Where can UK investors find alternative exposure to bitcoin?

Those of you with an eye on the markets will know that the best performing asset class in 2023 has not been stocks, real estate, bonds or gold, but bitcoin, the world’s first and largest cryptocurrency born from the ashes of the 2008 global financial crisis.

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

While bitcoin has failed to cement itself as a true cross-border payment network – primarily due to prohibitive transaction fees and sluggish transaction speeds – the digital currency has been rebranded by its evangelists as a kind of inflation hedge, an alternative store of value with a limited circulating supply that is impossible to dilute.

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

Financial analysts and Twitter handles will continue to lock horns over the credibility of the so-called “digital gold,” but for investors looking to diversify their portfolio without the technical hassles of managing crypto wallets and unreliable crypto exchanges, what’s the best way to gain exposure?

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

Although far less developed, there is also a burgeoning bitcoin mining segment at the lower end of London’s capital markets.

Bitcoin miners use long rows of specialized computers to solve complex equations that help the bitcoin network run, receiving newly minted bitcoins in return. This makes the start-up costs high, but the margins also tend to be high when operations start.

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

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

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

These companies are as risky as the cryptocurrency that underpins their business, although there will soon be another avenue for bitcoin exposure.

The London Stock Exchange Group has just teamed up 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 ever.

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

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

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

The partnership also provides a glimpse into 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, although growing.

But if bitcoin prices maintain the rapid momentum we’ve seen over the past calendar year, there’s a good chance we’ll see more miners, innovators, and derivatives platforms hit the public markets.

London may be particularly well-placed to draw IPO interest if, as is generally accepted to be the case, bitcoin is treated as a commodity on a par with physical gold rather than a technology-adjacent security.

The other fundamental question every person must ask themselves is: Should I risk an investment?

The many controversies of the past 12 months, from the dramatic collapses 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. from the wild west that is decentralized finance, NFTs and others.

Unlike gold, bitcoin has no intrinsic value, and it certainly doesn’t return the way a security does, but that hasn’t stopped institutional adoption from plowing ahead, whether it’s commission-free trading offered by Fidelity or BlackRock launching a private bitcoin -trust to American customers.

The message remains as always, do your research, keep your wits sharp and there will be opportunities.