Removing the Anxiety from Cryptocurrency Investment
Since the birth of cryptocurrencies not too long ago, virtual coins have entered the mainstream consciousness but struggled to make the leap into the mainstream investment universe. It’s easy to find people who’ve heard of Bitcoin, but more difficult to find people who own some.
That is beginning to change. Total cryptocurrency market capitalization (in other words, the combined value of all the coins in the market) surged during the pandemic, after previously remaining largely flat.[1] In November 2021, the global market value reached US$3 trillion[2] before falling to around US$2.26 trillion in early December.[3]
Mainstream investors are jumping on board. Increasingly, large companies are reporting Bitcoin holdings as a reserve asset, leading some to speculate that Bitcoin is becoming a rival to that traditional hedge against inflation, gold. For instance, Tesla holds about $1.5 billion in Bitcoin, business intelligence and software company MicroStrategy owns about $5.5 billion, and payments firm Square has about $250 million.[4]
“The market has grown rapidly over the past several years,” said Matthew Davidson, Commercial Director, IG. “What was once dismissed as a passing fad has quickly made its way into the mainstream. Investors can no longer watch from the sidelines. The opportunities are too big to miss. Yet the risks are equally large.”
Inevitably, as cryptocurrencies begin to achieve wider acceptance as credible assets, interest among retail investors has also started to build. However, several key concerns are holding many potential traders back.
Understanding – One of Warren Buffett’s many famous maxims was that people should never invest in businesses they don’t understand, and that has certainly applied to cryptocurrencies. The concept of virtual coins held in digital wallets, having no evident rational value or worth and unable to be spent freely, is difficult to grasp for a lot of investors. Unlike stocks, commodities, fiat currencies or other traditional investment classes, the value of cryptocurrencies is not tied to any tangible economic or geopolitical activity.
Volatility – The wild swings in the value of cryptocurrencies make global headlines. The idea that an investment worth $15,000 today might lose half of its value tomorrow is understandably frightening to many potential investors.
Security – Even more worrying than high volatility is the potential for an entire investment to be stolen by hackers or fraudsters. Security is the biggest concern of all when retail investors contemplate entering the cryptocurrency market, with good reason. As the market expands and more money flows through, this lures criminals and creates greater opportunities for theft. In 2020, crypto criminals stole $1.9 billion worth of coins through fraud, hacking and similar activities. While that was an improvement over the $4.5 billion stolen in 2019, crypto theft actually rose 40%.[5]
And cases keep coming. In August 2021, hackers stole $600 million in one of the biggest cryptocurrency heists ever recorded.[6] In November 2021, the U.S. Securities & Exchange Commission charged decentralised finance lender Blockchain Credit Partners and two of its executives for raising $30 million through allegedly fraudulent offerings.[7]
The Dilemma
Retail investors interested in exploring this burgeoning opportunity face a difficult dilemma. While the cryptocurrency market is clearly growing and gaining acceptance, there are clear and unresolved risks to consider. But there are ways to enter the market more safely.
Potential investors are faced with three options:
Direct Investment – Direct crypto investing is relatively simple, but it may require a significant capital outlay (at the time of writing, one Bitcoin was close to US$50,786 and one Ether was valued at US$4,337), and exposure to high volatility. To buy cryptocurrency, investors often have to go through unregulated exchanges and must store their purchases in wallets, leaving themselves vulnerable to hacking. Alternatively, they can target companies with exposure to the cryptocurrency industry (miners, infrastructure providers, and so on) – but this requires considerable research, analysis and expertise.
Exchange-Traded Funds – ETFs are an emerging frontier in cryptocurrency investment. They offer an alternative exposure to the coin universe with none of the risks of direct investment, and even in their infancy they are proving popular. The Purpose Bitcoin ETF, the first Canadian spot Bitcoin fund, drew more than $1 billion in assets in its first month,[8] while the ProShares Bitcoin Strategy ETF — the first in the U.S. – saw inflows of $1 billion in only two days. There are many other ETFs in the pipeline.[9]
Other funds, such as Australia’s recently launched BetaShares Crypto Innovators ETF (CRYP), invest in global companies at the forefront of crypto.
“Mainstream investors have been awaiting a Bitcoin ETF for years,” said Oliver Imre, Director, IG. “This makes digital currencies more accessible for investors who are not yet willing to fully embrace crypto exchanges. While much of the focus is currently on Bitcoin, we will likely see an Ethereum ETF in the near future.”
However, while ETFs offer the security of listed investment vehicles, they don’t provide 1:1 price exposure. Funds that do – like the Grayscale Bitcoin Trust (GBTC) – are not listed and charge relatively high management fees.
Brokerages – Brokerages combine the best of both worlds. They provide a marketplace of major cryptocurrencies where investors can gain 1:1 exposure to prices, which ETFs currently don’t offer, without the security risks and significant capital outlay of direct ownership.
“We know that security is the biggest concern for clients who are contemplating entering the cryptocurrency market,” said Dan Herriotts, Head of Trading, IG. “And so through our cryptocurrency CFDs, clients can get exposure to up to 12 major cryptocurrencies, including Bitcoin, Bitcoin Cash, Ether, Litecoin, Stellar, Polkadot and Dogecoin, without the security worries of managing a cryptocurrency wallet. Our Crypto 10 Index also offers investors the chance to get broad exposure to the top ten major crypto currencies.”
There are several advantages to using a platform like IG. Customers are able to use a seamless platform featuring asset classes from stocks to commodities to currencies and indicies, enabling them to get an overview of a single unified account and making the process of weaving cryptocurrencies into a portfolio much simpler. The IG platform also offers a demo account, where potential investors can become familiar with the crypto markets without committing their own funds.
Crypto CFDs can also be traded long and short, unlike ETFs or direct coin ownership – and the ease of trading on a platform makes it much simpler to exploit the innate volatility of the coin markets. Just as with trading in equity, commodity or currency CFDs, investors can utilise careful leverage to maximise their opportunities, while managing their exposure and risk through the use of stop and limit orders.
“Trading cryptocurrencies for the first time is a daunting prospect, given all the headlines surrounding security risks and thefts,” said Matthew Davidson, Commercial Director, IG. “Using a trusted, regulated provider like IG removes that overriding concern, ensuring that newcomers to the market or even experienced traders can explore the opportunities of this growing market the same way as any other asset class.”
