Although cryptocurrency can be an incredibly rewarding investment, it’s important to understand the substantial risks involved, especially when you’re just starting out. Even seasoned investors approach cryptocurrencies with a degree of caution, knowing how volatile and unpredictable this market can be. But don’t be disheartened—if you’re interested in the potential rewards of cryptocurrency but are hesitant about directly buying or holding these digital assets, there are alternative, less risky ways to invest.
Let’s explore these options together, so you can make an informed decision, reduce your risks, and still have a chance to earn significant profits.
What’s on the Agenda?
With the meteoric rise of cryptocurrencies like Dogecoin, Ethereum, and Bitcoin in recent years, many investors have been lured into the market, hoping to strike it rich. However, the reality is that despite all the research and market forecasts, the risk of losing money is very real. The cryptocurrency market is in constant flux, and predicting its future is nearly impossible. It’s even conceivable that Bitcoin could lose its value entirely, especially with the economic strains caused by the COVID-19 pandemic. Yet, the allure of cryptocurrencies continues to grow, making them almost irresistible.
So, how can you invest in cryptocurrencies without directly buying or holding them? Let’s look at three primary strategies.
Invest in Cryptocurrency-Holding Companies
Most people who invest in cryptocurrencies buy tokens like Bitcoin directly. But there’s a smarter, less risky approach—investing in companies that hold cryptocurrencies or are involved in the crypto space.
These companies, often referred to as “crypto stocks,” offer indirect exposure to the cryptocurrency market. By investing in businesses that have Bitcoin on their balance sheets or provide services related to digital currencies, you can still benefit from the cryptocurrency boom without directly holding any tokens. Some of the biggest names in this space include Tesla and MicroStrategy.
Tesla Tesla made headlines when it invested $1.5 billion in Bitcoin and briefly accepted it as payment for its products. However, the company later changed its stance, selling most of its Bitcoin holdings and halting Bitcoin transactions due to environmental concerns related to Bitcoin mining. Despite this, Elon Musk’s influence on the market is undeniable, and his frequent endorsements of Dogecoin suggest that it might become Tesla’s preferred cryptocurrency in the future.
MicroStrategy MicroStrategy, a Virginia-based business analytics firm, is another major player in the Bitcoin space. The company made a bold move in August 2020 by investing $250 million in Bitcoin, citing economic factors like declining cash yields and the depreciating value of the US dollar. Since then, MicroStrategy has invested nearly $2 billion in Bitcoin, making its stock value highly sensitive to Bitcoin’s price fluctuations.
Coinbase Coinbase is the first US company to run a cryptocurrency trading platform listed on the Nasdaq exchange. The company’s value soared in 2021, driven by Bitcoin’s rising price. With a market cap of around $47 billion, Coinbase is a significant player in the crypto space, and its stock provides indirect exposure to the market.
Square Square, a digital payments company, has also made substantial investments in Bitcoin. In October 2020, the company invested 1% of its total assets ($50 million) in Bitcoin, a stake now worth over $220 million. Square’s involvement in the cryptocurrency market continues to grow, offering yet another way to gain exposure without buying tokens directly.
While Bitcoin is not the primary focus of these companies, it plays a significant role in their operations. As cryptocurrencies become more widely accepted, these companies stand to benefit, and so do their investors.
What to Expect from Crypto Stocks
Investing in crypto stocks can be a smart way to mitigate risk, but there are a few things you should consider before diving in.
First, never invest in a stock just because it has a connection to Bitcoin. Companies with weak fundamentals that don’t perform well in the crypto space will struggle to recover. On the other hand, strong companies with solid financials and experienced leadership are more likely to weather the storm, regardless of what happens in the cryptocurrency market.
Before investing, do your research. Is the company financially stable? Is it led by a competent team? Does it have a competitive advantage in its industry? Answering these questions will give you a better understanding of the company’s long-term potential.
And remember the old adage: “Don’t put all your eggs in one basket.” Diversifying your investments across different stocks can help you manage risk. If one of your investments doesn’t pan out, having a diverse portfolio will protect you from significant losses.
Cryptocurrency is one of the hottest trends in the investment world, but it’s also one of the riskiest. Fortunately, there are ways to invest in the crypto space that reduce risk without sacrificing potential returns.
Invest in Companies Involved in Cryptocurrency-Related Sectors
Another way to benefit from the growth of cryptocurrencies is by investing in companies that are involved in related sectors, such as blockchain technology.
PayPal is a well-known company that gives investors indirect exposure to Bitcoin through its digital payment services. Other companies, like Galaxy Digital and Riot Blockchain, are leaders in digital assets, cryptocurrency, and blockchain technology, offering financial services and investment management in this rapidly growing space.
Major tech giants like Google, IBM, Amazon, SAP, and Microsoft are also exploring or fully embracing blockchain technology in various aspects of their operations. By investing in these companies, you can tap into the potential of blockchain without directly dealing with cryptocurrencies.
Investing in companies that produce the specialized hardware used in cryptocurrency mining, such as GPUs (graphic processing units), is another strategy.
Nvidia Nvidia, a leading manufacturer of GPUs, has capitalized on the cryptocurrency boom by developing chips specifically designed for cryptocurrency mining. These GPUs are essential for the mining process, and as the demand for cryptocurrencies grows, so does the demand for Nvidia’s products.
Invest in Cryptocurrency-Linked Investment Funds
Finally, you can gain exposure to cryptocurrencies by investing in funds that track their performance.
Grayscale Bitcoin Trust The Grayscale Bitcoin Trust allows investors to gain exposure to Bitcoin’s price fluctuations without needing to buy and store the digital asset themselves. This fund is a convenient way to invest in Bitcoin, and it’s especially attractive to those who don’t want to deal with the complexities of digital wallets and private keys.
Osprey Funds Osprey Funds offers a low-cost, secure way to add Bitcoin to your investment portfolio. With the lowest management fee among US publicly listed Bitcoin funds, Osprey Funds provides an accessible entry point for investors. The trust can also be held in tax-advantaged accounts, making it a versatile option for those looking to include Bitcoin in their long-term investment strategy.
These investment funds offer a more hands-off approach to cryptocurrency investing, making them ideal for those who want exposure to the market without the hassle of buying and managing digital assets.
In conclusion, while cryptocurrency investing carries significant risks, there are several ways to reduce those risks while still capitalizing on the market’s potential. Whether you choose to invest in cryptocurrency-holding companies, related sectors, or specialized investment funds, you can find a strategy that aligns with your risk tolerance and financial goals.
