If you’re looking to invest in cryptocurrencies, you can get a digital wallet, get up to speed on crypto, and buy bitcoins, ether, and other altcoins. However, there are indirect ways of investing in the crypto world, which may be cheaper and less risky. Here’s what you need to know if you want to invest in crypto without buying crypto.
Key Takeaways
- Although cryptocurrency has existed for some time, many consider it a relatively new investment with a major learning curve.
- Investing directly in cryptocurrencies can be challenging because of their volatility, and some investors prefer using more traditional investments.
- You can indirectly invest in crypto through funds and cryptocurrency-related stocks.
- Options include spot and futures-based crypto exchange-traded funds (ETFs).
What Is Indirect Crypto Investing?
You have options if you don’t want to open an account on a crypto exchange and buy cryptocurrencies. You can invest in cryptocurrency indirectly through traditional methods like stocks, mutual funds, and ETFs.
There are pros and cons to consider, including security, fees, and the risk of losses. When you buy cryptocurrency through third parties, those funds are going to earn their keep somehow, so you should consider any additional costs when deciding whether to buy crypto using an indirect method.
Here are some ways you can invest in crypto indirectly.
Crypto ETFs
When trying to get broad access to a particular asset class, the first port of call is usually ETFs. Investment funds can be found that track pretty much everything, from gold to the S&P 500. Unfortunately, with cryptocurrency, it’s a little more complicated.
After many years of denying spot cryptocurrency ETF applications, the Securities and Exchange Commission (SEC), under pressure from a 2023 D.C. Court of Appeals decision, approved the first 11 in January 2024. Previously, the regulator only gave the green light to ETFs that owned bitcoin futures contracts. Here are some:
- ProShares Bitcoin Strategy ETF (BITO)
- Valkyrie Bitcoin Strategy ETF (BTF)
- VanEck Bitcoin Strategy ETF (XBTF)
- Global X Blockchain & Bitcoin Strategy ETF (BITS)
Here are the first Bitcoin spot ETFs to be approved:
- ARK 21shares Bitcoin ETF (ARKB)
- Bitwise Bitcoin Trust (BITB)
- Fidelity Wise Origin Bitcoin Fund (FBTC)
- Franklin Bitcoin ETF (EZBC)
- Grayscale Bitcoin Trust (GBTC)
- Hashdex Bitcoin ETF (DEFI)
- Invesco Galaxy Bitcoin ETF (BTCO)
- Ishares Bitcoin Trust (IBIT)
- Valkyrie Bitcoin Fund (BRRR)
- Vaneck Bitcoin Trust (HODL)
- Wisdomtree Bitcoin Fund (BTCW)
There are catches to investing in crypto this way. First, futures contracts and ETF shares don’t necessarily deliver the same returns as their target assets. Second, ETFs for crypto can be complex and have fees that can eat into your potential returns.
Fees and underlying investments vary based on which fund you choose, so be sure to read the prospectus carefully to know what you’re getting.
Ethereum ETFs
Once spot Bitcoin ETFs were approved, calls became louder for Ethereum’s native token, ether, to get the same treatment. At present, Ethereum ETFs can only use futures contracts to track the price of ether rather than directly holding the digital currency, as traditional ETFs and now many Bitcoin ETFs can do.
Asset managers like VanEck, Grayscale, and Fidelity have filed for permission to launch Ethereum ETFs, which would give investors exposure to the world’s second-largest cryptocurrency via SEC-regulated funds. This would likely give Ethereum greater liquidity, improve price tracking, and lead to potentially lower fees than futures-based ETFs can offer. However, analysts are doubtful that the SEC will approve ETH ETFs soon.
The introduction of spot Bitcoin ETFs has raised hopes by crypto proponents that ETFs tracking other cryptocurrencies could soon be launched. However, regulators aren’t expected to bow down easily.
There are many reasons for the SEC’s hesitancy in approving spot Ethereum ETFs. One of them is the token’s ambiguous legal status. Some have argued it’s a commodity, while others say it counts as a security. For an Ether ETF to be approved, the SEC has to conclude that ether is a commodity. This might seem confusing since, generally, commodities fall under the rubric of the U.S. Commodity Futures Trading Commission. However, the fund itself would fall under the SEC since it would be traded on an exchange. Moreover, if ETH were ruled a security, it would need to come under far more SEC regulations and couldn’t trade at all, let alone through an ETF, until various transparency and other rules were followed.
Approval also hinges on applications showing there are enough investor protections against fraud and price manipulation. The fact that Ethereum permits staking is also an obstacle. This has led some to argue that ether tokens are far more like a security.
The consensus seems to be that spot ETH ETFs are far more likely in the long term than the short to medium term.
Other countries, including Canada, have been quicker to adopt spot crypto ETFs.
Crypto ETFs vs. Crypto ETPs
ETPs are financial instruments that track underlying securities, an index, or other financial products traded on exchanges. They can be purchased and sold throughout the trading day, like stocks. ETFs are the most common form of ETP. Other types of ETPs are exchange-traded notes, which specialize in debt securities, and exchange-traded commodities, which track the performance of commodities such as precious metals, agricultural products, and energy resources.
When the SEC approved spot bitcoin ETFs in January 2024, they were classified as ETPs under the Securities Act of 1933 rather than ETFs as defined by the Investment Company Act of 1940. Thus, the term ETP is a bit of a misnomer, though Investopedia has followed the more common usage in the investment community despite the SEC’s determination.
What are the implications? Besides having a less diversified portfolio, ETPs are governed by slightly different rules. Diversification and the type of assets held played a role in this designation. With bitcoin ETPs, physical spot exposure is given to a single commodity of cryptocurrency. Conventional funds like other ETFs and mutual funds must hold a more diverse range of assets. Registered under the Securities Act of 1933, ETPs are not subject to the same diversification and leverage restrictions as ETFs. This provides more flexibility in the types of assets they can hold, including cryptocurrencies.
While ETPs are subject to securities regulations, they do not offer the same level of investor protection as ETFs. Investors should exercise more caution and conduct thorough due diligence. The tax treatment of ETFs and ETPs can also differ. Investors should consult with tax professionals to understand the tax implications of investing in crypto ETPs. Lastly, the crypto market in which crypto ETPs are now players, since they have to trade crypto tokens, is not SEC or CFTC-regulated.
Cryptocurrency and Blockchain Stocks
Another way to invest in crypto without buying digital tokens is to purchase shares in companies that work in blockchain or hold cryptocurrency on their balance sheets.
Companies specializing in blockchain technology are often involved in crypto mining, software development, and other blockchain-based services. Notables include Riot Blockchain (RIOT), Canaan Inc. (CAN), HIVE Blockchain Technologies (HIVE), and Bitfarms (BITF). These companies have different risk and reward trade-offs than those directly invested in cryptocurrencies.
Alternatively, some companies hold cryptocurrencies directly. Coinbase (COIN) is one of the largest and best-known cryptocurrency exchanges.
Generally, as crypto prices decline, related stocks also struggle. This volatility is one of the risks inherent in this sector, a key point to remember when exposing your portfolio to crypto-related products. Given the rapid changes in cryptocurrency regulations and market moves—and as a general rule of thumb for investing—it’s prudent to diversify your portfolio to guard against crypto’s risks and consult a trusted financial professional to review your investment plans.
There are also ETFs that specifically invest in companies with links to cryptocurrencies.
Crypto and Your 401(k)
You can invest a part of your retirement funds in cryptocurrencies with minimal effort. In 2022, Fidelity announced that clients could add Bitcoin to its 401(k) accounts. Fidelity buys the coins and holds them in a digital asset account.
This was a major step toward bringing cryptocurrencies fully within the mainstream through traditional retirement investment portfolios. Ultimately, it’s often up to your employer to decide on the specific portfolio of funds available to you for your 401(k).
Credit Card Rewards
Credit card rewards are one final method to fill your cryptocurrency portfolio without opening your fiat wallet. Several cards allow you to earn crypto when you swipe, tap, dip, click, or do anything else to use a credit card for payment.
Examples of cryptocurrency credit cards include the BlockFi Rewards Visa Signature card, Gemini Credit Card, and Upgrade Bitcoin Rewards Visa card. The Crypto.com exchange and Coinbase also offer rewards cards.
Some cards, like the Venmo credit card, offer flexible redemption options, including cryptocurrency. When you earn crypto as a credit card reward, you invest in crypto without buying crypto.
What Is Cryptocurrency?
A cryptocurrency is a digital currency created using cryptographic techniques that enable people to buy, sell, or trade them securely while controlling the creation of new units. Unlike fiat currencies, a cryptocurrency is not controlled or maintained by any central authority, such as a central bank.
How Can Beginners Start Investing in Cryptocurrency?
Knowing how to invest in crypto can be intimidating, given the complexity of blockchain technology, the hype surrounding it, and the many available currencies. The first step is to get up to speed on the fundamentals of cryptocurrencies, how blockchain technology underpins them, the kind of crypto wallet you will need, and the differences among cryptocurrencies like bitcoin, ether, and altcoins. Reputable resources such as Investopedia and courses offered by universities—many freely available online—can be invaluable. Platforms like Coinbase or Binance might be a good choice for your initial steps into the market since they have accessible interfaces and resources to guide you. Once in, stay updated on crypto news and regulatory developments.
How Can I Get Crypto Without Spending Money?
A few companies offer crypto in exchange for a service, such as referring someone to a program, completing a survey, completing captcha puzzles, or watching advertisements. A handful of credit cards also reward spending with cryptocurrency.
The Bottom Line
Investing in cryptocurrency directly requires getting set up on an exchange and finding ways to store your digital coins safely. It can also mean potentially having a lot of money tied up in a volatile asset.
Fortunately, there are alternatives. You can invest indirectly in cryptocurrencies through ETFs that own future contracts tied to currency prices, bitcoin ETFs that securitize bitcoin holdings, or by purchasing shares in companies involved in cryptocurrency mining, software development, and other services. Alternatively, you can consider a credit card with cryptocurrency rewards or see if your employer offers this asset class through your 401(k).
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.