How to gain exposure to crypto without buying it

Cryptocurrencies are everywhere: in social media, sports, music, celebrity promotions and real estate. You can’t go a day without hearing how bitcoin, ethereum and other digital coins are seeping into yet another aspect of our lives. Even legacy financial institutions, long averse to digital assets, are climbing onto the crypto bandwagon.

Cryptocurrencies are now undeniably mainstream. Couple that with their spectacular rally last year—the crypto market hit a US$3 trillion market cap in November 2021—and it’s little wonder that more and more retail investors are exploring how to get into crypto.

The easiest way to bet on cryptocurrencies is to buy them on a crypto trading platform, but many investors are still wary of taking the direct ownership route. Some avoid digital coins due to lack of knowledge, some are nervous about cryptos’ wild price swings, and others prefer the familiarity of more traditional investments such as stocks, bonds and ETFs. 

Direct ownership is no longer the only way to invest in cryptocurrency. Here are a few options you can consider for indirect exposure, including ETFs, investing in crypto technology, crypto-related stocks and more.

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Investing in crypto ETFs

For risk-averse investors, exchange-traded funds (ETFs) may be the way to go. There are now several crypto ETFs in Canada and the U.S. that track the price of cryptocurrencies such as bitcoin and ethereum. These funds are seen as less risky than buying and holding crypto directly. You’ll have to pay management fees in exchange for this greater peace of mind.

There are two types of crypto ETFs: those that invest directly in cryptocurrencies, which debuted in Canada in early 2021, and futures-based ETFs, which debuted in the U.S. last October.

ETFs are versatile investment vehicles that trade like stocks. They provide the “ability to easily get in and out of a position [like a stock] without having a crypto exchange account,” says Chris Chen, a certified financial planner and chief investment officer at Insight Financial Strategists. 

On the flip side, though, there’s the danger that the ability to trade in and out easily will increase the speculative character of digital coins, which some conservative investors may find too risky.  

While ETFs protect investors from dramatic price fluctuations, they aren’t without risks. “Unlike direct ownership, indirect exposure often involves some component of tracking errors, as well as investments made in non-crypto assets,” cautions Devesh Mamtani, chief market strategist at Century Financial.

U.S. crypto ETFs, for instance, park some of their funds with U.S. Treasury and money market instruments. “As such, these ETFs might not reflect the actual price trend during sharp volatile moves or times of market distress,” he notes.

Investing in crypto technology

Another indirect way to gain cryptocurrency exposure is by investing in companies involved in crypto-related technology, such as blockchain, crypto mining or cross-border transactions.

Notable companies in this space include Riot Blockchain (RIOT), Marathon Digital (MARA), MicroStrategy (MSTR) and Hut 8 Mining (HUT). The performance of most of these stocks, in terms of value, closely correlates with underlying trends in cryptocurrency markets. “One of the biggest rewards for gaining exposure through such stocks is their lower price value when compared to large-value cryptos such as bitcoin and ethereum,” says Mamtani.

Investors can also consider publicly traded companies whose technology is related to blockchain or coin trading. In addition, financial payments companies such as PayPal and Block (formerly Square), which was founded by Twitter’s co-founder and former chief executive officer, Jack Dorsey, allow users to trade select cryptocurrencies on their platforms.

Alternatively, “you could invest in an ETF that invests in blockchain, one of the key underlying technologies that is powering crypto,” says Chen. These ETFs provide exposure to multiple companies that use, invest in, develop or benefit from blockchain technology. Examples include First Trust Indxx Innovative Transaction and Process ETF (LEGR), Siren Nasdaq NexGen Economy ETF (BLCN) and Amplify Transformational Data Sharing ETF (BLOK).

Good ol’ trusts

It’s also possible to gain crypto exposure through trust funds. The U.S.-domiciled Grayscale XRP Trust, Grayscale Bitcoin Trust and Osprey Bitcoin Trust are a few examples of crypto-themed trusts that tie your portfolio to digital assets without direct ownership.

However, these trusts require a minimum investment ranging from US$25,000 to US$50,000, which some investors may find prohibitive.

Further, there is the risk of dislocation between the trust’s performance and crypto prices. “There could be an instance where the actual stock value or the fund value trades at a discount to underlying crypto,” says Mamtani.

The disconnect between the fund’s value and the price of the underlying crypto it holds is likely due to a lack of institutional investor interest or because a trust has unlocked shares, says Mamtani.

When a trust unlocks shares, it provides investors the opportunity to liquidate holdings in the secondary market, which creates potential selling pressure and drags the fund’s value relative to the underlying crypto.

Canadians can buy and sell crypto on CoinSmart*
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Crypto exposure through stocks

Another strategy is to invest in companies that hold bitcoin on their balance sheet, says Douglas Boneparth, certified financial planner and president of Bone Fide Wealth. 

Tech companies like MicroStrategy, and to a lesser extent Tesla and Block, regularly purchase bitcoin, thus effectively tethering their profits to the fate of the cryptocurrency. By investing in these companies, investors can hitch their portfolios to the crypto market.

“The risk is that you’re not getting enough crypto exposure or that the actual company you’re investing in dictates the performance of the stock, not bitcoin,” says Boneparth.

A better way to tap into the crypto market is by investing in the stocks of companies that have cryptocurrency-related services or hold coins themselves. One such company is CoinSmart, which recently became publicly traded. The Canadian-built crypto trading platform debuted on the NEO exchange on Nov. 2, 2021 (ticker symbol SMRT), along with a dual listing on the Frankfurt Stock Exchange (ticker symbol IIR). NEO is a next-generation Canadian stock exchange based in Toronto and is home to more than 100 fintech companies.

Given how closely CoinSmart’s performance and profits are tied to the cryptocurrency market, shares of SMRT provide investors an appealing alternative to buying digital currencies. CoinSmart is one of only a handful of Canadian-based crypto asset trading platforms that are fully regulated and publicly traded.

“Going public is the culmination of years of hard work trying to make cryptocurrency accessible for everyone,” says Justin Hartzman, CEO of CoinSmart.

The listing is a pivotal moment for CoinSmart as the company looks to further accelerate growth in Canada’s digital assets market and expand its geographic footprint. CoinSmart already has a presence in 40 countries. “Being registered in multiple jurisdictions and striving for a global footprint, we are poised to be the venue of choice for a full suite of crypto-related products and beyond,” says Hartzman.

SMRT represents an attractive investment opportunity for investors looking to capture the high-growth potential of the rapidly expanding cryptocurrency market without having to worry about holding digital assets or keeping them safe from cybertheft.

With its regulatory-first approach, CoinSmart continues to work hand-in-hand with its regulatory partners in various jurisdictions. For example, CoinSmart has restricted dealer registration with the Ontario Securities Commission and is registered as a money services business with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Since 2018, CoinSmart has provided an intuitive, easy-to-use platform with helpful features for both novice and experience crypto traders. It offers a selection of the most popular cryptocurrencies, including bitcoin, ethereum, litecoin, stellar, USD coin, dogecoin, cardano and more. CoinSmart’s features include a simple fiat-to-crypto exchange facility, robust security and 24/7 online client support.

Investors keen to gain crypto exposure without having to deal with the challenges of digital asset ownership can now have the best of both worlds by investing in shares of SMRT through their usual investment channels, including discount brokerage platforms and full-service dealers.

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