Cryptocurrencies as Investment Vehicles in Today’s Financial Markets

Ranjeet Sethi  |

Image via BTCKeychain/Flickr CC

Cryptocurrencies were not initially created to be investment vehicles. However, the cryptocurrency market has proven to be one area where the power of human innovation has been fully expressed, leading to the creation of different cryptocurrency-driven markets. Now, anyone can invest their money into cryptocurrencies and expect to make a return if the investment turns out well. Whether you are a conservative investor or an aggressive one, there is a cryptocurrency investment for you out there.

Why Cryptocurrencies?

There are a few reasons why cryptocurrencies have emerged as one of the best investment avenues going forward. Some of the reasons are stated below.

a) Rate of returns

Cryptocurrencies have shown some remarkable returns in 2017 alone . Bitcoin’s performance in the markets has been nothing short of stellar in this regard. Compare these stats. The US markets have been on an amazing 7-year bull run. The NASDAQ exchange has this year alone, gained nearly 15%. But Bitcoin has gained more than 1,200% in the same period under consideration. To put this clearly in monetary terms, a trader who invested $5000 in trading NASDAQ futures would have got a yield of $750, while the same investment in Bitcoin would be worth $60,000 today. There are already indications that plenty of investment money is starting to go the way of cryptocurrencies. Any investor would settle for a market with the highest returns, and cryptocurrencies seem to fit the mold.

b) A Broader and All-Inclusive Investment Vehicle

The cryptocurrency investment vehicles are structured in such a way as to promote global inclusiveness. This is a departure from the conventional financial markets where some investment avenues have actually been designed to lock out a certain category of the public or users from certain countries. Cryptocurrencies have come to stay as a broad-based, all-inclusive form of investment, open to both sophisticated investors and the average Joes on the street. To get a perspective of this, you need to look at the rules regarding financial market participation from country to country. In the US for instance, CFTC rules enacted soon after the global financial crisis actually locked out the “unsophisticated” investors from the market in a bid to protect these investors from market assets that were deemed too complex. Those who are deemed to be qualified to trade have to muster at least $25,000 to participate. Countries like Israel, Belgium, and France have put in place partial or complete prohibitions on the trading of Forex products. But when it comes to cryptocurrencies, access to exchanges or online platforms to trade these assets is almost universal.

c) Technology

There is an enabling technological backbone on which cryptocurrency investments work. This blockchain technology is not under centralized control but in the hands of peers operating within the network.

What Cryptocurrencies Can I Invest In?

There are more than 30 cryptocurrencies presently , but not all of them are worth trading or investing your money in. Before you start trading a cryptocurrency, you need to consider some inherent characteristics of each cryptocurrency. These features can make some cryptocurrencies suitable for investment and make others unsuitable for investment purposes. You must understand that investments are not the primary reason crypto coins were designed in the first place. Therefore, some things must be in place for a crypto coin to become a good avenue to seek returns.

  • General Acceptability: A crypto asset must be acceptable globally for it to be worthy of investment. What drives the price changes that can be translated into monetary gains when trading a cryptocurrency is demand? Supply of cryptocurrencies is generally limited, and repeated mining efforts yield fewer quantities of each crypto coin over time. Therefore, increasing acceptability of a cryptocurrency on a global scale will drive liquidity and price variations in a cryptocurrency.
  • Liquidity: When there are more people trading a particular crypto coin, it becomes more liquid, which means that it becomes easier for brokers to match buyers and sellers. This makes transactions faster and keeps trade costs lower.
  • Volatility: Volatility is what produces the price variations that traders can profit from. You can see this from the charts below:

NEO/USD Chart: prices stuck within a narrow range

ETH/USD Chart: prices are moving in a wide range

If you had to choose between putting your money on the NEO/USD pair and the ETH/USD pair, which would you choose? You would definitely want your money working for you on a pair where prices can move within a wide range, thus giving you the opportunity to profit from the price differential. In this case, this would be the pair of ETH/USD (Ethereum/USD).

What Cryptocurrencies Should I Be Trading?

Taking into account the characteristics of cryptocurrencies that make some of them more suitable for trading and investment than others, the following crypto coins should make up your cryptocurrency investment portfolio:

  • Bitcoin: Bitcoin is by far the most volatile cryptocurrency and ranks highest in terms of popularity, acceptability, and liquidity. Of all cryptocurrencies, it commands the highest market capitalization and daily trade volumes. It has also soared the most, rising from just above $800 in January 2017 to cross the $11,000 mark in late November 2017. If there is any cryptocurrency that you should be investing your money in, it is Bitcoin.
  • Ethereum: In terms of market capitalization and price performance in 2017, Ethereum comes behind Bitcoin. One of the key elements that have helped Ethereum beat out other cryptocurrencies such as Litecoin is its adoption in the creation of tokens for Initial Coin Offerings.
  • Litecoin: The relationship between Litecoin and Bitcoin has been likened to that of gold (Bitcoin) and silver (Litecoin). Litecoin was created to yield more currency units and also process transactions faster than Bitcoin. Litecoin is an asset that does not have the wild volatility of Bitcoin in the market but still maintains a reasonable daily price variation to make it tradable.

Other cryptocurrencies that are good for investment purposes are Ripple (XRP), Dash, Monero and Bitcoin Cash.

Also, according Bill Barhydt, Founder & CEO of ABRA Bitcoin Wallet “Investor interest in buying bitcoin and other cryptocurrencies as part of their overall investment strategy is growing at a rapid rate. We encourage people to start small, get comfortable and then scale their holdings when they are comfortable with the risk. Do not try to time the crypto market. You can even buy a fraction of a bitcoin for $25 to get started.”

Avenues for Cryptocurrency Investing

There are different avenues for cryptocurrency investing. The following have emerged in 2017 as the preferred cryptocurrency investment channels.

  • Initial Coin Offerings (ICOs)
  • Exchange-Based Crypto Trading
  • Crypto CFD Trading
  • Crypto Hedge Funds

ICOs

In the stock market, companies can raise funds for expansion or to startup their business using Initial Public Offerings (IPOs). During IPOs, investors can buy into the ownership of the companies involved. Equity is divided into shares, which are prices and the number of shares allocated to investors according to how much they paid for the offer. Companies usually go through a lot of processes with the regulatory bodies before such stocks can be offered for sale in an IPO and also before they can be listed on the stock market. Initial Coin Offerings (ICOs) have emerged as a new method of raising capital without having to go through the regulatory hoops associated with an IPO process. Instead of shares, cryptocurrency tokens are issued to investors and priced accordingly. ICOs are typically concluded faster than IPOs, and the issued tokens can be monetized on cryptocurrency exchanges if their values go up. The market is currently littered with hundreds of ICOs. Investors have to know how to sift the ICOs with potential from those which are just a pile of junk. However, a good ICO investment can pay off handsomely for the investor.Mangrove Capital, in a report that was published on the Business Insider website, estimates that the average ICO return in 2017 is 1,320%! After a long time sitting on the sidelines, institutional investors are starting to take notice.

CFD Trading

Trading of cryptocurrencies on exchanges and on online platforms has seen tremendous growth in 2017, making the collapse of exchanges such as Mt.Gox look very distant. It is hard to imagine that just three years ago when Mt.Gox collapsed, it looked like cryptocurrencies were about to become relics; products of a failed experiment in altering the global financial landscape. But here we are, with exchanges like GDAX, Gemini, Bitstamp, Poloniex, and others leading the way. Many forex brokers are also incorporating cryptocurrency pairs on their trading platforms. This has deepened the online trading market and the trend looks set to continue in months to come.

Crypto Hedge Funds

The announcement by TechCrunch founder Michael Arrington that he was about to launch a $100million Ripple-denominated hedge fund is presently causing a buzz. This is no doubt a great addition to the crypto hedge fund market which has already seen big players such as Meta-Stable and PolyChain Capital. While retail traders may not be able to operate on the scale of these mega crypto funds, they can tap into smaller crypto hedge fund projects which are being spearheaded by retail brokers such as eToro.

Conclusion

The institutional investors have traditionally been the ones driving price movements in the financial markets. However, they have been slow in reacting to the cryptocurrency investment boom. They have started to take notice. Goldman Sachs is mulling a Bitcoin/Altcoin trading desk, and NASDAQ has announced its intention to establish the trading of cryptocurrency futures on the exchange.

If the smart money has noticed the benefits of investments in cryptocurrencies, you should too and get in on the party.

DISCLOSURE: The information in this article is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. It is very important to do your own analysis before making any investment in Cryptocurrencies based on your own personal circumstances.​


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


Discover: Trending Events

United Nations
Blockchain for Europe
Humanity 2.0
World Economic Forum

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
GOOG

     
XOM

     
BRK.A

     
FB

     
JNJ

     
WFC

     
T

     
NFLX

     
TSLA

     
V

     
UNH

     
PG