular exchanges that offer Bitcoin futures include the Chicago Mercantile Exchange (CME) and Deribit. You will also need to understand the leverage options available and how the exchange deals with futures contracts.

It is important to note that investing in Bitcoin futures carries a high level of risk and is not suitable for everyone. Make sure you understand the risks involved and only invest money you can afford to lose.

Invest in blockchain technology companies

Investing in blockchain technology companies is a way to gain exposure to bitcoin without directly dealing with crypto. Here are some options for investing in blockchain technology:

• Invest in companies that hold or trade bitcoin: You can purchase shares of publicly listed companies whose performance is tied to the price of bitcoin. For example, Coinbase, a publicly traded crypto exchange, or Tesla, which keeps bitcoin on its books.
• Invest in mining stocks: Mining companies such as Hut 8 Mining and Riot Blockchain tend to rise when bitcoin performs well and slump when it crashes. Many bitcoin mining companies hold onto their bitcoin instead of selling it, or use their holdings to finance investments.
• Invest in companies that support Bitcoin infrastructure: Invest in companies that create the chips and other components required by mining operations. Bitcoin relies on ASIC mining machines and cloud computing power, so you can look into where the chips are made and how the mining is powered.
• Trade synthetic bitcoin: Bitcoin is based on the Bitcoin blockchain, which isn't interoperable with other blockchains. However, it's possible to trade synthetic bitcoin on other blockchains such as Ethereum or Solana. Wrapped bitcoin (wBTC) is the most popular version of this.
• Invest in companies developing blockchain uses: Many well-known companies are investing in and developing blockchains for business or in-house use. Examples of markets to consider include decentralized finance, financial technology, and the metaverse.

Invest in Bitcoin derivatives

Crypto derivatives are financial instruments that derive their value from underlying crypto assets. They are contracts between two or more parties that allow traders to speculate on the price movement of the underlying cryptocurrency without owning the asset. Crypto derivatives are complex financial contracts that often involve high-risk, high-return strategies.

There are three main types of crypto derivatives: crypto futures contracts, perpetual contracts, and options. Crypto futures contracts are agreements between two parties to buy and sell crypto tokens, such as Bitcoin, at a predetermined price and by a specified date in the future. If the market price of the cryptocurrency goes above the set price by the expiration date, the buyer makes a profit. Sellers will profit if the market price falls below the predetermined price.

Perpetual contracts are similar to futures contracts, but they do not have an expiration date. Traders can hold their position (long or short) indefinitely, provided they pay the funding rate, which is typically due after eight hours.

Options are another type of derivative contract that gives the trader the right to buy or sell a specific commodity at a set price on a future date. Options provide more flexibility than futures because the trader is not obligated to buy or sell the underlying crypto. Call options allow traders to buy crypto tokens at a price lower than the current rate, while put options allow traders to sell above the market price.

Crypto derivatives can be traded on exchanges such as Deribit, which offers options, perpetuals, futures, and spot trading. It is important to note that crypto derivatives are high-risk financial instruments, and the volatile nature of the crypto market can lead to significant gains or losses.

Frequently asked questions