Cryptocurrency and more broadly blockchain technology look set to be one of the major investment themes for the next decade. If you are unfamiliar with cryptocurrency, the best place to start is our guide.
In this article, we will explore a number of different ways on how you can get exposure to crypto through the stock market. This can allow you to invest in crypto through tax efficient wrappers such as ISAs for the Brits, or a Roth IRA for the Americans.
Here’s an executive summary of the 6 options we cover:
- Crypto miners who mine crypto thus generating revenue from the mining and from the value of the mined coins.
- Funds or trusts that hold and secure crypto so you don’t have to, and charge management fees for doing so.
- Crypto ETFs are a low-cost way of tracking the value of crypto – most of these are yet to be approved by regulators but expect them to arrive in the near future.
- Picks and shovel plays that look for the companies that provide the infrastructure that enables crypto.
- Early adopters – i.e. those companies that incorporate crypto and blockchain services into their companies to attract new customers and enhance existing offerings.
- Unrelated asset plays where you invest in companies that have no business relationship to crypto aside from holding it on their balance sheet as an investment.
Akin to gold miners, these companies primarily generate their revenue from the transaction fees they get from mining crypto and by selling the mined crypto itself.
Many crypto miners have recently pivoted to holding (or HODLing) their mined crypto. If you want to learn more about the mining process, here is a short video that explains it quite well.
Over the past year, bitcoin crypto miners in particular have seen their share price outpace the gains of bitcoin itself so there is potentially more money to be made through this route as these companies are revenue generating as well.
Keep in mind that with crypto miners you are also exposed to the business risk of the company itself which you wouldn’t otherwise be exposed to if you were simply holding bitcoin.
Key things to watch out for here are the total mining power of the miner which dictates how much crypto they mine and the amount of crypto that they hold on their balance sheet.
Bonus points for companies that mine and hold other cryptos apart from bitcoin, diversifying their operations. Although you still want to make sure that the other coins are the real deal.
This is one of the more direct options on this list where you invest into funds/trusts that directly hold mainly bitcoin and sometimes other crypto.
They also look after the custody aspect of holding crypto and for this they charge management fees which can be substantial. There aren’t many options available at the moment through this route but we can expect more options in the future as crypto becomes more mainstream.
The most established current option is the Grayscale Bitcoin Trust which holds bitcoin and charges an annual fee of 2%. They have also historically traded at a premium relative to the price of bitcoin due to the lack of other options available for stock market investors to gain direct exposure to bitcoin.
Given the high management fee and premium price, in our view this option is only suitable for those who want a completely hands-off approach and can’t wait for the adoption of low-cost bitcoin ETFs – more on these shortly.
Crypto ETFs (exchange-traded funds) are funds listed on the stock market that specifically invest in the theme of crypto. More details on ETFs can be found in our article here.
Crypto ETFs are still in their infancy as they have faced pushback from regulators in the past but there are positive signs that regulators are warming to the concept.
Last month saw the launch of the Purpose Bitcoin ETF in Canada, which is the first western-traded Bitcoin ETF. They charge a management fee of 1% which compares favourably versus the 2% fee for the Grayscale Bitcoin Trust. Expect many more crypto ETFs to be approved in the near future.
A crypto focused ETF can be a great low-cost way to gain exposure to crypto without much work required on your part. The only downside of this option is that it is pretty rare to find ETFs that are completely sharia-compliant. Although ETFs that primarily hold crypto themselves should be fine provided the underlying crypto is compliant.
To help with that, here’s our list where we assess which of the top 50 cryptocurrencies are sharia-compliant. It’s when the ETF includes revenue generating companies such as crypto miners that could be using excessive leverage where you need to be really careful.
Picks & Shovel plays
Pick and shovel plays is an investment strategy where you invest in the supplier of a certain product rather than the product itself. This strategy was coined back in the 19th century during the California gold rush, where the businesses selling supplies to the miners outperformed the gold miners themselves.
For this strategy you need to understand what makes crypto tick and look for the companies that provide these services. Examples include the likes of AMD and NVIDIA, two very strong semiconductor companies in their own right.
They supply the GPUs that power the machines that mine crypto and thus can expect demand for their products to increase with the increased adoption of crypto.
The early adopters of crypto and blockchain technology will put themselves in pole position to benefit from this growing market. From payment processors such as Visa and Mastercard facilitating the use of crypto for everyday payments to companies that build products on the blockchain.
A great recent example is IBM using blockchain technology to develop Covid-19 vaccination passports. Using blockchain will enable efficient data tracking of vaccination records across countries and could bring in a lot of revenue for the firms that provide this service.
DocuSign is a leading e-signature company that addresses the full lifecycle of contract management online. They have enhanced their offering with a blockchain solution based on Ethereum to facilitate smart contracts – contracts that use code to enable the automatic execution of clauses if certain conditions are met.
Initiatives like these could help companies such as DocuSign and IBM dominate the market for years to come if these technologies provide a genuine competitive advantage and as demand for these types of products increase.
Unrelated Asset Plays
This is a bit of a left-field option where you invest in companies that have no business link to crypto apart from the fact that they hold bitcoin or other cryptos on their reserves.
The most famous example is MicroStrategy, a data company whose CEO Michael Saylor famously converted all of their cash reserves into bitcoin back in 2020. As bitcoin embarked on its latest bull run, MicroStrategy’s share price has seen a tremendous 7x return over the past year.
Tesla is another well-known example of a company that holds bitcoin on their balance sheet, although it is worth keeping in mind that their bitcoin investment only represents a small proportion of their market capitalisation.
Therefore it is unlikely to substantially influence their price but you may take the view that it enhances their investment case by doing so.
The key things to look out for when investing via this method is to ensure that you are happy with the companies’ primary business activity, and that their crypto holding is a material size relative to their company.
So there we have it. 6 different methods of gaining exposure to crypto through the stock market. Hopefully this article enables you to tap into the growing trend of crypto, provide some diversification and boost your investment gains. If you have any other suggestions on how to gain exposure, do let us know in the comments below.
For more information, check out our crypto guide here.