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Can I Invest In Bitcoin Without Actually Buying It?
This rapid rise in value of the ‘original’ cryptocurrency continues to drawn the attention of investors, many of whom are looking at ways to gain exposure to the ‘digital gold’.
However, many are struggling to find a way of doing so without having to navigate the often complex world of crypto exchanges or get bogged down in crypto wallets and self-custody solutions.
How can I add Bitcoin to my portfolio?
If you’re not quite ready to take the plunge and become your own digital bank, there are ways to gain exposure to Bitcoin (BTC) without actually buying the cryptocurrency yourself.
New Bitcoins are minted using a process called ‘mining’. This is where hugely complicated calculations are completed to secure the Bitcoin network and maintain the blockchain.
It used to be the case that you could mine Bitcoin on your home PC, but the process has become so complicated that you now need vast arrays of specialist machines, known as ASIC computers, to make a profit.
It’s in the mining process that an opportunity to invest in Bitcoin indirectly exists.
Gain exposure to Bitcoin with mining companies
Building a profitable Bitcoin mining farm requires a large chunk of start-up capital and a lot of technical expertise.
But the rewards are potentially huge, especially during a bull run.
The profitability of a mining farm depends on the underlying price of Bitcoin so your gains and losses will directly correlate with the market performance of the crypto.
There are several stock market listed mining companies which allow curious crypto investors to gain exposure to Bitcoin in this way.
They include Argo Blockchain, Hut 8 Mining, Quantum Blockchain and Bit Digital, but there are several others to choose from.
You can buy shares in these companies as you would any other and hold them in your portfolio alongside your ‘traditional’ investments.
You can also trade them in the same way you would a traditional stock.
This way you can add Bitcoin to your investments without the technical hassle and risks involved in buying the coins yourself.
What are the risks involved in Bitcoin mining farms?
Many mining companies didn’t survive the so-called ‘crypto winter’ of the past couple of years and were forced to shutter operations.
There are other things you need to consider before taking the plunge into crypto mining shares.
There are currently significant environmental concerns about the amount of energy used by the mining farms and whether companies should be allowed to operate them.
PoW v PoS
Bitcoin currently uses a mechanism called Proof of Work (PoW) to secure the network, but this requires vast warehouses filled with energy hungry computers to do so as I’ve already mentioned.
Ethereum, the second largest cryptocurrency by market cap, transitioned from PoW to Proof of Stake (PoS) in 2022 and by some accounts reduced the network’s energy consumption by up to 99%.
Some countries are taking a tough stand against Bitcoin due to its energy demands still being met primarily using dirty fuel, such as coal.
This could become a major problem in the future unless mining companies can find a way to use far more renewable energy in the mining process.
Bitcoin v The Banks
Bitcoin as an alternative currency which cuts out the need for banks (and hence deprives them of any profit) is another contentious subject surrounding the crypto.
As a result, many financial bigwigs say they are concerned about the potential impact crypto will have on the stability of the global banking system.
Whether this is motivated by a fear of their businesses being eroded or a genuine concern for the security of people’s finances is difficult to tell.
But a lot of powerful people are speaking out against Bitcoin at this time.
Regulation and Bitcoin
Added to these concerns are the growing calls for the crypto industry to be more tightly regulated.
This can be seen as both positive and negative when it comes to investing in Bitcoin.
Some Governments are taking a crypto-friendly approach to regulation which could bring the industry into the mainstream and make it far more ‘investable’ for the average person.
Others, however, are launching all out offensives against Bitcoin. China, for example, implemented an outright ban on trading Bitcoin not so long ago.
Countries such as the UK are among those taking a much more welcoming approach to crypto, and the regulatory proposals here could actually help the industry rather than hinder it.
A lot of countries, including the UK, are also planning to launch their own Central Bank Digital Currencies (CBDCs) which are seen as a possible replacement for cryptocurrency. China has already launched the digital Yuan.
Take a cautious approach to Bitcoin investing
As you can see, there’s a lot of potential for both upside and downside in the Bitcoin market in the future.
For now, it’s best to approach crypto investing with a healthy dose of caution and understand that you could potentially lose any cash you invest in this sector.
As with all investing, you should take a long-term approach to smooth out the peaks and troughs and avoid panic selling when times are tough.
But Bitcoin and the crypto market in general are particularly volatile and high risk – it can take particularly strong diamond hands to stay the course.
Other ways to gain exposure to Bitcoin
If you’ve bought some Bitcoin mining shares and are looking to diversify your Bitcoin exposure while still keeping the actual crypto itself at arm’s length, there are other products available.
These include digital asset derivatives, such as futures and options, plus Exchange Traded Funds (ETFs).
For example, according to thisismoney, The London Stock Exchange as partnered with Global Futures and Options (GFO-X) to bring a number of derivatives products to UK investors.
This also means that Bitcoin trading is effectively being brought under the umbrella of the traditional markets.
In the US, BlackRock, Fidelity and other financial giants have launched Bitcoin spot ETFs giving investors another ways of investing in Bitcoin without actually owning any.
Buying Bitcoin – a guide
You may have ruled out the hassle of involving yourself in the more technical and geekier side of Bitcoin, but don’t write it off completely.
Buying Bitcoin is actually incredibly easy and there are now many large, internationally recognised crypto exchanges, such as Coinbase, that make buying crypto a doddle.
You can even use an exchange to store your crypto for you, although this is frowned upon by many investors, especially after the collapse of platforms such as FTX.
The best way to secure your coins is to use a self-custody wallet such as Exodus (software) or a hardware wallet such as a Ledger or Trezor.
This brings with it a number of additional complexities and the potential to lose your coins through theft or carelessness if you don’t know what you’re doing.
However, many people struggled with online banking when it first hit the scene but now it’s second nature to most, so don’t let this put you off.
Here are a few guides that will help you:
Disclaimer: Nothing on this website constitutes financial advice. The information provided is for educational purposes only.
