Technological advancements are changing every aspect of human lives in every corner of the world. The disruption of e-commerce, the growth of content streaming platforms such as Netflix, and autonomous cars are a few classic examples of how high-tech driven solutions are improving the quality of life. The global payment industry is also experiencing radical changes with the invention of online transactions and mobile banking. However, there’s another disruptive force that is changing the payment industry upside down: cryptocurrencies. Over the last few years, cryptocurrencies have emerged as a viable payment method to complete many kinds of online transactions, and any investor can gain exposure to this new asset class which is often referred to as the “digital gold”. Bitcoin is the most widely used cryptocurrency and it is assumed that a person with the name Satoshi Nakamoto mined the first coin back in 2009. Here’s an illustration of how Bitcoin, or any other cryptocurrency for that matter, works.
This analysis will serve as a complete guide to investing in cryptocurrencies. Before we introduce the various ways to invest in this promising asset class, it’s important to get a thorough understanding of how cryptocurrencies work and the future outlook for these assets.
The hype about cryptocurrencies is grounded on various assumptions
Many tech investors and traders believe that cryptocurrencies will eventually replace fiat currencies, or the centralized and regulated currencies by various governments. There are various reasons behind this assumption, and some of the most important ones are listed below.
- The legalization process of Bitcoin and other cryptocurrencies have already begun.
- Institutional investors such as the largest banks and asset managers in the world are now treating cryptocurrencies as an asset class, indicating these players will likely promote crypto assets to their high-net-worth clients once the legalization process is complete.
- The increased media coverage for cryptocurrencies will help more individuals discover this asset class, leading to an increased usage of these currencies to pay for goods and services. For instance, popular media outlets such as CNBC and Bloomberg have a dedicated space for cryptocurrencies in their respective websites.
- Bitcoin is gaining in popularity as a “store of value”, meaning many investors believe that the price of Bitcoin will weather macro-economic and geopolitical issues better than traditional currencies, leading to a surge in popularity for all cryptocurrencies.
- The decentralized nature of cryptocurrencies is seen by the young generation as one of the most important characteristics. The fact that a central regulatory authority is not managing Bitcoin and other cryptocurrencies is expected to enable these assets to be foolproof against regulatory policy changes.
In addition to these assumptions, there are many characteristics of cryptocurrencies that are cited as the drivers of its value in the coming years. The speed with which these transactions are completed and the cost-effectiveness are two of the most prominent features of cryptocurrencies that are expected to help these digital assets make it to the mainstream of the payment industry.
Speed: Bitcoin vs traditional payment methods
It usually takes a few seconds for a Bitcoin transaction to go through, and sending payments could never have been faster than what Bitcoin brings to the table. Zero-confirmation transactions will be processed instantaneously, whereas a verified transaction by the blockchain technology takes about 10 minutes to complete. The speed at which Bitcoin transactions can be completed addresses the long-standing issue of bureaucratic delays we all experience from time to time when dealing with banks.
Banking systems and processes have also improved considerably over time with technological advancements, and the speed with which an online transaction could be completed has drastically increased. High penetration of smartphones in most countries around the world, the high-quality of infrastructure, high internet speeds, and the paradigm shift to doing things online have all contributed to the growth story of online facilities provided by banks.
Online banking penetration in selected European countries
(Source – Statista)
For now, it would be fair to call that online banking systems are a legit and reliable alternative with which one could complete transactions with the same speed as Bitcoin.
The real difference between Bitcoin and banks is visible when check payments are considered in the equation. Written checks would take around a couple of days to process, and this makes the global payment process much slower, and a need arises for an alternative payment solution to address this issue, and Bitcoin fits into the picture nicely.
Overall, it is conclusive that Bitcoin has a much faster payment processing turnaround time but for the technology to become more widely used, the security risks related to these transactions need to be mitigated.
Cost-effectiveness: Bitcoin is the undisputed leader
Purely from a transactional perspective, Bitcoin is the undisputed leader since transfer costs have reached record lows. In addition to this, Bitcoin provides the flexibility of executing transactions as and when those are required rather than sticking to a schedule adhered to by banks. For example, there are more than ten bank holidays in the U.S. for a year, but even on such days, Bitcoin transactions could be completed hassle-free.
The average transaction fee for transferring Bitcoin
(Source – Bitinfocharts)
Banks and financial institutions, on the other hand, are coming up with countermeasures to tackle these issues, and prominent banks are offering digital-only banking options to embrace the online-only sensation. Banks might never be able to catch up with what Bitcoin is offering its users but on the other hand, added security with acceptable turnaround times might be sufficient to stay ahead of the game against Bitcoin.
With this, we move on to the second half of this analysis in which several ways to invest in cryptocurrencies will be introduced.
Buy cryptocurrencies directly on an exchange
Purchasing Bitcoins or any other cryptocurrencies directly on an exchange is one of the most widely used methods to invest in this asset class. There are various regulated exchanges around the world, and it is paramount to select one of these highly regulated exchanges to buy crypto assets. The process of buying cryptocurrencies on an exchange is quite similar to registering with an online broker to invest in stocks. The first step, as one would imagine, is to open an account. Most exchanges require an investor to have a Wallet to start investing in this asset class as the purchased cryptocurrencies will be stored in these wallets. Making this process simple, the leading cryptocurrency exchanges allow investors to create wallets on their websites itself. Upon creating a wallet and opening a trading account, the buying and selling process of cryptocurrencies is quite similar to any other asset class, which is depicted below.
Selecting an exchange to buy cryptocurrencies is the tricky part as rules and regulations governing this asset class often change from one jurisdiction to another. Therefore, the best course of action is to search for exchanges that are regulated by local governing bodies as this adds a degree of safety to the investment. Some of the leading cryptocurrency exchanges include,
Before selecting any one of these exchanges, however, an investor needs to verify its regulated status in the given jurisdiction.
Invest through an exchange-traded fund
Exchange-traded funds, or ETFs as they are commonly referred to, has gained in popularity over the last decade. Since the fallout of the financial crisis in 2008, many investors have shown a preference to invest through ETFs than to directly purchasing the underlying securities as this makes the investing process much easier and enables them to obtain the expertise of a fund manager at a fraction of the cost.
Even when it comes to investing in cryptocurrencies, there are ETFs to choose from. Grayscale Bitcoin Trust (GBTC) is one of the most popular ETFs that enable retail investors to gain access to this asset class. There are many advantages to using this trust, starting with its pricing mechanism. Many retail investors tend to look for alternative options to invest in Bitcoin as the price of a coin is substantially higher than the price of alternative coins. At the time of preparing this analysis, Bitcoin was trading close to $10,000 per coin, which is one of the reasons why some investors are not interested in directly owning Bitcoin. The investment objective of GBTC is to track the Bitcoin market price, less fees and expenses. Each share of GBTC represents 0.00097753 Bitcoin, which explains the much lower price of GBTC in comparison to Bitcoin. One GBTC share costs around $11 on May 18 and this low price make it accessible to all investors alike.
Another advantage of investing in GBTC is that its operating structure makes these shares eligible for inclusion in IRA and Roth IRA products. In contrast, Bitcoin is not a recognized asset class for any of these accounts. Below is a snapshot of the advantages of investing in GBTC over directly buying Bitcoin.
Source: Grayscale Bitcoin Trust
As with other exchange-traded funds, GBTC charges an annual fee that comes to the tune of 2%. An investor should look at this fee as the cost of facilitating the transactions and safeguarding his or her assets.
The Bitwise 10 Crypto Index Fund is another fund U.S. investors can consider to gain exposure to this asset class. The fund tracks the cryptocurrencies in the Bitwise 10 Large Cap Crypto Index, which is a basket of the largest coins, weighted by 5-year diluted market capitalization and rebalanced monthly. It should be noted that this fund has a minimum investment requirement of $25,00 and is only open to investors based in the United States. Below are the cryptocurrencies held in this fund and their respective weightings.
Using an ETF to invest in cryptocurrencies is one of the easiest and cost-effective methods, and many large institutions can be expected to rollout these types of funds in the future depending on how soon the Securities and Exchange Commission of the United States accepts these funds as reliable options for investors.
Investing in the shares of publicly listed cryptocurrency-oriented companies
The Bitcoin boom in 2017 that saw the price of Bitcoin skyrocketing to over $20,000 gave rise to many cryptocurrency companies. The same way an energy investor can invest in the shares of listed oil and gas companies to gain exposure to the energy industry, a cryptocurrency investor can invest in these blockchain-oriented companies in hopes that an eventual appreciation of cryptocurrency prices will lead to stellar financial performance, resulting in substantial capital gains.
The primary advantage of investing in the equity securities of a company is the regulatory appeal. Investors can access the financial reports of these companies to determine the risk of solvency until cryptocurrency prices reach the required level to earn profits. This transparency makes investing in the shares of blockchain companies less risky than directly investing in crypto assets.
HIVE Blockchain Technologies (HVBTF) is one company to consider in this space. The company operates as a cryptocurrency mining company and is involved in the mining of Ethereum, Ethereum Classic, ZCash, and Bitcoin. The company was formerly known as Leeta Gold Corp. and changed its name to HIVE Blockchain Technologies Ltd. in September 2017.
RIOT Blockchain (RIOT) is another company to keep an eye on. It is involved in digital currency mining operations, which utilizes specialized computers that generate digital currency, primarily bitcoin. The company also holds interests in various activities, including purchasing and selling digital currencies, providing accounting, audit, and verification services for blockchain-based assets such as cryptocurrencies, and develops TessPay, a payments ecosystem for component and sub-component supply chain settlement solution, as well as other blockchain solutions for telecommunications companies.
Both these companies are loss-making ventures, and the success of these companies is closely tied to the price of the leading cryptocurrencies. Therefore, a close evaluation of the outlook for these digital currencies is required before reaching any investment conclusion. To indirectly gain exposure to the potential rise of cryptocurrencies, an investor can buy shares of the leading chipmakers such as NVIDIA and IBM as these companies will play a major role in the transition to a world dominated by digital assets. Payment facilitators such as PayPal and Square can also be expected to benefit if cryptocurrencies become mainstream financial products as these companies are in a strong position to facilitate digital transactions.
By investing in the shares of blockchain companies, an investor can gain direct exposure to the promising cryptocurrency industry and investment in the largest technology companies outlined above will provide indirect exposure.
Buying cryptocurrencies on over-the-counter (OTC) exchanges
Over-the-counter markets are popular among stock traders as companies that do not meet the exhaustive listing requirements on popular stock exchanges usually settle for these OTC markets. Similarly, an investor can use crypto OTC markets to invest in these assets. Most of these exchanges facilitate crypto-to-crypto and fiat currency-to-crypto transactions. These markets play a vital role in the growth of cryptocurrencies as most of the high-value transactions are completed on OTC markets as buying or selling a large number of cryptocurrencies is a difficult task on regulated online exchanges.
Below are some of the leading OTC exchanges to trade digital assets, including cryptocurrencies.
- Circle Trade
- Genesis Trading
- Jump Trading
- Cumberland Mining
- Kraken OTC Services
- Octagon Strategy
An investor should ideally check for OTC markets that are governed by regulatory bodies as this would ensure the safety of transactions.
The projected increase in the number of institutional investors taking an interest in cryptocurrencies will likely lead to the growth of OTC markets in the coming years, and it would be reasonable to assume that these markets will expand exponentially to all continents, enabling investors to invest in cryptocurrencies with ease.
Buy cryptocurrencies from ATMs
We have so far discussed the traditional methods of investing in cryptocurrencies. There is, however, one other way of investing in this asset class which is gaining traction on a global scale: Bitcoin Automatic Teller Machines. These ATMs allow an investor to buy and sell Bitcoin and operate similarly to the traditional kiosks of banks and other financial institutions. These machines are connected to the internet and an individual can pay by cash or card to purchase Bitcoin or any other supported cryptocurrency. These machines virtually connect to a cryptocurrency exchange, enabling the transactions to be completed. There are many ATM vending companies such as Bitnovo, Bitcoin Depot, and BitVending. Collectively, there are over 1,400 ATMs installed all over the world, and this number can only be expected to increase in the coming years as cryptocurrencies emerge as a reliable alternative to fiat currencies. The below map provides a summary of the locations where an individual can find cryptocurrency ATMs.
The cost-efficiency of using an ATM to buy cryptocurrencies should be considered before deciding to use this option as some of these machines charge between 3% to 8% for making a purchase using the machine.
One important thing to note is that an investor would not receive any physical coins whatsoever when using an ATM to buy these assets. Rather, the investor needs to scan the mobile wallet QR code or receive a paper receipt with the codes and instructions on how to transfer the coins to the wallet.
The primary benefit of using ATMs is the preservation of confidentiality this brings along. To sign up for an exchange to buy cryptos, an investor needs to disclose all financial and personal information. However, this is not the case when it comes to using ATMs. This is the main reason why privacy-concerned individuals tend to use this option to invest in cryptos despite the high costs associated with it.
Another advantage of using an ATM is the fact that an investor need not be concerned about the regulatory background of using an ATM. These machines are installed only in countries and localities where using and investing in cryptos is perfectly legal.
Bitcoin prices have halved since reaching a record high of over $20,000 in December of 2017. It’s important to pay attention to the adoption cycle, a popular mechanism used to determine the attractiveness of an asset, to gauge a measure of expected price performance. This cycle is illustrated below.
It is reasonable to believe that Bitcoin entered the “Mania Phase” in 2017, which was followed by a massive sell-off. The growth in the popularity of cryptocurrencies will be slow and steady in the next few years, which is exactly what needs to happen. More countries are likely to approve the use of cryptocurrencies and some sort of regulation will likely be developed to monitor and track the owners of cryptocurrencies in real-time. This is work in progress. Once the regulatory tone is set, the price of popular cryptocurrencies will skyrocket along with the increased adoption of these assets as a mode of payment and store of value.
In anticipation of these events, an investor might want to invest in this asset class today. There are various ways to gain exposure to crypto assets, and the most trustworthy and popular methods were introduced in this analysis. In addition to these methods, one could always use CFDs, or contracts for difference, to invest in cryptocurrencies as well. However, this is not a direct way of holding crypto assets as CFDs do not provide ownership of securities to an investor.
The preferred investment vehicle will depend on personal circumstances of investors, but regardless of the chosen method, it is imperative to pay close attention to the dynamics driving this industry as cryptocurrencies have historically been extremely volatile in comparison to other traditional asset classes such as stocks and bonds.