Despite the recent meltdown in crypto valuations over 2018, investors across the globe continue to open accounts at exchanges at a rapid pace. Coinbase, a major crypto exchange in the U.S., boasts 25 million accounts, more than twice what you might find at either Charles Schwab or Fidelity. What’s more, Coinbase announced last October that it is adding 25,000 new accounts per day, and this activity relates to just one exchange. There are more than 250 crypto exchanges spread across the planet and many more to come online soon.
Obviously, investors are beginning to take cryptocurrencies seriously, but in their haste to get into the game, so to speak, are they exploring the many different ways to invest in this space? Cryptos are high risk, at the top of the risk pyramid, which means that greater care and attention are necessary, if you are to record consistent gains over time in this arena. Due diligence is a must. Awareness, education, and training, i.e., investing hours on your demo system perfecting your trading or investing style, are givens. You must approach this market in a disciplined fashion or risk becoming an early casualty.
The typical investor is eager and obsessed with “FOMO”, fear of missing out, just one of many anagrams that populate the crypto ecosphere. Another one you need to know is “HODL”, a crude re-do of the word “Hold”, but in crypto parlance, a “Hodler” is someone that holds a position in cryptocurrencies for the long haul. They do not pretend to be traders, but they feel so strongly about the future of digital currencies that they have no desire to part with their coins. The smart ones did sell when cryptos peaked in early 2018. Over the course of the year, many programs lost 80% and more, but indications are that 2019 will be a re-birth of enthusiasm and support from many sources.
There are actually five distinct strategies for getting “into this game”. Yes, most everyone rushes to an exchange, opens an account, deposits some cash, and then they are off to the races. For want of a better name, this method is called the “Direct Strategy”. There are, however, four other approaches that you might employ, depending upon your appetite for risk and degree of comfort with price volatility, a constant in crypto-land.
This approach is the simplest way to get started. If you chose Coinbase as your exchange, you might be disappointed, since they only support a handful of tokens, the leaders of the pack. Exchanges differentiate themselves by their number of offerings, platform ease-of-use, fees and charges, and customer service. Exchanges have also been frequent targets of professional hacking gangs, resulting in billions in dollar losses that investors have had to absorb. Be sure to investigate crypto “wallets”, a safer way to control your keys. Two bits of advice: 1) Never think your exchange is like your bank, and 2) “Not your keys, not your crypto.” National compensation plans or insurance are rare. Look for exchanges with a good track record for preventing security breaches. The good ones segregate 98% of your coins from operations and secure them in “cold storage” wallets, until needed, but the message is that you are your first line of defense.
If you lean to the technical side and wish to profit from your “Inner Geek”, then you might enjoy being a miner. The profession has gotten extremely competitive, but you can compute your way to earning fees and coin rewards. Traditional mining requires a lot of computing power and more importantly, electricity. There are newer methods that relate to Masrernodes and Staking, far too technical a discussion for this piece, but there are YouTube videos that will offer more explanation. You will see terms like “Proof-of-Work”, for the traditional approach, and “Proof-of-Stake”, for newer coin offerings.
If you are a miner, you will be paid in cryptos that you can “hodl” or sell on the open market for cash, if the coin is listed on an exchange. The vast majority Of Initial Coin Offerings are not. You can get paid for your services in cryptos, too, but be sure that it is legal in your jurisdiction. There may also be tax consequences to deal with, depending upon how your local taxing authority treats crypto transactions from a tax perspective. Once again, check with local tax professionals to prevent bad surprises down the road.
Traditional indirect investing products have already begun to appear in the crypto universe. This strategy could be termed “indirect”, in that you are participating in the futures market and not really purchasing a crypto asset directly. The major players in the U.S. are the Chicago Mercantile Exchange (CME) and the Chicago Board of Exchange (CBOE). The industry is also anxiously waiting for “Bakkt” to start operations in early 2019. It is owned by the parent of the New York Stock Exchange and will service institutional clients in the futures market. Europe’s equivalent is the Swiss Bitcoin ETP, HODL. There is also a stock called Bitcoin Investment Trust (GBTC) by Grayscale, as near as you can get to an ETF these days. The company owns Bitcoins, but they charge a hefty premium to buy in. Lastly, the SEC has turned down a dozen applications for a Bitcoin ETF for a variety or reasons, but insiders believe that the dam may break in 2019. A Bitcoin ETF could offer access to cryptos without the worries of an exchange.
It has often been said that the only ones to benefit during a gold rush were the people that sold pick axes and other prospecting tools of the trade. The same analogy can be applied to the crypto industry to a degree. Two stock companies that have been big in the support space for miners have been Nvidia and AMD. These entities manufacture GPU equipment and hardware used in the mining profession. As the crypto ecosphere expands, more stock companies will benefit from their participation in the industry and offer indirect ways to profit from the growing crypto revolution.
There is more than one way to “skin a cat” and profit from the cryptocurrency phenomenon. Most investors will choose the direct approach, but there are other ways to consider that will only grow in importance over time. A large factor in your choice will be your personal tolerance level for risk, but whatever your choice, do your homework and feel comfortable with how you approach this market.