Cryptocurrencies are inherently cryptic, it's right there in the name.. And if you follow Warren Buffett's advice to never invest in a business you can't understand, it may be difficult to justify investing in a coin made of math instead of gold.
But it's also hard to ignore the impressive performance of some cryptocurrencies: The price of a bitcoin has risen from less than $ 5,000 in March 2020 to more than $ 60,000 in April.
The excitement surrounding digital currency can make some investors feel like an only kid at a pool party, wanting to join their friends and have fun deep inside, but too eager to participate.
For investors with cautious curiosity, here are ways to gain exposure to cryptocurrencies without buying them and, if you decide to buy, how to reduce your risk.
Invest in companies that have cryptocurrency holdings
Think of this strategy as investing in cryptocurrency once it is removed. Some publicly traded companies own holdings of cryptocurrencies. And since they are betting on its success, you can too, since those companies act as a buffer.
"When you're thinking about investing in a company because they have exposure to crypto, it really runs the gamut from how direct or indirect you are in terms of that exposure," says Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York City. "It just depends on how much of their balance sheet is in crypto."
A review of the company's balance sheet may reveal: As of June 30, 2021, Tesla had $ 1.31 billion in digital assets. And while the tech giant has received a lot of media attention for its investments, $ 1.31 billion currently equates to about 2.4% of Tesla's total assets. But if these assets increase in value, as cryptocurrency is sometimes used, it could also increase the value of Tesla shares.
Invest in cryptocurrency infrastructure
Another way to gain exposure is to invest in companies that have a stake in the cryptocurrency industry. Coinbase is a platform where investors can buy and sell cryptocurrencies, and they are publicly traded.
"As with gold, you can invest in the commodity itself or the surrounding infrastructure, miners and mining materials, as well as energy and oil," says Boneparth. "And there are public companies that work specifically in the blockchain space, but there aren't many."
Riot Blockchain Inc. is one of those few publicly traded companies that focus on cryptocurrency mining. Riot Blockchain, among other things, helps build a cryptocurrency infrastructure and provides another investment opportunity in addition to cryptocurrency.
Prepare for the cryptocurrency ETF
While no money is currently traded on the cryptocurrency exchange that has been approved by the Securities and Exchange Commission, there is a demand. A crypto ETF will work like any other ETF, but instead of tracking a market exchange like the S&P 500, it will track the cryptocurrency. For instance, a Bitcoin ETF will track the price of Bitcoin.
Says Tristan Yver, corporate director of strategy at FTX.US, a regulated cryptocurrency exchange in the US, “I don't have an estimate of when that will happen, but I think it's something that will happen, and I think it's something that will allow people who are not comfortable investing directly in digital assets are exposed to bitcoin and other cryptocurrencies. "
There have been many requests for crypto ETFs, and the Securities and Exchange Commission is expected to decide whether to approve investment manager VanEck's offer to buy a bitcoin ETF, which could be the first fund of its kind in the United States, November 14, 2021.
Be careful if you are investing directly
If you are willing to invest in cryptocurrencies directly, there are several ways to mitigate the risks. One way to do this is to reduce the amount of money you invest. Some credit cards offer rewards in cryptocurrencies in a similar way to recovering cash or miles. If you decide to add cryptocurrencies to your wallet through rewards, you don't even have to use your dollars to do so.
Another way to reduce risk is to invest in stablecoins, which are similar to traditional cryptocurrencies but are backed by real assets, making them less vulnerable to significant drops in value.
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