How can crypto be an asset for your investment portfolio?
As crypto becomes more and more mainstream, investors are increasingly looking at ways to gain exposure through their portfolios. In many cases though, it’s not as easy as checking in with your broker and buying some cryptocurrency.
We look at the different approaches to crypto asset management and see how you can invest in cryptocurrency.
Crypto As an Asset
Crypto is classed as an alternative asset similar to commodities and real estate. As they have a low correlation to traditional assets such as stocks and bonds, they’re seen as a way of diversifying a portfolio.
Whereas a commodity such as gold is seen as a very stable asset, crypto is much more volatile. Trading happens throughout the world, 24-hours a day, 365-days a year, and the value of coins like Bitcoin and Ethereum can change very quickly.
This being said, the year-on-year return on many of these cryptocurrencies has been impressive. This long-term growth makes crypto an appealing asset to hold, and as it becomes mainstream, more and more investors are exploring their options.
Having started as a very niche investment, crypto has announced itself to the world — roughly 22% of US adults are thought to own a share of Bitcoin. However, the ways you can invest in crypto are still not as mainstream as traditional asset trading. This is changing quickly, but it’s important to explore your options when it comes to crypto asset management.
Ways to Hold Cryptocurrency As an Asset
Cryptocurrency is still in its infancy and for the moment, there aren’t many traditional online brokers that allow you to hold cryptocurrencies directly. Instead, crypto exchanges are filling the gap, offering a wide range of crypto-related services.
Crypto exchanges are digital marketplaces where you can buy and trade crypto.
Once you’ve signed up for an account, you can convert your fiat currency (e.g., USD) into your chosen cryptocurrency, trading it as you see fit. Exchanges offer a much wider selection of cryptocurrencies to invest in and provide you with all the crypto asset management tools you need.
When choosing an exchange, there are some important details you should consider:
- Accessibility: There’s a lot of regulatory uncertainty surrounding cryptocurrency, so it’s important to make sure the exchange you choose doesn’t have geographic limitations that might impact you.
- Security: You want to protect your crypto assets, so it’s important your exchange has a strong focus on security. Your cryptocurrency investments aren’t backed by a central institution, so they’re not protected in the same way as your other investments.
- Fees: Exchanges will charge fees on your transactions. While it’s not the number one consideration, it is something to keep in mind.
- Coins Offered: There are a lot of different cryptocurrencies out there — make sure the exchange you choose offers the ones you’re interested in trading.
- Educational Content: If you’re new to crypto assets, then you’ll want to educate yourself as much as possible. Your exchange should be there to help you out with high-quality content and good support.
If you’re going to treat crypto as an asset, you want to look after it, and the right exchange will help. Check out options like Coinbase, Binance, Kraken, CEX.IO, and Gemini.
Cryptocurrency assets form part of your investment portfolio, so it’s natural to want to see everything in one place. For many investors, this means the ideal option would be to trade cryptocurrency through their brokers.
This option isn’t as widely available as it might be just yet, but there are some large platforms where it is possible:
- Robin Hood
- SoFi Invest
- Trade Station
Brokers offer a much wider variety of investment options than a crypto exchange, so there’s naturally going to be less of a focus on crypto. However, they’re often a better option for high-value investments and traders looking to make a short-term or mid-term profit.
Other Ways to Make Money While Holding Cryptocurrency Assets
To realize profits on your investment, you sell an asset for more than you bought it. In crypto terms, this would mean buying Bitcoin or any other coin at a certain price and selling it on for more.
This isn’t the only way to make use of your cryptocurrency assets though, and there are ways to earn money without having to sell your assets.
Staking is a little bit like when you put your money into a savings account. There may be a minimum amount of time you can leave money in there, and the bank will make use of your funds, rewarding you with an interest payment.
When you stake crypto, you lend your coins to the cryptocurrency protocol and they’re used to verify transactions. Once the transactions have been verified, they’re added to the blockchain, and new coins are minted. If your coin was used in the process, then you receive a reward, generally in the cryptocurrency that you staked.
Staking isn’t available with all cryptocurrencies – only those that use a proof of stake model rather than a proof-of-work model. So, this rules Bitcoin out for staking, but it is possible with Ehtereum, BNB, Tezos, and many more.
As you might expect, staking isn’t without its risks, though. Generally, it requires you to lock up your coins for a certain amount of time meaning you can’t trade them. With crypto being a volatile asset, this leaves you with no option of getting out if there’s a major crash in value.
With so many variables to take into account, things start to get a little tricky when we start talking about crypto lending and loans. This is an intriguing feature of decentralized finance though and something that might fit into some people’s crypto asset management strategy.
At the moment, interest rates in traditional finance are almost historically low. Throw in the fact that inflation is high, and it’s not a good sign for your money.
This has drawn many people towards crypto, but if your coins are simply sitting in your wallet, it’s a similar story to when your money sits in your bank. It’s not doing much for you – yes, it might be going up in value (hopefully), but it’s not earning interest.
You’ve also got the issue of cash flow. You may, for some reason, need to take some of your money out of Bitcoin or another currency. When you do, you’ll not only need to pay capital gains tax on it, but you’ll also be faced with buying back in at a higher price.
Crypto lending helps to solve these problems.
- Crypto Lending: Allows investors to lend their crypto to borrowers in return for interest payments (the borrower puts up a portion of their crypto assets as collateral).
- Crypto Loans: Borrowers put up a portion of their crypto assets and receive a loan in stablecoins – coins that are more stable than Bitcoin, such as Tether, which is tied to the USD. The borrower pays interest on the loan and once they’ve repaid the terms, they get their Bitcoin back.
The same caveats exist here as with every other form of crypto asset — it’s volatile, and you don’t know what’s going to happen. If you’re tied into a loan, then you’re much less agile, but it does have other upsides.
Crypto Assets without Holding Cryptocurrency
Cryptocurrency isn’t the only way to get in on crypto. There are lots of other assets to invest in that are connected to crypto without being completely tied to the performance of individual coins.
Businesses that provide the infrastructure and technology that underpin cryptocurrencies are prime examples. This industry is still in its infancy, which means there’s untold development and growth still to take place. Bitcoin and Ethereum might get all the headlines, but behind the scenes, thousands of innovative companies are working to mold the future of crypto.
Take our BLOQPODS and BLOQ PARKS. They’re a step towards solving one of the dirtiest issues in crypto – energy consumption.
Backing innovative companies with a connection to cryptocurrency can give your crypto assets more diversity and limit risk. Much of this technology is useful in other industries, so you’re much less dependent on cryptocurrencies fully establishing themselves.
The great thing about investing in companies with close ties to crypto and blockchain is that there are already established ETFs to choose from.
Conclusion: Crypto Asset Management
As crypto becomes more mainstream, more and more ways to invest are becoming available. This is excellent news for investors, especially those who wish to take a more active role in their crypto asset management, rather than wait for the value of a coin to go up.
The one thing you can’t lose sight of is that this still remains a speculative investment. Crypto is volatile, and we’re yet to see what its true position in the world will be. Even if you’re extremely optimistic about the future of crypto, you’ve still got to be prepared to lose everything.
Most advisors recommend a maximum crypto investment of 5% of your portfolio to protect yourself.
If you are happy with the risks, then there are plenty of different ways to invest in crypto and many ways to manage your crypto assets.