It’s Not Just Bitcoin. How To Invest In The Crypto Economy.
Shopping online at Grass Hill Alpacas farm, you can buy a pair of socks in various sizes, colors, and styles. You can also choose how to pay: credit card, PayPal, or Bitcoin. Accepting the world’s leading cryptocurrency is now business as usual, says Grass Hill owner Jim Forster. “We do 5% to 10% of our sales in Bitcoin,” he says.
Buying socks, or anything, with Bitcoin has its drawbacks. The price could change in minutes due to Bitcoin’s volatility, and the transaction could trigger capital gains. But it’s one of many ways that crypto and e-commerce are tying the knot. And it’s an example of how the crypto economy is angling into the mainstream—signs of which are popping up everywhere and creating investment opportunities.
In the payments arena, Visa (ticker: V) and Mastercard (MA) are linking credit and debit cards to crypto brokerages, while PayPal Holdings (PYPL) and Block (SQ), formerly Square, weave crypto deeper into their apps. The mayors of Miami and New York are promoting their cities as crypto havens saying they’re taking some of their pay in Bitcoin and generating a little tax revenue from “CityCoins.” JPMorgan Chase (JPM), America’s largest bank, with $3.3 trillion in assets, recently opened a virtual lounge to promote its blockchain division, Onyx, in an online world called Decentraland.
The bedrock of this activity is blockchain technology—ledgers of transactions maintained by a decentralized computer network. Peering into the future—no one knows how far—is a next-generation internet, known as Web3. Blockchains, the thinking goes, could be the plumbing for a decentralized web, with cryptos as its currencies and digital assets.
The other buzzy term for Web3 is metaverse, extending the idea to online games, marketplaces, social-media sites, and workspaces. “The metaverse will likely infiltrate every sector in some way in the coming years,” J.P. Morgan said in a recent report. According to crypto fund sponsor Grayscale Investments, the metaverse will be a “trillion-dollar opportunity” in annual revenue for companies, including advertising, social media, and videogames.
If this all sounds like a Silicon Valley marketing pitch, that’s because it is. Cryptocurrencies and blockchain technology may indeed transform everything from banking to buying sneakers—the latter already in the works at Nike (NKE) and Adidas (ADDYY) (see “What’s Ahead for NFTs—and What Investors Need to Know.”). But blockchains and cryptos are still fringe technologies. And financial markets have become much less forgiving of tech investments that probably won’t generate meaningful profits for years.
Cryptos’ volatility shouldn’t be taken lightly. Russia’s invasion of Ukraine triggered a 10% drop in the crypto market over a 24-hour period, taking it down to $1.6 trillion in total value. Bitcoin fell in line with the broader market, while smaller-cap tokens slid much further, with ether, Avalanche, Dogecoin, and Solana all declining more than 15%.Read More in Guide to Wealth
Crypto proponents have long claimed that Bitcoin should be viewed as an alternative asset, dubbing it “digital gold.” The idea is that it may act as an independent source of returns in a portfolio, with a low correlation to stocks and bonds. Its other rationale, according to advocates, is as a hedge against inflation and erosion of purchasing power in sovereign currencies—ideally taking market share from gold as an investment store of value.
However, that story is under siege. Bitcoin and the broader crypto market have become more closely linked to equities, particularly tech stocks. The undertow pressuring tech—including tighter monetary policies from the Federal Reserve—has pulled down Bitcoin and other cryptos even more. The crypto market has lost nearly half its value since peaking last November at $2.96 trillion, performing far worse than the Nasdaq Composite. Gold, meanwhile, has been rising steadily, as investors snap up the metal amid the geopolitical unrest in Europe and concerns about inflation. The SPDR Gold Shares exchange-traded fund (GLD) is up 5% this year, sharply outperforming stocks, bonds, and Bitcoin.
Before investing in crypto, investors should also consider its sensitivity to government intervention and the risks of a cyberattack. China and other countries view Bitcoin as a threat to their sovereign currencies and financial controls. Beijing has largely banned crypto trading and commercial activity, and India and Russia are imposing more rules to monitor transactions. Washington is also developing rules to tax crypto transactions and supervise the industry more closely, including more law-enforcement tools to monitor transactions. Crypto brokerages, markets, and exchanges are also vulnerable to hacks and cyberattacks. If you lose digital assets to theft, there may be scant recourse to recover them.
None of this means that the crypto economy isn’t real, or that cryptos like Bitcoin won’t survive and thrive. Many advisors recommend exposure to blockchain-related companies, including software, hardware, payments, and e-commerce. Exposure to crypto, whether through the coins, stocks, or funds, is also gaining popularity among institutional investors and advisors. According to a survey by Fidelity, a third of these large-scale U.S. Investors owned digital assets or related investments last year, up from 22% in 2019. Bitwise Asset Management, a crypto fund sponsor, says that about 16% of advisors put their clients in crypto investments last year, up from 9% in 2020.
Two years ago, advisor Frank Marzano believed that as a fiduciary, he had no business making crypto recommendations to clients. “But we now feel we have a fiduciary responsibility to have solutions in this space,” says Marzano, head of GM Advisory Group, which oversees $5.6 billion in assets. He estimates that he has guided 75% of his clients on investments in tokens, stocks, exchange-traded funds, and private crypto investments.
Still, the crypto hype machine can make it hard to separate real economic value from pipe dreams. Advisors who generally praise the technology urge investors not to get carried away. “I’m a very big proponent of Bitcoin and digital assets,” says Ric Edelman, founder of the Digital Assets Council of Financial Professionals. “But you should invest for the right reasons—because you believe the technology will be adopted globally—and you’re willing to hold on for as long as that takes.” He generally recommends a 1% position in tokens, along with crypto-related stocks, as long-term holdings.
Here are a few ways to invest, with varying levels of risk:Betting on Tokens
About 60% of the crypto market’s $1.6 trillion value now sits in Bitcoin and ether. Below them reside the major alt-coins, including Cardano, Solana, Avalanche, and Binance—each a separate blockchain with its own uses for trading, payments, and decentralized finance, or DeFi, applications. Other large-cap tokens include stablecoins Tether and USDC, which function like digital dollars, and the meme tokens Doge and Shiba Inu. Nonfungible tokens, or NFTs, are another category, used for swapping everything from digital art to videogame assets.
As the oldest and largest crypto, Bitcoin has gained the most institutional traction, including a futures market, ETFs, and custody services from major firms like Fidelity and Coinbase Global (COIN). A few large companies, notably Tesla (TSLA) and Block, hold it as a corporate treasury asset. El Salvador has turned it into legal tender, albeit problematically, affecting the country’s financial stability.
What Bitcoin is worth hinges on a key premise: that it has a future as “digital gold.” The argument is that because Bitcoin has a fixed supply of tokens, which dribble out at a slow, predictable rate, it could help investors hedge against an erosion of purchasing power in traditional currencies. Gold has played that role historically, but Bitcoin will sit alongside it, proponents predict, especially as it becomes more widely adopted in countries with unstable currencies and governments.
“It’s going to be harder for Bitcoin to go up 100 times…But the other side is that you’re taking on less risk.”— Chris Kuiper, Fidelity Digital Assets
Bitcoin’s Achilles’ heel is instability. Its annual volatility is about four times that of gold, according to J.P. Morgan. That volatility prevents it from taking off as a reserve asset or transaction currency. If its volatility recedes with more widespread adoption, it could appeal more to institutional investors. Bitcoin now has a 20% share of the global store of value market, with gold capturing the rest, according to Goldman Sachs analyst Zach Pandl. If Bitcoin gets to 50% in a few years, he estimates, it would more than double in price to $100,000 a coin.
There are several holes in that argument. One is that Bitcoin’s volatility has been rising, rather than receding. Bitcoin also faces hostile governments, notably in China and other countries that view it as a threat to their financial oversight. And the carbon toll from mining—greater than Norway’s annual electricity consumption—poses environmental and energy-security risks.
Even if it holds its value, investors shouldn’t expect huge price gains. “It’s going to be harder for Bitcoin to go up 100 times, but the other side is that you’re taking on less risk because it has become more institutionalized,” says Chris Kuiper, head of research at Fidelity Digital Assets.
Crypto companies urge investors not to lose faith during Bitcoin’s periodic crashes, insisting that its real value will take time to materialize: “If you’re going to invest in Bitcoin, a short time horizon is four years, a middle time horizon is 10 years, and the right time horizon is forever,” says Bill Barhydt, CEO of Abra, a crypto lending and trading company.
While Bitcoin may be the least risky crypto, ether is a close second. The pitch is that the Ethereum blockchain has taken off as a base “layer 1” network for thousands of other cryptos, stablecoins, and DeFi applications. It’s also the underlying blockchain for most NFTs, which are priced in ether.
The hitch with Ethereum is that it is congested and costly. Mining fees are far too high for small-dollar transactions. A network upgrade is in the works, aiming to switch it from a proof-of-work to proof-of-stake method for validating the authenticity of transactions. The new system is supposed to slash fees, speed up processing, and reduce the supply inflation of ether tokens. But it’s unclear when the upgrade, scheduled for this year, will go live. It may also make the network less resilient to hacks and could centralize control in the hands of a few large operators.
For long-term investors, owning coins directly with a major exchange may be far more cost-effective than going through a fund or individual equity. While you’ll pay commissions to transact, the tokens don’t have carrying costs on an exchange. Stocks and ETFs have benefits for advisors—they can slide right into a traditional portfolio and be managed alongside other investments. But they aren’t as efficient for performance. The ProShares Bitcoin Strategy ETF (BITO), for instance, holds Bitcoin futures and charges a 0.95% expense ratio. It’s down 37% since it launched last October, against a 35% decline in Bitcoin.
Two options for baskets of cryptos are the Bitwise 10 Crypto Index fund (BITW) and Grayscale Digital Large Cap fund (GDLC). They both trade over-the-counter, similar to closed-end funds. Their share prices can diverge sharply from their underlying net asset value; both are now at deep discounts—18% for the Bitwise fund and 20% for Grayscale. Both have 2.5% annual expense ratios.Crypto Exchanges and Miners
Exchanges and miners are closely tied to crypto demand, taking cues mainly from Bitcoin. But as equities, they can be valued on metrics like price/earnings ratios and future cash flows. Many of these stocks have fallen sharply, pushing valuations to more-reasonable levels.
Coinbase is the biggest pure play on trading. The company is building out institutional services, adding more tokens to its exchange, developing an NFT marketplace, and linking accounts to Visa and Mastercard. The shares trade around $172, down from a high of $430. Wall Street is looking for $6.90 in adjusted earnings per share this year, giving the stock a P/E ratio of 25 times.
“We like Coinbase as a way to get exposure to the crypto economy,” says J.P. Morgan analyst Ken Worthington. “Its revenue is going to be tied to transactions of crypto assets—primarily tokens—but over time, there will be ancillary revenue streams,” he says. Worthington cut his target on the stock to $345 this past week, reflecting ongoing weakness in Bitcoin, but maintained his Overweight rating.
A major threat to Coinbase is industrywide pressure on trading fees. Rival exchanges like Robinhood Markets (HOOD) offer commission-free trading in several major cryptos. As more brokerages enter the field, fees are expected to fall. Bulls argue that Coinbase will be able to compensate for lower trading fees with new revenue streams like NFTs and institutional services.
Bitcoin miners get paid in crypto in exchange for their computing work to add transactions to the network. Their main operating cost is electricity to run the machines, but if Bitcoin prices top their energy costs, the business can be quite profitable. Marathon Digital Holdings (MARA), Riot Blockchain (RIOT), and Core Scientific (CORZ) are three of the largest miners. All should have production costs that are well below recent prices for the coin around $36,000, according to D.A. Davidson analyst Christopher Brendler. He rates them all Buys with price targets at least 50% above recent levels.
The stocks trade like derivatives of Bitcoin. If that token falls further into a bear market, the miners will probably dive, too. Also unclear is the resiliency of their business model; Bitcoin mining rewards will diminish as the network doles out fewer coins per block, starting in 2024, according to preset software rules. Miners also have to upgrade their machines in a network processing arms race, adding to their costs. Profits could suffer as a result.Side Bets on Blockchain and Crypto
Plenty of other companies are capturing crypto revenue. While most aren’t nearly as exposed as miners or exchanges, they should benefit if the broader crypto economy keeps growing. Stocks in this camp include chip maker Nvidia (NVDA), futures exchange CME Group (CME), and payments apps PayPal and Block.
Visa and Mastercard also aim to be players—both are building out card services with brokerages and banks, aiming to play a role in processing transactions and helping convert tokens to traditional currencies. “What can we do with Bitcoin? We can be the bridge between the crypto economy and fiat economy,” Visa Vice Chairman Vasant Prabhu recently told Barron’s.
Silvergate Capital (SI) is building a major crypto business, too. Silvergate’s bank says that it has nearly 1,400 institutional customers in crypto as it develops a network for trading and lending digital assets. Silvergate recently bought the Diem stablecoin assets from Meta Platforms (FB) and other companies, aiming to build its own stablecoin. Shares trade at 20 times estimated 2023 earnings, a steep multiple for a bank. But Silvergate is becoming more of a bet on crypto, while its core banking business continues to bring in revenue from standard deposit and lending practices. Wedbush analyst David Chiaverini likes its strong core business and sees gains in crypto hedge fund and capital inflows benefiting the bank, expecting the shares to hit $165, according to a recent note.
The Amplify Transformational Data Sharing ETF (BLOK) holds most of these stocks in an actively managed format. It has racked up nearly $1 billion in assets, making it one of the largest crypto ETFs. While it has slumped 37% in the past year, the fund has edged the Nasdaq Composite and has traded in line with the S&P 500 tech sector over the past three years.
Bitwise runs the Bitwise Crypto Industry Innovators ETF (BITQ), which tracks the Bitwise Innovators 30, an index of companies across the crypto ecosystem. About 85% of fund assets are in companies that derive at least three-quarters of their revenue from crypto.
With so many tokens and blockchains battling it out, the crypto economy may not need Bitcoin to thrive. Even if Bitcoin doesn’t settle in as a rival to the dollar or gold, though, it may still ride shotgun. Grass Hill Alpacas farm owner Forster says he’s impressed with how seamless it has been to process Bitcoin transactions, and he’s paying lower fees than he would on a credit-card purchase.
“I’ve been surprised with how smooth it’s been,” he says. “The only concern was my accountant, who said he had to fill out a bunch of forms—and charge me more.”
Bitcoin: How To Invest In This Digital Asset (the Smart Way)
The popularity among American investors relies upon the cryptocurrency market.
Cryptocurrency markets are volatile. Nevertheless, it’s gotten the attention of public opinion.
The crypto market boomed after people learned that some investors generated thousands, hundreds of thousands, or millions in revenue.
Sensationalism generates expectations. Knowing that a crypto investor became rich generates interest among people.
Nevertheless, many people entered the cryptocurrency market with blind knowledge of the matter.
If you are entering the crypto market, we’ll help you with basic steps that everyone should take.Is Crypto safe to buy
Today, most people buy and sell crypto directly using crypto exchanges like Coinbase.
You can use Robinhood and other online brokers apps to trade crypto directly. Nevertheless, always be careful.Have an emergency fund
Cryptocurrencies are volatile. Prices go up and down dramatically. Investors should have an emergency refund to cover unexpected costs before investing in assets.
It is crucial to have money for emergencies before buying any cryptocurrency.
Without an emergency fund, you could be forced to sell all your assets with a loss margin.Find crypto that fits your portfolio
There are a ton of options in the cryptocurrency market. However, you need to understand how cryptos fit your other investments.
Diversifying is a good idea, but investing everything in risky (most volatile than usual) assets is not the safest idea.
It may be worth putting some of your money into safer bets.Evaluate crypto investments
Develop a strategy for cryptocurrency investment based on fundamentals rather than social media discussions, or celebrity commercials.
Commit a long-term investment, don’t plan to “get rich” quickly.
How To Invest In Cryptocurrency
Cryptocurrencies such as Bitcoin (BTC) are rapidly gaining popularity, but some investors may still be trying to determine whether crypto…
Cryptocurrencies such as Bitcoin (BTC) are rapidly gaining popularity, but some investors may still be trying to determine whether crypto is a good opportunity or a risk they’d rather not take.
Opinions about cryptocurrencies may vary widely, but there’s no denying that crypto assets are in widespread demand from individual and institutional investors alike, and they are becoming more closely correlated with the movements of mainstream indexes.
Bitcoin’s share of the total crypto market is roughly 43%, making it the most well-known and widely owned cryptocurrency, but the crypto universe is vast. More than 17,900 cryptocurrencies are available to trade, with a global crypto market cap of about $1.9 trillion. In 2021 alone, the crypto sector’s market cap grew by 187.5%, according to the World Economic Forum.
The cryptocurrency market reaches beyond the coins that are viewed as digital money to include blockchain investments, such as Ethereum (ETH), Polygon (MATIC) and Cardano (ADA), which provide networks for applications to be built on their platforms.
Bitcoin’s price has dropped about 11% for the year, but some alternative cryptocurrencies have outperformed. For example, the price of smart contract altcoins Solana (SOL) and Terra (LUNA) are up about 660% and 1,600% for the year, respectively.
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With crypto subsectors such as smart contracts, decentralized finance applications and nonfungible tokens on the rise, cryptocurrencies are making themselves indispensable. As more businesses accept cryptocurrencies and the blockchain technologies that facilitate their operation, more investors will be interested in learning the dynamics of the crypto world and investing in it.
Here’s what you need to know about investing in cryptocurrency:
— What is cryptocurrency?
— How to invest in cryptocurrency.
— What to consider before investing in cryptocurrency.
— How to make money with cryptocurrency.
What Is Cryptocurrency?
Cryptocurrency is any digital currency secured by cryptography, or secure communications, that can be used as a peer-to-peer medium of exchange, store of value or investment.
Bitcoin, the first blockchain cryptocurrency, is a form of digital currency invented by an anonymous founder using the pseudonym Satoshi Nakamoto. Cryptos aren’t managed by a bank or public agency. Instead, transactions of cryptocurrency tokens are typically recorded on a public blockchain, comprising digital information stored on a database.
Blockchain technology is used to keep an online ledger of all the transactions, and it provides a data structure for the ledger that is considered secure.
Unlike fiat money, or government-issued currency, that is controlled by central banks, cryptocurrencies do not require banks to verify transactions and are independent of a central banking authority. Each of the thousands of cryptocurrencies has its own security standards and value propositions.
Although cryptocurrency is a newer phenomenon, it has the potential to revolutionize the financial system and how we think about money.
“Cryptocurrency is a new asset class that is at the foundation of the cryptoeconomy, an entirely new set of financial services, commerce and global payments that will be built on top of this new technology,” says Max Branzburg, vice president of product at Coinbase Global Inc. (ticker: COIN), one of the leading crypto exchanges.
James Putra, senior director of product strategy at TradeStation Crypto, says cryptocurrencies are opening retail investors to “a world of global capital, as opposed to what they can access through the U.S. Market.”
How to Invest in Cryptocurrency
There are many cryptocurrencies on the market that have different fundamental values. Investors should recognize that a cryptocurrency can be here one day and gone the next, which could leave your investment worthless. That’s why it’s important to have a strategy for investing in cryptocurrencies and to know how to manage your risk.
Beginner crypto investors may want to consider elements such as transaction fees, types of cryptocurrencies available on a platform, available education resources and other features that may align with their interests and goals.
There are many crypto exchanges from which to choose. TradeStation, Coinbase, eToro and Gemini, among others, offer easy, accessible and secure platforms for owning and conducting transactions with cryptocurrencies.
Take into consideration the role cryptocurrency will play in your portfolio. Putra says it’s best to take a balanced approach toward investing in crypto, allocating only about 2% to 5% to the sector in your investment portfolio because its volatility can cause dramatic swings in value.
For investors who want to use cryptocurrency as a way to diversify, Putra says, this asset is still one of the least correlated to stocks and bonds, meaning it remains an effective hedge against those other asset classes.
Investors may also choose cryptocurrency as an inflation hedge. Putra says that since bond yields are not keeping up with inflation, cryptocurrencies can serve as a bond alternative.
“Because of the low interest rates across bonds, there is a reshuffling of capital on a macro level out of bonds and into other assets that are more inflation-protected,” Putra explains. Some cryptocurrencies, such as Bitcoin or Ethereum, can even give your portfolio some stability because the inflation protection they provide balances with their volatility, he says.
What to Consider Before Investing in Cryptocurrency
Investing in cryptocurrencies is highly speculative. Despite stories of investors making millions, entering the market at an inopportune time can result in rapid and extreme losses.
Although the prospect of striking it rich with crypto investing is enticing, it’s important to weigh the potential impact of volatility. An asset that can rise quickly is prone to equally severe drops.
Another risk: Unlike in other markets, the future of cryptocurrency regulation is uncertain. Some countries that so far allow the more-or-less free use of Bitcoin include the U.S., Canada and Australia, to name a few. El Salvador even adopted Bitcoin as a legal tender. But other countries, such as South Korea, are pushing restrictive regulation of cryptocurrency, with China essentially banning it. In the U.S., new legislation targets crypto investments for taxation.
Although cryptocurrencies were conceived of as a unit of exchange, there are only a handful of businesses today that accept crypto as a form of payment. Crypto advocates support its broad economic use, but this adoption could take time because regulators around the world are still critical of the digital asset.
[Read: Bitcoin vs. Ethereum — Which Is a Better Buy?]
How to Make Money With Cryptocurrency
There are several ways investors can increase the value of their assets and secure a profit when investing in cryptocurrency. Just like in the stock market, the way to make money when investing in the crypto market is to buy the cryptocurrency when its value is low and then sell it when its value has increased.
“You can get more out of your money with cryptocurrency than with other traditional assets,” Branzburg says, because of the price swings and opportunities that conventional investments don’t offer.
The first method he points to is staking. Staking lets you earn income with your crypto by participating in the network of the asset. When you stake your crypto, you make the underlying blockchain of that asset more secure and more efficient. In exchange, you get rewarded with more assets from the network, like a yield you would get from a savings account.
Some cryptocurrencies that offer staking rewards include Cardano, Ethereum, Tezos and Algorand.
“You can lend the assets that you have in your portfolio into decentralized finance, or DeFi, protocols to generate yield, as well,” Branzburg says. Accessing DeFi allows users to “tap into a global liquidity pool,” he says. From the decentralized money market, other users are able to borrow your crypto assets, and you garner a yield.
Cryptocurrency is a new and exciting way to think about money. But experts say the first and most important step is to educate yourself about these emerging digital currencies and the technologies they use so that you can understand the risks and rewards.
Calculating the intrinsic value of a publicly traded company might be a bit simpler, but learning about cryptos and how they perform can help you avoid investing at a peak.
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How to Invest in Cryptocurrency originally appeared on usnews.Com
Update 03/01/22: This story was published at an earlier date and has been updated with new information.