How to own cryptocurrency without buying coins

Bitcoin is making headlines yet again in the recent bull run, breaking USD$50K again.

If we compared it to the 100+ years old stock market, cryptocurrency can be considered to still be in its infancy. Some investors may be interested in getting their hands on some bitcoins but the friction of access has probably deterred them to do so – you can’t simply buy Bitcoin via a normal stock broker as it isn’t trading on a typical stock exchange.

But there’re now ways for you to own cryptocurrencies without having to navigate cryptocurrency exchanges. I share two ways in this article.

---

tl;dr

Two ways to own cryptocurrency without buying coins:

1. Buy stocks of listed companies with cryptocurrencies
2. Buy ETFs that hold companies involved in cryptocurrency

Choose your preferred method based on your own financial situation and goals.

---

Let’s dive into the details:

1) Buy stocks that hold cryptocurrencies

Since MicroStrategy had publicly announced its shift from cash to bitcoin in Aug 2020, more institutions have been pouring funds into bitcoins and cryptocurrencies. These moves will help to increase the legitimacy of Bitcoin. I believe this trend will continue, even as governments figure out how to regulate this new industry.

These companies provide an easy way for us to gain exposure to cryptocurrencies.

Of course, this isn’t the most elegant way to invest as you would also have to own their underlying businesses too. But well, you have to give up something for convenience.

Here are 5 companies that allow you to own cryptocurrencies without needing to buy the coins:

#1 MicroStrategy (NASDAQ:MSTR)

MicroStrategy provides business intelligence software to companies. Its CEO, Michael Saylor, has publicly advocated for bitcoin. He has decided to keep MicroStrategy’s reserves in Bitcoin rather than in cash. That is a very bold move and signalled his strong belief in bitcoin being a store of value.

Below is a screenshot of MicroStrategy’s assets as taken from their 2020 Annual Report. The company held $1,054 million worth of “Digital assets” and the cash and cash equivalents are now only $59 million. Compare this to the $457 million cash they had on 31 Dec 2019. MicroStrategy’s bitcoins are now almost 2x of their cash in the company now.

If you head on to MicroStrategy’s website, you will see digital real estate dedicated to bitcoin. You can also see the updated press release on their bitcoin holdings:

“As of February 8, 2021, we held approximately 71,079 bitcoin that were acquired at an aggregate purchase price of $1.145 billion and an average purchase price of approximately $16,109 per bitcoin, inclusive of fees and expenses.”

I am quite certain that the rise in MicroStrategy share price is mainly driven by the increase in bitcoin prices.

This is because the revenue for the first 9 months of FY20 declined and it went into a loss (profitable in the previous FY). Revenue growth is one of the key drivers of such software companies and a revenue decline is likely to get its share price punished. But MicroStrategy share price shot up instead.

Below is a chart of MicroStrategy (in blue) vs Bitcoin (in orange) prices from Apr 2020 to Oct 2021. You can see that after the initial spike in price due to the announcement that MS is shifting to Bitcoin, their price movements were pretty correlated. This is proven true with the recent Bitcoin bull run as well.

Hence, MicroStrategy is more like a proxy bet for bitcoin and that is overshadowing its underlying software business.

#2 Tesla (NASDAQ:TSLA)

Tesla, Inc. specialises in electric cars, battery products, solar and clean energy, you should have heard of its founder and CEO, Elon Musk.

Tesla manufactures and retails a range of products, this means that they would need to keep a huge portion of liquid cash for various transactions. At the point of writing, it no longer accepts purchases in Bitcoins due to “climate concerns”.

In early 2021, they announced that they’ll be investing a part of that cash in Bitcoin in order to maximise returns:

In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy.

Tesla Annual Report 2020

As of their 2Q21, they reported to have $1,311 million worth of Bitcoin:

Do note that Tesla will only adjust the value of Bitcoin on their balance sheet upon sale of the digital assets, hence the value reported above is closer to their buying cost rather than the actual market value. It was reported in Jun 2021 that they had sold about 10% of their Bitcoin holdings.

Despite their holding in Bitcoin, Tesla’s share price is does not seem to correlate as closely to Bitcoins. Their underlying business (and the clout of their CEO) may play a greater influence on their share price.

#3 Square (NASDAQ:SQ)

Square Inc is a payments solution that allows its users which are usually merchants, to accept card payments. It also operates Cash App, a P2P payment service that allowed users to transact with Bitcoin since Jan 2018. Jack Dorsey, its co-founder and CEO has also talked about plans to launch DeFi services in the future.

Of the 5 companies I’ve listed, Square is the only one that not only owns Bitcoin, but also generates revenue from Bitcoin via its Cash App bitcoin transaction. So, Square’s business and Bitcoin investment would be the most aligned out of all these companies.

Now let’s look at their balance sheet. Square has made multiple purchases of Bitcoin since it first announced a $50M Bitcoin purchase in Oct 2020. As of Jun 2021, it holds $154.8M worth of Bitcoin:

So, does it give you good exposure to cryptocurrencies? Let’s look at its share price performance:

As of Jun 2021, they reported a cash and cash equivalent of $4.5B. Ignoring the rest of their assets, this would mean that their Bitcoin holdings are only a small fraction (~3%) of their total worth. It is likely that the changes in Bitcoin prices will not affect Square’s valuation significantly. Hence, Square’s share price does not correlate strongly with the movement of Bitcoin.

#4 Galaxy Digital (TSE:GLXY)

Canadian-listed Galaxy Digital aims to bridge financial institutions to the crypto world. It is no surprise that they should own bitcoin in order to walk the talk.

The company has almost half of its assets in “digital assets”. But I am not sure what cryptocurrencies were held because there was no breakdown in the statements. In a separate announcement, the company reported having held $176.4 million worth of bitcoins as of 30 Sep 2020. That translated to about 16,651 bitcoins. Similar to Ruffer, this investment is held on behalf of clients and does not belong to the shareholders of Galaxy Digital.

Galaxy Digital share price continues to outperform that of bitcoin price in the past 6 months by more than 2 times! I suspect this could be due to its overall business theme in cryptocurrency and blockchain, which is hot right now and investors see more possibilities for the company as adoption increases.

#5 Ruffer Investment Company (LON:RICA)

Ruffer Investment Company is a fund manager listed on the London Stock Exchange.

Ruffer Investment surprised the world when it announced a $745 million investment into bitcoins in Nov 2020. It is a surprise because Ruffer has been a conventional fund manager investing in conventional assets such as stocks and bonds. Cryptocurrencies are an anti-thesis to traditional finance and it is hard to agree when someone is trying to take your lunch away.

Ruffer explained that the investment acts as insurance against the massive money printing and devaluation of the dollar.

Their $745 million investment was equivalent to about 45,000 bitcoins. But to be clear, this investment is held on behalf of clients and doesn’t belong to the shareholders of Ruffer. This is different from MicroStrategy which invested its own cash reserve. Shareholders of Ruffer only stand to gain from performance fees collected by the fund management service, if any, should bitcoin continue to break new highs.

You can see from the chart below that Ruffer’s share price didn’t move much after its bitcoin investment announcement, despite Bitcoin’s volatility.

This list isn’t exhaustive, but I hope I’ve shared some interesting stocks that could give you exposure to bitcoins and cryptocurrencies. There are many others like Coinbase (NASDAQ:COIN), Riot Blockchain (NASDAQ:RIOT) and even Meitu (HK:1357) just to name a few.

The cryptocurrency space moves very quickly. If you’re looking for more companies to research, do refer to CoinGecko’s list of Bitcoin Holdings by Public Companies.

2) Buy ETFs with cryptocurrency focused thesis

ETFs are investment funds that track a basket of assets. You should have heard of popular ones like the STI ETF which tracks the Straits Times Index.

Good news, there are now ETFs focusing on the cryptocurrency space. There are two main categories:

i) Blockchain ETFs

A blockchain ETF invests in listed companies that are involved with blockchain technology. This means you do not need to force yourself to invest in any of the companies listed above. Instead, you look for an ETF with an investment thesis you like and let the manager do the stock-picking for you.

Here’re the top 3 blockchain ETFs by market cap:

Amplify Transformational Data Sharing ETF (BLOK)

BLOK is managed by Amplify ETFs and looks to generate returns by actively investing in companies involved in the development and utilisation of blockchain technologies.

At the point of writing (Oct 2021), BLOK trades on the NYSE Arca and has:

• market cap of $1.72B,
• expense ratio of 0.71%,
• grown 136.15% since inception in Jan 2018,
• 42 holdings.

The top 10 holdings include MicroStrategy, Square, Coinbase, Nvidia, Paypal, Hive Blockchain Technologies, and more.

Siren ETF Trust Siren Nasdaq NexGen Economy ETF (BLCN)

BLCN is managed by SRN Advisors and tracks the NASDAQ Blockchain Economy Index that measures returns of companies involved in the use, support and development of blockchain technology.

At the point of writing (Oct 2021), BLCN trades on NASDAQ and has:

• market cap of $0.28B,
• expense ratio of 0.68%,
• grown 92.88% since inception in Jan 2018,
• 62 holdings.

The top 10 holdings include Silvergate, MicroStrategy, IBM, JP Morgan, Alibaba and more.

NFirst Trust Indxx Innovative Transaction & Process ETF (LEGR)

LEGR is managed by First Trust Portfolios and tracks the performance of the Indxx Blockchain Index which tracks companies that use, develop and are positioned to benefit from blockchain technology.

At the point of writing (Oct 2021), LEGR trades on NASDAQ and has:

• market cap of $0.14B,
• expense ratio of 0.65%,
• grown 11.30% since inception in Jan 2018,
• 101 holdings.

The top 10 holdings include Oracle, Salesforce, IBM, Intel, Microsoft and more.

Blockchain ETFs give you exposure to cryptocurrencies through listed companies that are involved in the technology. This means they are still a rather indirect way to own cryptocurrency.

Note: Index funds tend to be low cost because they passively follow the index. However, do note that ETFs with specific themes may be actively managed and if so, could come with higher expense ratio as the manager might be required to do more work in order to deliver returns.

So, why not invest in ETFs that hold a basket of cryptocurrency instead?

That’s where crypto ETFs come in.

ii) Crypto ETFs

You may have heard of Grayscale Bitcoin Trust or Osprey Bitcoin Trust that hold cryptocurrencies. Unfortunately, these private trusts are only opened to accredited investors and are not an option for most retail investors like us.

ETF managers have been applying to launch their Crypto ETFs for over 8 years. Due to tight regulations, most crypto ETFs have not been approved yet.

But this might be able to change. These are the latest from Bloomberg’s optimistic report:

Do note that these ETFs if approved, will hold Bitcoin futures instead of the actual cryptocurrencies. But I think many more ETFs will come if this batch is successful.

[UPDATE: as of 15th Oct 2021, ProShares and Valkyrie Bitcoin Strategy ETFs have been approved]

ProShares Bitcoin Strategy ETF has made its debut on NYSE under the ticker ‘BITO’ on Tuesday, 19 Oct 2021, and jumped 4.8% on closing.

Should you buy the Bitcoin futures ETF?

Although the launch of the ProShares Bitcoin Strategy ETF is a good sign for cryptocurrency’s growth and will likely be the enabler for future spot ETFs, it may not be a good idea to invest in it. Here’s why.

Bitcoin futures ETF doesn’t track the price of Bitcoin directly. Instead, it tracks the CME bitcoin futures which speculates on the future price of Bitcoin. Why add more uncertainty to your portfolio when you can simply own stocks of companies that move in line with Bitcoin’s growth instead?

Which is the best cryptocurrency proxy?

Although cryptocurrencies have been gaining traction, it remains in its infancy. If you are not comfortable buying bitcoin or cryptocurrencies on your own, I’ve shared two main ways you can gain exposure:

1. buy stocks that own bitcoin or cryptocurrency
2. invest in blockchain ETFs (or explore crypto ETFs once they are available)

The best cryptocurrency proxy for you depends on your risk appetite, amount of capital and how much research you are confident of doing.

Use stocks if…

If you’re a confident stock picker, seek out listed companies like MicroStrategy which holds a significant amount of Bitcoin. You’ll want to study their underlying business and consider if their cryptocurrency holdings actually contribute to their share price. Remember, the aim of this article is to find exposure to cryptocurrencies through these stocks.

IMO, MicroStrategy remains the strongest proxy for bitcoin as its price movements seem to closely correspond to that of Bitcoin.

And, companies like Ruffer Investments do not provide good exposure. You can already see that their historical performance is not affected by their cryptocurrency holdings.

Use ETFs if…

If the above sounds too complicated, then a blockchain ETF might be a better option for you. Do take note of the expense ratio, performance and find out how the ETF is managed.

We are still in the early days. But watch this space as more companies would put bitcoins and cryptocurrencies in their balance sheets. Crypto ETFs may be coming to us soon too! DDYDD!

If you prefer to learn about crypto and invest in them as an alternative investment…

Join AK at his upcoming webinar where you’ll learn the fundamentals of cryptocurrency in 2 hours.