Stocks — Passive Exposure to Cryptocurrency

Block, Inc. (SQ), which started as Square and is led by former Twitter CEO Jack Dorsey, has made significant inroads into the Bitcoin space, with Dorsey being a prominent advocate for the cryptocurrency. One of Block’s initiatives, Spiral, aims to establish Bitcoin as a mainstream currency. Stay informed about their progress through the Quarterly Update Q1 2023 and their blog.

In my view, Block remains a wise choice among tech stocks due to several factors:

• Their focus extends beyond just cryptocurrency; Square offers payroll services, invoicing, and point-of-sale solutions for small to medium-sized enterprises. You may have seen their sleek mobile payment systems. Additionally, Cash App facilitates global money transfers, stock purchases, and Bitcoin transactions, while Tidal marks Block’s entry into the music streaming sector.
• Currently, SQ’s share price has decreased by over 65% from its peak of approximately $275, which coincided with all-time highs in the crypto market. As digital payment adoption, especially with cryptocurrencies, continues to grow, early investors in Block are likely to reap significant benefits.

Coinbase (COIN) is the first major crypto exchange to go public. It’s likely that other exchanges like Binance or Kraken will follow suit. For some, investing in Coinbase can provide exposure to the crypto market without holding Bitcoin or altcoins directly, particularly for those who prefer trading shares.

However, it’s important to note that Coinbase operates as a centralized exchange, which contradicts the fundamental principle of Bitcoin and other decentralized cryptocurrencies: users should have control over their funds without relying on a central authority. Therefore, I have placed Coinbase last on this list, although I believe it has potential for medium- to long-term growth as more individuals enter the crypto space.

Investors should also keep an eye on the SEC’s determinations regarding XRP, Ethereum, and other altcoins, as these rulings will significantly influence altcoin markets and exchanges like Coinbase.

Note: Some cryptocurrencies that claim decentralization may not be entirely so.

Stocks — Companies Involved in Crypto Mining

Publicly listed Bitcoin mining companies, such as CleanSpark (CLSK) and Riot Platforms (RIOT), are noteworthy examples. While there are many Bitcoin mining companies, I will focus on those that are publicly traded.

I firmly believe Bitcoin will maintain its relevance for decades to come. As such, both publicly traded and private mining operations will likely expand and prosper from anticipated increases in Bitcoin prices.

Pension and Retirement Funds

Fidelity Investments, a leading financial services provider with $3.9 trillion in assets under management as of December 2022, allows clients to allocate up to 20% of their 401(k) holdings to Bitcoin. This is a fantastic opportunity for clients seeking exposure to the top cryptocurrency. While some may find the 20% cap restrictive, I believe it is a prudent measure to prevent inexperienced investors from overly relying on cryptocurrency.

Conversely, I prefer funds that allow at least a small percentage (e.g., 10%) of total holdings to be invested in Bitcoin or blockchain companies. In 2023, numerous opportunities exist for those interested in this relatively new asset class.

It’s worth noting that investing in Bitcoin through a 401(k) carries more risk than more stable investment options typically found in retirement funds. However, many funds already offer riskier choices, making Bitcoin a plausible option when compared to emerging small-cap stocks.

Note: Please consult a registered financial advisor to determine what suits you best, considering your current life stage and tolerance for volatility.

In addition to a 401(k), many Americans utilize individual retirement accounts (IRAs) to fund their retirement. For those interested, I found a helpful Forbes article outlining the pros and cons of a Bitcoin IRA.

After a tumultuous year for crypto in 2022, some senators have urged Fidelity to reassess its Bitcoin policy for 401(k) plans. They suggest that funds should allow retail investors to allocate a small portion of their holdings to cryptocurrencies, even as part of a broader high-growth or emerging technologies option.

Essentially, giving individuals choices and providing unbiased education can empower them to make informed decisions about including Bitcoin or altcoins in their portfolios.

Exchange-Traded Funds (ETFs), Index Funds, and Mutual Funds

An ETF comprises a collection of financial assets such as stocks, bonds, and commodities. Unlike mutual funds, ETFs are designed for easy trading on stock exchanges. This collection allows for risk diversification instead of investing in individual stocks.

Various types of ETFs exist, including those focused on crypto. A Bitcoin Spot ETF would enable investors to gain real-time exposure to Bitcoin without directly holding it in a wallet. Conversely, a Bitcoin Futures ETF involves purchasing contracts at a predetermined price for a future date, with contracts typically expiring monthly.

While these are simplified descriptions, the emphasis here is on crypto and blockchain rather than the complexities of these funds. Personally, I prefer direct ownership of Bitcoin for the flexibility it offers.

For a comprehensive overview of Bitcoin spot and futures ETFs, I recommend checking out additional resources.

Ark Invest, led by Cathie Wood, is well-known for its tech-focused ETFs that cover various sectors, including fintech and crypto. The ARK Fintech Innovation ETF (ARKF) and ARK Next Generation Internet ETF (ARKW) are two of their funds with significant Bitcoin exposure, featuring companies like Block and Coinbase in their top holdings.

VanEck also provides exchange-traded notes (ETNs) that are completely backed by Bitcoin.

Grayscale offers a blockchain-focused ETF named the Grayscale Future of Finance ETF (GFOF), which includes several previously mentioned companies in its diverse portfolio. With over $23 billion in crypto assets under management, Grayscale has been a significant player in the crypto investment space for years.

Grayscale is currently engaged in a lawsuit with the SEC after its request to convert its Bitcoin Trust into a Spot ETF was denied. Attempts to launch a Bitcoin spot ETF date back to 2017, yet the SEC has yet to approve any such offerings.

Before concluding on ETFs, I acknowledge that this discussion has primarily centered around the USA, overlooking other countries that have embraced Bitcoin Spot ETFs, including Australia.

Why Consider Indirect Exposure?

Ultimately, the appeal of indirect exposure to cryptocurrency can be summarized through three main factors:

• Convenience: Avoid the complexities of setting up a crypto wallet and managing private keys, frequent firmware updates, and additional KYC requirements.
• Diversification: This approach allows for partial exposure to the volatility of the crypto market while providing a safety net through diversified investments.
• Mainstream Adoption: While crypto can be complicated for many, the options and services discussed can enhance overall crypto acceptance, even if they contradict the core tenets of Bitcoin and decentralized currencies.

It's important to remember that not everyone is inclined to manage their own private keys, even though many individuals under 50 should have the technical ability to do so. This reluctance can stem from a preference for traditional banking methods over self-custody systems.

Understanding that people have different priorities and varying levels of technological proficiency is crucial.

I believe in providing choices, as long as companies act transparently, maintain the amount of Bitcoin they claim to hold for clients, and conduct thorough due diligence when incorporating Bitcoin into investment portfolios. However, numerous financial institutions have acted irresponsibly, particularly banks, indicating that we still have a long way to go before retail investors feel confident in entrusting their crypto holdings to financial services.

Concluding Thoughts

While I considered including centralized exchanges in this discussion, the focus of this article is on individuals who prefer not to manage specific cryptocurrencies directly. Instead, they rely on companies to handle the work for them.

Additionally, working with a qualified financial manager who specializes in cryptocurrencies can offer a blend of direct and indirect exposure, depending on how investments are allocated.

This approach alleviates the typical burdens associated with cryptocurrency investing, such as finding an exchange and setting up wallets.

What have I overlooked? I welcome your feedback and suggestions.

If you found this article useful, consider following my Medium page for regular updates on crypto assets, blockchain technology, and more. Also, check out my publication, Crypto Insights AU.

Thank you for your support.

Disclaimers

N.B. None of this constitutes financial or legal advice. I am neither a financial advisor nor a lawyer. You are solely responsible for your crypto investments and how you interpret the information in this article.

The views expressed herein are my own and may not represent those of any listed entities.

Please conduct thorough research before investing in cryptocurrencies, staking, NFTs, or any related products.

Statistics and prices mentioned are accurate as of the writing date and based on the provided sources.

Among the stocks discussed, I hold positions in COIN, SQ, and CLSK, which comprise 5–7% of my overall portfolio. Their performance will have minimal impact on my total holdings if they were to fail.

I have received no compensation from any companies or entities mentioned in this article.