If you are like many investors right now you have heard of bitcoin and cryptocurrencies and the high returns that have been generated for investors but you really don’t know much about them – and you know you should. Even though prominent skeptics remain the sector continues to grow as an asset class and garners increasing support from legitimate financial market participants.
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In September Japan took a leading position towards legitimizing cryptocurrency trading and investing by authorizing 11 cryptocurrency exchanges to operate in the country. Earlier in the year Japan made Bitcoin a legal currency. These are significant developments given that Japan is the world’s third largest economy. RecentlyMark Cuban, billionaire co-star of the reality television series Shark Tank,recommended that investors have up to 10% of their investment portfolios allocated to cryptocurrencies. Nevertheless, one of the more significant developments recently is the announcement by the CME Groupthat they will launch a bitcoin futures contract before the end of the year. This will certainly help move cryptocurrencies closer the mainstream as it will attract greater participation by institutional investors and it further legitimizes bitcoin, and by default the cryptocurrency sector as a whole.
As mentioned in Part 1 of this article,there are a couple approaches that can be taken by the average individual investor when looking to participate in cryptocurrency investing. There is a self-directed approach, where an investor makes their own decisions as to what to buy and sell and when, or the investor can work with professionals who are well versed in the sector and who make portfolio decisions on behalf of a group of investors. In the second instance the investment would be in a portfolio of cryptocurrencies via a coin traded fund (CTF),such as The Token Fund, an up-and-coming leader in the CTF sector.
For self-directed investors who want to participate in the cryptocurrency market directly, you’ll need to open an account with an exchange and fund the account. Like any financial market exchange this is central hub where bitcoin and other cryptocurrencies are traded. Some of the larger exchanges include Coinbase and Gemini in the U.S., Kraken in Europe, and BitFinex and Coincheck in Asia.A larger exchange can be expected to have better liquidity and therefore the potential for less slippage on order fills when compared to a smaller exchange.In general, it’s better to use an exchange that is within your general geographic region in case there are issues to resolve with the exchange.
A simple approach to investing is to build a portfolio of equal weighted positions in the 10 largest cryptocurrencies. In other words, if you have $50,000 to allocate to cryptocurrencies you would purchase $5,000 worth of each. Another approach is to allocate your capital based on a weighting relative to the market capitalization of the top five or ten cryptocurrencies. The largest allocation would go to bitcoin since it has the largest market capitalization by far, approximately $110 billion as of this writing. One source where you can find a list of cryptocurrencies by market capitalization is Coinmarketcap.com.
You can also take a combination of approaches where you build a portfolio of a variety of coins with some of your capital, and then you actively trade another portion of your capital. Keep in mind though that there is a level of skill that needs to be learned if you plan to actively trade.
If you’re going to hold your coins for some period of time then you should take them out of the exchange account and store them in a digital wallet. Although Blockchain is safe the applications on the Blockchain such as exchange applications have gotten hacked a few times. So it’s safest to hold coins for longer periods of time in a personal digital wallet. There are a number of wallets out there and it’s best to do some research to find what suits you best.
If this all seems a bit complex and time consuming, well it is. The CTF structure was created as a hassle free alternative to direct participation in the cryptocurrency market. A CTF, such as The Token Fund, provides a vehicle for individual investors to more easily invest in cryptocurrencies without all the hassles and the learning curve. Similar to the idea behind an ETF or a hedge fund, a CTF has a team who can research and investigate various cryptocurrencies from a fundamental and technologyperspective. Further, they can implement trading strategies that usetiming mechanisms such as technical analysis and quantitative strategies to take advantage of the short-term up and down fluctuations in price which as everyone knows can be very volatile. In addition, a CTF will store your digital assets on your behalf so you don’t have to deal with the responsibility and safety protocols of owning and trading directly.
Regardless of which approach you take there is a strong argument to be made for including at least part of an investment portfolio in cryptocurrencies. We are still in the very early stages of the Blockchain technology revolution of which cryptocurrencies are a part. If the venture capitalists are right then the impact of this revolution will eventually be much bigger than the impact from the internet.
