SMALL CAP IDEAS: Where can UK investors find alternative exposure to bitcoin?

Those of you who watch the markets will know that the best performing asset class of 2023 was not stocks, real estate, bonds or gold, but bitcoin, the world’s first and largest cryptocurrency that emerged from the ashes of the global financial crisis of 2008. .

Bitcoin was originally conceived by pseudonymous developer Satoshi Nakamoto as a decentralized payment network without the need for an outside financial institution.

While bitcoin has failed to cement itself as a truly cross-border payment network — mainly due to prohibitive transaction fees and slow transaction speeds — the digital currency has been rebranded by its evangelists as a kind of inflation hedge, an alternative store of value with a finite circulating supply that cannot possibly become diluted.

So it comes as no surprise that bitcoin’s spot price is up more than 80 percent since the start of 2023, rising above $30,000 earlier this month for the first time in nine months.

Financial analysts and Twitter accounts will continue to question the credibility of so-called “digital gold,” but for the investor looking to diversify their portfolio without the tech hassle of managing crypto wallets and dodgy crypto exchanges, what’s the best way? gain fame?

For physical gold, the answer is simple: the London Stock Exchange is a global hub for small-cap gold exploration and production groups; Shanta gold, Mining in Caledonia, Greatland gold And Ariana Resources to name a few.

While much less developed, there is also a burgeoning bitcoin mining segment at the lower end of the London capital markets.

Bitcoin miners use long lines of specialized computers to solve complex equations that help the bitcoin network run, receiving newly minted bitcoins in return. This makes start-up costs high, but margins are usually also high once the operation gets going.

Argo Blockchain (12.75p), rescued by the sale of its Texas-based Helios bitcoin mining facility to Galaxy Digital, is the most established name (its 78 percent year-to-date performance perfectly underscores how bitcoin miners mirror bitcoin’s market price ).

There is also Quantum Blockchain (1.58p), the AIM-cited group interested in the arcane world of quantum computing.

Chief executive and Italian theoretical physicist Francesco Gardin is leading a research and development team trying to develop a new way to mine bitcoin using proprietary algorithms to give miners a competitive edge.

Bitcoin miners like Argo Blockchain, whose stocks have crashed from their pandemic peak, as the chart above shows, are just as risky as the cryptocurrency that supports their operations

These companies are just as risky as the cryptocurrency that underlies their operations, although there will soon be another route to bitcoin exposure.

The London Stock Exchange Group has just partnered with digital asset derivatives platform Global Futures and Options (GFO-X) to bring regulated bitcoin futures and options products to UK investors for the first time.

Paris-based clearing house LCH, which is owned by the London Stock Exchange Group, will facilitate the transactions through a new, segregated service called DigitalAssetClear.

GFO-X called it “the first steps to extract efficiencies from new technologies within a traditional market structure, aiming to deliver 24/7 trading to globally regulated digital asset markets over time.”

DigitalAssetClear will bring bitcoin derivatives products to the regulated market a year after the Financial Conduct Authority banned Binance, Coinbase and other trading platforms from offering them.

The partnership also offers a glimpse of Prime Minister Rishi Sunak’s plans to turn the UK into a “global crypto hub.”

All things considered, the options for UK retail investors seeking alternative exposure to bitcoin prices are objectively limited, albeit growing.

But if bitcoin prices maintain the rapid momentum we’ve seen in the last calendar year, chances are we’ll see more miners, innovators, and derivatives platforms coming to the public markets.

London could be particularly well placed to attract IPO interest if, as is widely believed, bitcoin is treated as a commodity akin to physical gold rather than a technology-adjacent security.

The other fundamental question everyone should ask themselves is: should I risk an investment?

The numerous controversies over the past 12 months, from the dramatic collapse of Three Arrows Capital and FTX to the more recent closures of crypto-focused US banks Signature and Silvergate, have tarnished crypto’s reputation as a respectable asset class, but bitcoin stands apart the Wild West, which is decentralized finance, NFTs and others.

Unlike gold, bitcoin has no intrinsic value and certainly doesn’t deliver returns like a security does, but that hasn’t stopped institutional adoption from plowing ahead, whether that’s commission-free trading offered by Fidelity or BlackRock that launches a private bitcoin trust to US customers.

The message remains as always, do your research, keep your mind sharp and opportunities will come.