Blockchain Investment: Beyond Bitcoin And The Riot

Investing in blockchain technology without buying cryptocurrencies like bitcoin can be done through various methods. One way is to invest in companies that hold bitcoin or provide cryptocurrency-related services. These include publicly traded businesses that have added bitcoin to their balance sheets or offer cryptocurrency storage or payment services. Another option is to invest in companies with technology related to blockchain, such as Square, Paypal, Riot Blockchain, and Galaxy Digital, or in companies that use blockchain in their operations, such as Microsoft, IBM, Google, SAP, and Amazon. Additionally, investors can explore blockchain-as-a-service (BaaS) providers like IBM and Microsoft, or blockchain consortia like Hyperledger and Enterprise Ethereum Alliance (EEA). It's important to note that investing in bitcoin-related industries carries risks, and investors should conduct thorough research and consider their financial goals and risk tolerance.

Invest in blockchain technology companies

Investing in blockchain technology companies is a way to gain exposure to the cryptocurrency market without directly buying Bitcoin or other digital tokens. Here are some options to consider:

Crypto and Blockchain Stocks

You can invest in companies that specialise in blockchain technology and are involved in crypto mining, software development, and other blockchain-based services. Some notable companies in this space include Riot Blockchain (RIOT), Canaan Inc. (CAN), HIVE Blockchain Technologies (HIVE), and Bitfarms (BITF). These companies offer a different risk-reward profile compared to direct investments in cryptocurrencies.

Hardware and Technology Companies

Another way to gain exposure to blockchain technology is by investing in companies that provide the underlying hardware and technology required for crypto mining and blockchain operations. This includes companies that manufacture graphics processing units (GPUs) and other computing components.

Some big technology names that utilise blockchain in different parts of their business include Microsoft, IBM, Google, SAP, and Amazon. Investing in these companies can provide indirect exposure to blockchain technology and its potential growth.

Crypto Industry ETFs

Exchange-traded funds (ETFs) that focus on the crypto industry and blockchain technology are another option. These ETFs invest in companies involved in developing new uses for blockchain technology. Some examples of crypto industry ETFs include:

• First Trust SkyBridge Crypto Industry and Digital Economy ETF
• Fidelity Crypto Industry & Digital Payments ETF
• Global X Blockchain & Bitcoin Strategy ETF

However, it is important to note that ETFs come with management fees, and the returns may not always match the performance of the underlying assets.

Crypto Industry Stocks

If you are more comfortable investing in individual stocks, you can consider publicly traded companies in the crypto industry, such as cryptocurrency exchanges like Coinbase (COIN) or bitcoin mining companies like Marathon Digital Holdings (MARA).

Crypto Funds

You can also invest in funds that have exposure to cryptocurrencies and blockchain technology, such as the Ark Next Generation Internet exchange-traded fund. This ETF has exposure to artificial intelligence, big data, cloud computing, and blockchain technologies.

Separately Managed Accounts (SMAs)

If you are a sophisticated investor, Separately Managed Accounts (SMAs) offer a more personalised approach. SMAs are portfolios created for individual investors and managed by financial advisors or investment firms. While they often require higher minimum investments, they provide more control and the ability to tailor the portfolio to your preferences.

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 bet on the price movements of crypto tokens, choosing to either sell or buy the asset. Derivatives exchanges are legal and regulated marketplaces for trading derivatives such as options, futures, and swaps. Crypto derivatives exchanges are online platforms that facilitate open-source peer-to-peer (P2P) decentralised cryptocurrency trading.

There are three main types of derivatives contracts in the crypto markets: futures, options, and perpetual swaps.

Crypto Futures Contracts

Crypto exchanges facilitate crypto futures contracts between two parties agreeing on the predetermined price for buying and selling crypto tokens, such as Bitcoin or Litecoin, with an expiration date for the contract to end. At the time of contract expiration, if the market price of the said cryptocurrency goes above the set price, the buyer makes a profit. Sellers will profit if the market price falls below the predetermined price.

Crypto Perpetual Contracts

Similar to futures contracts, crypto exchanges facilitate traders to bet their investment on perpetual contracts. The key difference is that perpetual contracts have no expiration date, and traders can choose to speculate on the market price of the underlying crypto and hold their position (long or short) indefinitely.

Crypto Options

Options are another type of derivatives contract that allows a trader to buy or sell a specific commodity at a set price on a future date. Options are not obligatory – the trader can choose not to buy the asset if they don't want to. There are multiple types of options: call and put options, as well as American and European options. Call options allow a trader to purchase an asset on a given date, while put options allow a trader to sell an asset on a given date. In addition, American options can be sold before the contract’s expiry date, whereas European options need to be sold on the agreed date.

Advantages of Crypto Derivatives

• Derivative trading practices arbitrage, ensuring market stability and accurate asset pricing.
• Low transaction costs – derivative contracts are effective risk management tools, reducing market transaction costs.
• Derivatives can be used to mitigate risks associated with fluctuating prices of underlying assets.
• Derivatives can be used to protect one’s crypto portfolio from adverse market movements (hedging).
• Derivatives allow investors to use leverage to increase profit margins without needing to invest large amounts upfront.
• Derivatives enable investors to execute complex trading strategies, such as betting on the volatility of the price of a crypto asset.

Disadvantages of Crypto Derivatives

• Derivative contracts can be very volatile due to the fluctuating prices of underlying assets.
• Derivatives trading remains illegal in some regions.
• Over-the-counter futures contracts involve counterparty risks due to a lack of due diligence.

How to Trade Crypto Derivatives

There is no formula to ensure gains or avoid losses when trading crypto derivatives. However, there are some practices that can help safeguard your investment:

• Choose the right derivative based on the current price fluctuation trend. If the market is bullish, choose an options contract. If the market is bearish, go for a futures contract.
• Don't hedge more than you are willing to lose.
• Choose a reliable trading platform that is established, with verified users, high trade volumes, and safety measures to detect fraud.

Invest in Bitcoin-related businesses

There are many businesses that accept Bitcoin as a form of payment. By investing in these businesses, you can gain exposure to Bitcoin's price and performance without directly purchasing BTC. These businesses include online retailers, restaurants, and even real estate companies.

For example, Coinbase, a publicly traded crypto exchange, makes most of its money through trading fees, and people tend to trade more frequently when Bitcoin is performing well. Similarly, Tesla, which famously purchased $1.5 billion worth of Bitcoin in 2021, is another well-known company that keeps Bitcoin on its books.

However, investing in Bitcoin-related businesses is not without its risks. The value of Bitcoin can be volatile, and these businesses may face regulatory hurdles or operational challenges that could impact their profitability.

It is important to do your research and understand the risks involved before investing in any business, especially those associated with Bitcoin and cryptocurrencies.

Invest in Bitcoin mining companies

Investing in Bitcoin mining companies is a way to gain exposure to Bitcoin and the cryptocurrency market without directly buying Bitcoin. These companies are involved in the process of verifying transactions on the blockchain and generating new coins. By investing in these companies, you are betting on the growth and success of their operations, which are closely tied to the performance of Bitcoin.

• Market Capitalization: Some Bitcoin mining companies have market capitalizations in the billions of dollars. This indicates a certain level of stability and potential for growth.
• Hash Rate: The hash rate refers to the processing power of the mining company's hardware. A higher hash rate means the company can mine more Bitcoin, potentially increasing profits.
• Bitcoin Holdings: Many Bitcoin mining companies hold onto their mined Bitcoin instead of selling it immediately. This can be a strategic move, as it allows them to benefit from the potential appreciation of Bitcoin's value over time.
• Revenue and Profitability: As with any investment, it is crucial to analyse the financial health of the mining company. Consider their revenue, profitability, and overall business model to assess their stability and potential for growth.
• Regulatory Environment: The cryptocurrency space is subject to changing regulations, which can impact the operations of mining companies. Stay informed about any regulatory developments that may affect the companies you are considering investing in.
• Marathon Digital Holdings (NASDAQ: MARA): One of the first cryptocurrency mining companies to trade on NASDAQ, with a focus on building a large-scale, low-cost mining operation in North America.
• Riot Platforms (NASDAQ: RIOT): A Bitcoin miner with subsidiaries in different aspects of the business, including hosting Bitcoin mining equipment for clients.
• Cipher Mining (NASDAQ: CIFR): Operates industrial-scale Bitcoin mining data centres, offering mining services to customers worldwide.
• Hut 8 Mining (TSX: HUT): One of the largest Bitcoin and Ethereum mining companies globally, with significant power capacity and mining facilities.
• Bitfarms (TSX: BITF): A blockchain infrastructure firm and one of the largest cryptocurrency mining operators in the Americas, with facilities across North and South America.
• Hive Digital Technologies (TSXV: HIVE): A crypto mining company that operates mining facilities in Sweden, Canada, and Iceland, mining digital assets such as Ethereum, Ethereum Classic, and Bitcoin.

Remember that investing in Bitcoin mining companies still carries risks associated with the volatile nature of the cryptocurrency market. Conduct thorough research, understand the regulatory environment, and diversify your investments to mitigate potential losses.

Invest in Bitcoin futures

Bitcoin futures are bets on the future price of Bitcoin. You can bet that the price will go up (known as going "long") or that it will go down (known as "shorting"). These bets are made through futures contracts, which are agreements between a buyer and a seller to speculate on the future price of Bitcoin.

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 to you at that price, you will make a profit if the seller has to sell their Bitcoin at that price when it is worth more. However, if the price of Bitcoin goes down and you have agreed to buy it at a higher price, you will make a loss.

Futures contracts can be used to amplify investors' profits through leverage. Leverage allows investors to put down a smaller amount of money and gain access to a greater amount. For example, if you put in $1,000, you can enter the market with $100,000 in markets that offer 100x leverage. This means that a 2% rise in price will yield a $2,000 profit with 100x leverage, compared to $20 profit without it. However, the higher the leverage, the smaller the margins for error in price prediction, and the greater the potential losses.

Bitcoin futures are exchange-traded and regulated, making them a compelling option for those seeking long-only exposure to Bitcoin. They are also a more familiar concept to many investors than buying and holding Bitcoin, and they are not subject to the same security concerns, such as the risk of hacking.

In the US, the Securities and Exchange Commission (SEC) has approved several Bitcoin futures ETFs, which track the value of short-term bets on the future price of Bitcoin. These include:

• ProShares Bitcoin Strategy ETF (BITO)
• Valkyrie Bitcoin Strategy ETF (BTF)
• VanEck Bitcoin Strategy ETF (XBTF)
• Global X Blockchain & Bitcoin Strategy ETF (BITS)

However, it is important to note that futures contracts and ETF shares may not deliver the same returns as their target assets, and that fees can eat into potential returns.

Overall, investing in Bitcoin futures can be a way to benefit from Bitcoin's price action without having to allocate funds to the asset itself.

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