What's the best way to invest in bitcoin, ethereum and other cryptocurrencies?

City of London office blocks
City of London office blocks

Is it time to invest in bitcoin? This is the question many investors are asking. Since the beginning of the year, the price of bitcoin had surged from around $1,000 to nearly $20,000, outpacing even the best-performing UK stocks.

But is there still time to invest, and if there is, how can you make money from bitcoin and its cryptocurrency peers?

The logic behind cryptocurrencies

The bull case for bitcoin, ethereum, and other cryptocurrencies is that the amount of these currencies in issue is limited. The critical difference between cryptocurrency and conventional money is that it is decentralised. No single institution controls the bitcoin network; it's also entirely anonymous and completely transparent.

Bitcoin stores details of every single transaction that ever happened in the network in a large version of a general ledger called the blockchain -- a technology that many banks, tech groups, and even city councils are testing around the world. Put simply, the more people use these networks, the more the demand for cryptocurrencies, which leads to higher prices.

However, there are over 1,000 cryptocurrencies in existence today, and while bitcoin is the largest, like all new technologies, there's no guarantee that this will be the one that eventually survives.

How to invest in crypto

Buying bitcoin or ethereum is one way to invest in cryptocurrencies, but this might not be the best decision for investors who don't understand the space. A better way to invest might be to buy companies that are benefitting from the crypto boom.

By investing in the companies that are part of the boom, not the currencies themselves, you can hedge your bets. Even if bitcoin fails, you will still profit if the technology takes off.

The companies that are benefitting from the bitcoin boom are also profiting from other tech trends like Microsoft, which is a giant in the tech space and is better known for its operating systems. Microsoft is not a direct bitcoin play, but you can be sure that the company is looking at ways to profit and use the tech. Even if bitcoin does not take off, you can be sure that Microsoft will have some part in the next tech boom, whatever that may be.

A more direct play on the bitcoin price might be US micro-chip producer Nvidia. It makes high-performance graphics processors, which are being used by cryptocurrency mining operations. Thanks to this demand, the company's profits have surged over the past 12 months pushing its shares higher by around 95%.

For UK investors, the best way to invest in the crypto boom might be through the Polar Capital Technology Trust. This investment trust invests in a broad range of tech companies. The top four holdings are Alphabet (Google), Apple, Microsoft and Facebook, four of the most significant tech companies in the world. With such a broad play on the tech sector, Foolish investors can put their money to work without having to worry about a capital loss. Over the past decade, the Polar Capital Trust has returned just over 580%.

Want to achieve financial independence?

Buying bitcoin might not help you achieve financial independence, but by following just a few simple rules, and investing sensibly, you can achieve this goal.

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Rupert Hargreaves owns no shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Apple, Facebook, and Nvidia. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.