Can You Invest in Crypto Without Owning Any Crypto?

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Many people are wondering whether they should invest in cryptocurrencies without owning them themselves. The answer is yes. There are several ways around buying cryptocurrency, such as investing through a broker or using margin trading. Before we answer this question in detail, let us try to understand what indirect crypto investing is.

What Is Indirect Crypto Investing?

To put it simply, indirect crypto investing is when you purchase an asset that will help increase the value of your investment portfolio. It can be anything from stocks and bonds to real estate and commodities. For example, if you want to invest in gold, you could buy physical bullion or a company that mines gold. With indirect investing, you don’t have to own the actual asset, only the underlying commodity (gold) does.

A futures contract for gold provides a means to obtain exposure to the price movement of gold without actually owning any physical gold. So, indirect investments work by providing access to assets that are tied to another asset that you already own. If the price of gold rises, then the value of the contracts increases proportionally with gold’s value. This way, even though you don’t own gold directly, you still reap the benefits of its rise or fall in the value of the underlying asset.

This is the same scenario that you would apply to crypto. There are several ways to invest in cryptocurrencies without actually owning them and a lot of advantages come with that. We explore them below.

How Does Indirect Crypto Investing Work?

There are many ways to indirectly invest in cryptocurrencies, including:

• Buying Bitcoin Futures Contracts
• Margin Trading
• Leverage Trading
• Cryptocurrency Exchanges
• Staking Coins
• ICOs

In order to learn about these methods, let us first look at how direct investing works. Direct investing involves purchasing the actual cryptocurrency like bitcoin, ether, litecoin, etc. If you do not own any of those currencies yourself, then you cannot use them to buy other assets. That’s why direct investing is often referred to as “owning the coin.”

Indirect investing, on the other hand, allows investors to participate in the success of a project without having to hold the actual currency itself. All they need to do is purchase an asset that has some kind of connection to cryptocurrencies. Indirect crypto investing includes:

1.      Buying Bitcoin Future Contracts

Bitcoin future contracts were created so that institutional investors could get involved in the crypto market without owning bitcoins themselves.

You can purchase BTC futures through two different types of exchanges: centralized and decentralized. A centralized exchange operates under the same rules as a stock exchange where shares are traded on the floor of the exchange.

On the other hand, decentralized exchanges act similar to over-the-counter markets where trades occur online. These transactions are peer-to-peer, meaning there is no middleman who manages or controls the trade.

With BTC futures, traders can make short term bets on Bitcoin prices without giving up their ownership of the actual coin. They are considered derivative products because they are based on the price movements of Bitcoin. In fact, the futures market is one of the biggest derivatives markets today.

2.      Margin Trading

Margin trading is a method used to leverage money in relation to traditional financial instruments. When someone buys something, they are given credit against that item. If the person sells the item later, then he/she gets back more than his initial payment. In this case, margin trading applies to the buying and selling of Bitcoin.

For example, if someone wants to buy $100 worth of Bitcoin, but only has $80 in cash, then it may be possible to borrow $20 from someone else (called borrowing) and then sell the $20 worth of Bitcoin on the open market. The buyer would pay him/herself back ($80), and the seller would receive $80 worth of Bitcoin. When the transaction is complete, the seller now owns $100 worth of Bitcoin.

This process is repeated many times until the trader accumulates enough Bitcoins to cover all the borrowed money. Once they reach that point, it is called being leveraged.

Leveraging can also apply to traditional securities (such as stocks). For example, a small scale investor might invest $10,000 into a large company. He/She can earn interest on the investment for years while hoping the value of the company will rise. This makes sense when long-term returns outweigh immediate profits. However, in a volatile market, these gains can disappear quickly. So, sometimes investors may want to borrow money from another party to gain access to the upside potential.

3.      Crypto Margins

Another way to leverage your money in relation to Bitcoin is by using crypto margins. With this type of account, you lend out part of your portfolio to someone else who uses part of theirs. You both share the risk, but each person earns a profit for himself/herself. Crypto margin accounts come with several advantages. One advantage is that the funds are not tied to any particular asset. As such, you can use them to speculate on anything. It doesn’t matter what kind of asset it is, whether its a single cryptocurrency or an index fund.

Another benefit of crypto margin trading is that it allows people to hedge their portfolios. Hiding your assets behind an intermediary like a broker makes it difficult to monitor how much money you have invested. Crypto margin accounts allow users to keep track of their finances in real time.

The final benefit comes down to safety. Because crypto margin accounts don’t require brokers, they are safer than regular brokerage accounts. Brokerages often hold thousands of dollars worth of clients’ money. That means there is a larger target on which hackers can attack. Fortunately, crypto margin accounts aren’t subject to these same risks.

There are two main types of crypto margin: fiat and crypto. Fiat margin accounts let you trade directly between cryptocurrencies and fiat currencies.

On the other hand, crypto margin accounts are designed to work with cryptocurrencies. They include those run by platforms like Coinbase and Gemini.

The most important factor to consider before opening a crypto margin account is the exchange you select. Choose wisely so that you don’t lose your entire margin balance!

4.      Staking Coins

One thing that separates cryptocurrencies from traditional investments is that some coins are actually staked instead of owned outright. Staking coins ensure that the network continues to function smoothly. There are different ways to stake coins depending on the coin. Some require deposits, while others do not. Here’s a quick breakdown of the three most common methods:

         i.            Deposit Based

These types of wallets make it easy to deposit new coins. All you need to do is sign up and send some money. Coinbases Wallet, Ledger Nano X, Mycelium, etc.

       ii.            Proof Of Stake

In proof of stake, miners compete to add blocks to the blockchain. Each block contains transactions. To win, miners must create a valid chain of blocks by adding transactions first. The miner with the longest chain wins. Proof of stake requires little to no involvement of the user, making it very profitable.

      iii.            Delegated Proof Of Stake

With delegated proof of stake, users vote to add blocks to the chain. Voting occurs via PoS protocols like Casper. Users receive rewards for participating. Delegated proof of stake has been gaining traction since the creation of Ethereum. However, the technology remains nascent.

5.      ICOs

Initial coin offerings (ICO) are another method of raising capital quickly. Instead of selling shares, companies launch tokens during ICO events. Tokens are usually sold at a discount compared to their value later. If a company successfully raises enough funds, they will release an actual product. ICOs have the potential to be extremely lucrative. However, investors should proceed with caution when entering into an ICO.

Is It Profitable to Invest in Crypto Indirectly?

If you invest USD 1,000 in Bitcoin or Ethereum, your investment could go as high as USD 20,000 if the price continues to rise. But investing $1,000 directly is much riskier. You stand to lose all of your initial investment if the market crashes. This is why it makes sense to put your savings into a cryptocurrency wallet where the money sits safely until you decide what to do with it.

Once you decide to buy, you purchase through one of many exchanges, such as Binance or Kraken. Then, you spend the cryptocurrency on goods and services. In this way, you indirectly invest in the altcoin without risking any of your own money.

Conclusion

There are several pros and cons to investing in cryptocurrencies. For example, there may be fewer regulations than in traditional markets but you can also lose all of your invested capital instantly. On top of that, there isn’t always a clear path to profit or loss. Most people who invest in cryptos expect them to increase in value. Others would rather see them fall. Either way, it’s still possible to profit from these assets.