If you are or have considered investing in cryptocurrencies or a particular cryptocurrency, then it makes sense to familiarise yourself with the different options available before you begin. There is more than one way to skin a cat, as the idiom goes. There are probably more ways than you realise that allow you to go gain investment exposure to the new wave of alternative digital currencies that have the potential to heavily influence global finance.
The different ways you can invest in cryptocurrencies, not only mean the kind of investment vehicle you opt for, but also the approach or strategy you adopt. That’s just as important. Let’s first take a look at the main cryptocurrency investment vehicles and then provide an overview of the different investment strategies open to you.
The first and most obvious way you can invest in cryptocurrencies is to buy them directly. This is done over a cryptocurrency exchange. Not all cryptocurrency exchanges work in the same way, support the same range of cryptocurrencies, or are equally secure and professionally run. So it is important to choose the right exchange to open an account with.
A standard cryptocurrency exchange matches buyers with sellers though an electronic system and takes a fee for facilitating the exchange. It’s important to choose an exchange that supports the cryptocurrencies you think you might want to invest in. Some just offer the biggest, most popular cryptocurrencies and some offer hundreds of options.
There are also P2P cryptocurrency exchanges which work in a slightly different way. There is no liquidity provided to guarantee a purchase or sale and users simply say what they want to sell or buy and other users will either enter into an agreement with them for all or part of the transaction or won’t if there is simply not a match.
Some exchanges allow you to pay fiat currency into your account, like dollars, euros, or pounds, that you will use to buy your chosen cryptocurrency investments. Others only work with cryptocurrencies. If you don’t yet own any cryptocurrencies, you’ll definitely need an account with the former.
Once you have an account with your chosen exchange you simply pay in as much fiat currency as you need to buy the cryptocurrencies you want to invest in and acquire. You’ll then sell them again over the exchange at the point you wish to cash in your, hopefully profitable, investment.
Another way to invest in cryptocurrencies without actually having to own them is to trade CFDs, Contracts for Difference. CFDs are financial instruments that track the price of the underlying asset without the holder of the contracts actually taking ownership of the asset.
One big advantage of trading CFDs as a way to invest in cryptocurrencies is that these instruments allow you to take either a long or short position on a cryptocurrency’s price direction. A long position means you are betting on the price going up and a short position that it will go down. That means it’s even possible to use CFDs to ‘hedge’ a bigger investment position in cryptocurrencies you actually own.
CFDs can also be traded with ‘leverage’. That means the broker allows you to borrow additional contracts which multiplies the amount of exposure you have. So leverage of 1:10 would mean with a $100 position on a cryptocurrency’s market price you would actually have exposure to $1000. This means both any profits or losses will also be multiplied by ten. Leverage is a double-edged sword. It both makes trading CFDs potentially very profitable but also risky.
If you do decide to trade CFDs you should use leverage cautiously and never expose yourself too much.
An ICO, initial coin offering, is used by blockchain companies to raise money to fund further development, marketing or staff, and other running costs. These companies sell a portion of the total cryptocurrency tokens that will be associated with the blockchain platform, usually while it is still in beta or even before it has been released. In theory, this should give investors who believe in the blockchain company behind the ICO’s product and business model, the opportunity to acquire tokens early at a discount.
ICOs are also quite a risky investment as, like with any start-up, most blockchain businesses will not go on to be a success. However, if one does, it can be highly profitably to have invested in the ICO.
At the time of writing there are no dedicated cryptocurrency ETFs available to investors. However, several have been submitted to the SEC for approval. While all cryptocurrency ETFs so far submitted to the SEC have been rejected, there is a good chance that at some point over the next couple of years one will be approved.
An ETF is a fund whose units can be bought and sold on a stock exchange like company shares. A cryptocurrency ETF would be expected to invest in a diversified selection of cryptocurrencies and offer investors an easy, regulated way to gain investment exposure to the wider cryptocurrency market.
Long or Short Term Investment: your choice of cryptocurrency investment vehicle might be influenced by your investment time horizon. Do you want to ‘hodl’ cryptocurrencies? That means buy and hold for a long period of time in the belief that at some point the market will enter the financial mainstream. Hodlers ignore any temporary market volatility and keep their eye on the long term prize.
You might want to take a short term approach to cryptocurrency investment. Because their values are very volatile, many investors look to ride the trends for several days, weeks, or months and then sell. CFDs are most suited to shorter term cryptocurrency investments as they make buying and selling easier because you don’t actually own the assets, just a position on their price direction. Holding CFDs overnight also results in a charge which builds up over time and means it’s not usually a good way to invest long term.
Diversified Cryptocurrency Investments
No matter what you are investing in, not putting all of your eggs in one basket is a good idea. Sure, if things turn out how you expect you could make a lot of money, but unfortunately the evidence shows that isn’t always, or even often, the case for investors. If your entire investment is in one or two cryptocurrencies and things go badly for them, you have lost your money or a large part of it.
If you spread your risk between more investments, a few of them not turning out well shouldn’t mean you can’t still have a profitable portfolio overall. That applies to both spreading your risk across different cryptocurrency investments and not putting all of your investment capital into only cryptocurrencies.