If you’re wondering how to invest in cryptocurrency, this article will provide you with six different solutions. Ranging from directly holding crypto to gaining indirect exposure through other means.
We’ll highlight the pros and cons of each approach and describe which type of investor might prefer to invest in cryptocurrency using each option.
This article provides education on the methods investors are using to tap into a growing cryptocurrency asset class, but it is not financial advice. Please remember that crypto assets are highly volatile and are not generally advisable as an investment for long term growth. As an editorial policy, we don’t promote bitcoin as a good investment.
The FCA warns that investors should only invest money in cryptocurrency that they could afford to lose.
How to invest in cryptocurrency: direct versus indirect
We’ll now introduce each investment method quickly before analysing these options in more detail.
We’ll group investment options into two groups: direct and indirect. Direct investment involves you owning real cryptocurrency as an individual. Because you simply hold the real asset, direct investments will produce a 1:1 return in proportion to changes in the price of the underlying coin.
Indirect investments provide a return that is linked to the performance of cryptocurrencies but it may not be highly correlated. Examples include units of collective investment funds which in turn buy crypto assets or ownership of companies whose share price is likely to be strongly correlated with the performance of cryptocurrencies.
Overview of how to invest in cryptocurrency:
- Directly hold crypto assets via a cryptocurrency exchange or platform
- Obtain new coins via an Initial Coin Offering (ICO)
- Indirectly hold via a physical Exchange Traded Fund (ETF)
- Gain indirectly exposure through equity investments in crypto miners
- Diversify through an active mutual fund that invests in crypto businesses
- Own a stake in listed crypto exchanges
Not permitted for UK investors: (at the date of writing)
- Synthetic crypto ETF
- Crypto CFDs
1. Cryptocurrency exchanges
The most straightforward way to invest in cryptocurrency is to buy some. This will involve you paying for the coins in your local currency, e.g. Pound Sterling, and in return your account will receive cryptocurrency.
The institutions which facilitate the process of ‘buying in’ to cryptocurrencies are known as cryptocurrency exchanges.
Here is a shortlist of the top ten crypto exchanges by size and relevance. This is not investment advice and we have not performed due diligence on every exchange.
- Binance – https://binance.com
- Coinbase – https://www.coinbase.com
- Huobi Global – https://www.huobi.com/en-us
- Crypto.com – https://crypto.com
- KuCoin – https://www.kucoin.com
- FTX – https://ftx.com
- Gate.io – https://www.gate.io
- Kraken – https://www.kraken.com/en-gb
- Bitfinex – https://www.bitfinex.com
- Binance US – https://www.binance.us/en/home
Each exchange listed above reports daily trading volumes of $500m+. This means that they have high liquidity, and prices shouldn’t be moved by even large orders. At the date of writing, Binance reports daily trading volumes of $22bn.
Picking a cryptocurrency exchange
When selecting a cryptocurrency exchange, size and reputation matter.
When I personally invest in cryptocurrencies, I use Coinbase. I favour Coinbase over Binance because Coinbase has embraced financial regulation whereas Binance is structured in a way that allows it to evade local rules.
Coinbase is a US-based, NASDAQ-listed company. As a US public company, it complies with Sarbanes-Oxley which is a stringent approach to financial processes and controls.
Despite its market dominance, Binance has no physical headquarters (although it operates out of offices based around the world). To its credit, it has recently announced that it will eventually set up a formal legal presence in many countries however this hasn’t taken effect at the time of writing.
I am attracted to a financial services provider who doesn’t shy away from the demanding rules and regulations of being listed in the US.
How to open an account with a cryptocurrency exchange
Opening an account with an exchange is similar to opening an account with a good UK stockbroker.
The exchange will need some basic information from you such as your identity, your address, and will either draw funds into the account via a debit card or a bank payment.
Depending on how the exchange is regulated, the exchange may need to perform some ‘Know Your Customer’ checks to verify your identity. This is a regulatory requirement to prevent money launders from utilising their exchange.
How to buy cryptocurrency using a crypto exchange
Once you deposit money that you can afford to lose, you’ll be able to place an order to buy a cryptocurrency. Deciding on the best cryptocurrencies to invest in is the hard part, but this guide won’t cover this decision.
Below is an order slip from Coinbase to illustrate how simple it can be to invest in cryptocurrency.
This order slip is filled out to purchase Bitcoin (BTC) with an investment of £1,000.
I needed to select the currency pair (in this case BTC-GBP as I am swapping Pound Sterling for Bitcoin), then the trade type (Market is selected, which means the trade will execute at the live market price), and the value of GBP that I will pay.
The slip calculates the Coinbase fee which will be applied to the transaction (£5 on an investment of £1,000 = 0.5%) and how much Bitcoin I will receive (0.02).
2. Initial Coin Offerings
An Initial Coin Offering, or ICO for short, is the crypto equivalent of an Initial Public Offering in the stock market. This represents a purchase of the original population of coins available for a currency, or a purchase of coins at the point where a cryptocurrency is first admitted to crypto exchanges and therefore can be freely traded with other cryptocurrencies (or fiat currency).
ICOs are high-risk endeavours because the coins launched through an ICO are usually at the very beginning of their journey and there is little evidence that investors can use to determine whether a coin will be popular. Many coins offered are little more than scams, used to take money from investors keen to ride the next coin ‘to the moon’. Bitcoin.com reported that just under half of 2017 ICOs had failed by 2018.
A comparison could be drawn between ICOs and Venture Capital / Private Equity. Both have a high risk of failure, but with a small chance of each investment striking gold. This comparison is perhaps unfair to the best UK VCTs and EIS schemes because of the level of due diligence which goes into private market equity transactions. The best cryptocurrency books will help you understand which factors and metrics you can use to improve your research ability.
In contrast, anyone can invest in an ICO because cryptocurrencies are an unregulated space. This should underline the point about only investing money that you are fully prepared to lose.
3. Bitcoin Exchange-Traded Funds (ETFs)
There are currently no Bitcoin ETFs that are permitted for UK investors. The best Bitcoin ETFs which are active in the US use derivatives rather than ‘real’ cryptocurrencies to provide their return, and the UK financial regulators dislike this structure.
Hope is on the way in the shape of the VanEck Bitcoin ETF which is seeking approval from the SEC to launch in the US. Expectations are low that the application will be approved, as the regulator has already twice deferred the decision and it does not seem keen on opening the floodgates to cryptocurrency ETFs.
For now, Bitcoin ETFs are a fantasy on the horizon of UK investors’ radars thanks to the regulatory purgatory that these funds find themselves in.
4. Equity investments in crypto miners
Similar to how commodity investors buy shares in mining companies to indirectly tap into commodity price movements, cryptocurrency investors can invest in crypto mining companies to enjoy a crypto-linked return.
Miners are awarded units of cryptocurrency as a reward for providing the computational firepower that cryptocurrency networks need to process and validate their transactions.
Thanks to the dramatic appreciation in the value of the crypto coins awarded, crypto miners have scaled up their businesses accordingly. As a result, they were blamed for the shortage of computer chips in 2021, thanks to their massive capital investment in huge farms of processors.
Examples of listed crypto miners include:
- SBI Holdings Inc
- Marathon Digital Holdings
- Riot Blockchain Inc
- GMO Internet Inc
- Northern Data AG
- Hive Blockchain Technologies
- Galaxy Digital Holdings Ltd
- Argo Blockchain PLC
We have not performed due diligence on these companies and their inclusion in this list is not a recommendation to invest.
Argo Blockchain PLC is the only crypto miner listed on the London Stock Exchange. Its computer facilities are based in North America. Mining is an energy-intensive business, therefore Argo uses cheaper hydroelectric power. It claims that this helps it to maintain a relative competitive advantage over miners using grid resources.
The advantage of owning crypto-related equities is that it’s possible for these businesses to still turn a profit during periods of stagnation in the cryptocurrency price. After all, their business models are usually service orientated, and therefore while a higher crypto price may boost margins, they may be capable of turning a profit even after a crypto crash.
The disadvantage of crypto-linked equities is that only a limited selection of crypto businesses are publicly traded, therefore it may be difficult to achieve a satisfactory level of diversification. One tip is to consider including graphics card manufacturers AMD and Nvidia with a crypto-miner portfolio, as their chip manufacturing businesses are now tightly linked to the crypto industry.
5. Crypto mutual funds
This leads us to crypto mutual funds which manage an equity portfolio of businesses in the crypto or blockchain space. Here are some examples, both US-based:
First Trust Indxx Innovative Transaction & Process ETF (visit provider website)
This ETF invests at least 80% of net assets in “crypto industry companies” and “digital economy companies,” with at least half of fund assets allocated to the former.
Bitwise Crypto Industry Innovators ETF (visit provider website)
This index fund tracks the performance of the Bitwise Crypto Innovators 30 Index, which includes prominent blockchain and crypto-orientated businesses.
6. Crypto exchanges
Finally, you could invest in the cryptocurrency exchanges themselves. Cryptocurrencies are heavily traded by day traders and other investors. Although hodling (i.e. holding for the long term) is a popular strategy, many traders attempt to generate a higher return than the underlying market by buying and selling at the right moments for maximum gain.
A listed cryptocurrency exchange like Coinbase (Ticker: COIN) will naturally benefit from trading volumes and any increase in the value of cryptocurrencies. Its trading fees are generally based upon the value of trades, therefore the more crypto is traded, the more revenues the business will enjoy.
Coinbase was listed through an IPO in early 2021 and while its share price performance hasn’t been positive since launch, it still represents an effective way to gain indirect exposure to the health of the cryptocurrency economy.
Summary: How to invest in cryptocurrency
I hope you’ve gained some valuable insights into how to invest in cryptocurrency from this article.
While direct investment is the simplest way to invest in cryptocurrency and will provide your portfolio with an asset class that will be highly correlated with the rises and falls in crypto markets, there are other opportunities that can be accessed from your stockbroker account and which provide some interesting opportunity for diversification.