Eps 1537: Investing in cryptocurrencies
— The too lazy to register an account podcast
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Soham Webb
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Given how risky crypto is as an asset class, it is particularly important to avoid investing in cryptocurrencies with more money than you can afford to lose. A high-risk investment such as crypto should be just the tip of your investment pyramid.
There are ways to get exposure for your cryptocurrency portfolio without actually buying coins, but do so carefully, using all of the same caution you would use for any other speculative investment. For those who are interested in crypto, but do not want to buy and hold any actual cryptocurrencies, there are still ways to invest, though indirectly. Just as with crypto purchases, there are different options to turn cryptocurrency holdings into cash.
If you are looking to invest directly into cryptocurrencies, you could use cryptocurrency exchanges. You can purchase coins/tokens/units from any company that facilitates cryptocurrency trading, and can swap, buy, or sell to others who have crypto--not unlike trading stocks in Corporate America.
You exchange real money, such as dollars, for the purchase of coins or tokens for any given cryptocurrency. Most exchanges convert cryptocurrency to other cryptocurrencies; that is, you can buy another cryptocurrency with one crypto, but not with fiat currency, such as dollars. With most exchanges and brokerages, you can purchase fractional shares of cryptocurrency, which allows you to purchase a small amount of a high-priced token, such as Bitcoin or Ethereum, that would otherwise cost thousands of dollars to own. Once acquired, you can move your cryptocurrency somewhere else, such as to a cryptocurrency-to-crypto exchange.
You can purchase cryptocurrencies using crypto exchanges or via some brokerages. Once you fund an account with fiat money, you can place an order to buy cryptocurrency. To purchase cryptocurrencies, first, you will have to choose either a brokerage or cryptocurrency exchange. Once you have decided on your crypto broker or exchange, you can register for an account.
Once you have decided which exchange you would like to begin investing in cryptocurrencies, you can create an account with them. You can directly invest in bitcoin using one of the main crypto-exchanges like Coinbase or Binance. You can think of specialized cryptocurrency exchanges as brokerage firms that are designed exclusively for cryptocurrency. Pure-play cryptocurrency exchanges do not provide access to primary assets such as stocks and bonds, but typically they offer a far better selection of cryptocurrencies, as well as multiple crypto storage options within the platform.
Some crypto-focused funds invest in cryptos directly, while others invest in companies that are focused on cryptocurrencies, or derivative securities such as futures contracts. Private trusts holding cryptocurrencies let accredited investors purchase shares directly at market value, but anyone can purchase shares on the secondary market via brokerage accounts with traditional firms, such as the long-standing investment company Fidelity. Some new ETFs are available, featuring portfolios that offer indirect exposure to cryptocurrency and digital assets. Some crypto ETFs are trading on foreign markets, and a handful of domestic investment firms have filed applications to the SEC to operate crypto ETFs, but so far, none has been approved for trading on U.S. markets.
You can access cryptocurrency in several ways with Schwab--trusts, futures, and individual stocks--but currently, you cannot buy or sell individual cryptos directly on your Schwab account. As a reminder, today, there are typically three ways you can get exposure; 1) buying cryptocurrency direct from the exchange, 2) mutual funds, exchange-traded funds , and trusts that are granted, and 3) private placements.
The easiest way to get exposure to cryptocurrency investments without purchasing the cryptocurrency itself is by purchasing shares in companies that have a financial stake in the future of cryptos or in blockchain technology. If you prefer investing in companies that have products or services on the physical side of things, and are subject to regulatory supervision - but you still want to have some exposure to the cryptocurrency market - you could purchase shares in companies that utilize or possess cryptocurrency and the blockchains that run it. You could also invest in companies such as MicroStrategy Incorporated that have significant amounts of cryptocurrencies on their balance sheets. If you are a more savvy investor, you might be willing to swap out some of your existing cryptocurrency holdings for a different kind of cryptocurrency - say, bitcoin for ether.
The goal of any investment is to earn money for you, and crypto investments can help make your money work more than once. As with any investment, be sure you think about your investment goals and your current financial state before investing in cryptocurrencies, or in the individual companies with large shares in them. Before buying or selling cryptocurrency, understand the risks so that you can decide whether investing in it is a good idea for your personal finances. Cryptocurrency offers an impressive value proposition, as you can invest a small amount and reap enormous returns, but this does not mean that there are no risks involved.
Given Bitcoins volatility, and the potential for a cryptocurrency investments full value to vanish, investors who feel unable to deal with market swings may want to steer clear. This means the prices of cryptocurrency assets could swing at extreme levels, solely on market speculation.
Cryptocurrency miners and validators receive rewards in crypto, which they may choose to keep as an investment or trade in another coin. Some also let you finance purchases using a credit card, although that can be a risky move for a volatile asset such as cryptocurrency, since the interest costs could compound losses should the value of your investment drop.