If you’ve followed the news recently, cryptocurrency is all the rage. Every day there is a new coin that is making people money.
It’s hard not to feel FOMO, or like you missed out if you’re sitting on the sidelines.
Many will have you believe that cryptocurrency is the future, making it a lucrative investment. The jury is still out on whether cryptocurrency is here to stay, and even if it does, it is anyone’s guess which of these coins will survive in the future.
The world of cryptocurrency is still very new and full of risks. First, you need to decide if cryptocurrency is a suitable investment for you.
If you’ve done your homework and are ready to take the plunge into the world of cryptocurrency, here are three ways to make your first investment in the world of cryptocurrency.
Cryptocurrency coins
The first way to invest in cryptocurrency is to buy cryptocurrency. You essentially exchange dollars (or your local currency) for the cryptocurrency you want to purchase.
There are many different forms of cryptocurrency. Some popular ones are Bitcoin, Ether, Solano Cardano, Polkadot, Dogecoin – the list goes on.
You can purchase these cryptocurrencies through a brokerage or cryptocurrency exchange. There will usually be fees associated with this transaction. Once you have the cryptocurrency you want, you can either hold them with the brokerage, or some brokerages allow you to move the currencies you just bought into your digital wallet.
Some popular cryptocurrency exchanges and brokerages are Coinbase and Binance.
If you are in Canada, you might want to check out Coinsquare (which I am currently using), Shakepay, or Newton.
Pros of investing in cyrptocurrency coins:
Direct exposure to cryptocurrency
This is the most direct option to buy and invest in cryptocurrency. You own the coins that you purchase, whether you move them to your wallet or leave them in the custody of the brokerage.
Can move it to your own wallet (depending on your brokerage)
Many believe that the potential for cryptocurrency signals the end of fiat money (or money issued by governments). This would be the most secure way to hedge the risk if fiat money is no longer wallet.
It would be the equivalent of buying gold as a way to minimize any risk associated with your local currency.
Access to the different cryptocurrencies
When you purchase cryptocurrency directly from the brokerage, you get to choose the currencies you invest. You can also trade between those cryptocurrencies if you are interested in keeping track of these trends.
Cons of investing in coins:
Unregulated markets and exchanges
Cryptocurrency is, in most countries, a largely unregulated market. Brokerages and exchanges do not need to offer consumer and investor protections you might get if you save money in a traditional bank account or when you buy stocks from a brokerage.
This is a new set of risks you need to be prepared to take on if you want to purchase cryptocurrency directly.
Can lose your cryptocurrency
There have been instances of people who have lost passwords to their digital wallets or brokerages that have been hacked and lost their customer’s cryptocurrencies.
While cryptocurrencies have become more mainstream, it is important to remember they are still a relatively new way to invest and have their own set of risks.
Cryptocurrency ETFs and Funds
Today on the market, several ETFs track or directly invest in different types of cryptocurrencies.
Pros of investing cryptocurrency ETFs and Funds
Easy to invest
You can buy cryptocurrency ETFs from the same bank or brokerage you use to purchase stocks and other ETFs. You will not create a new account or deal with depositing funds into a new platform.
Can be held in tax sheltered accounts
While you cannot directly buy a cryptocurrency in a registered account like a TFSA or RRSP, here in Canada, a cryptocurrency ETF can be bought and sold in a registered account. This means that your gains are tax-free or tax-deferred, which can be worthwhile if cryptocurrency continues to grow.
Some investor protection
Cryptocurrency ETFs are offered by popular investment companies. The ETFs and the companies themselves are regulated, so there may be a little less risk of investing in these than an unregulated brokerage.
Cons
Don’t directly own coins
Ownership in an ETF or Index Funds doesn’t equate to direct ownership of a cryptocurrency. You will not be able to exchange one cryptocurrency for another.
Mainstream currencies
Cryptocurrency ETFs usually provide exposure to mainstream currencies like Bitcoin and Ethereum. If you are an adventurous investor, you will not be able to dabble into the newer, smaller cryptocurrencies. This may, of course, may change in the future as the sector matures.
Potentially more expensive
ETFs and funds come with their own set of management fees and expenses. These can be a lot higher than other actively managed ETFs, which could eat into your returns.
Invest in companies that are exposed to cryptocurrency
Today, many companies have publicly said they own cryptocurrencies on their balance sheet. This could be a way to diversify their cash holdings. Or it might be because they offer their customers products related to the cryptocurrency market.
This is an indirect way to get some cryptocurrency exposure in your portfolio.
Pros of investing in companies with cryptocurrency exposure
Not directly investing in the coins
If you purchase a stock in a company with cryptocurrency, you will not own the cryptocurrency. This may help you diversify some of your risks if you trust the company’s management to make the right decision on cryptocurrency.
Easy way to dabble
If you are not sure that cryptocurrency is the future, but there are companies you trust, this can be a way to start indirectly investing in cryptocurrency.
Cons
Companies can choose to change strategy at any time
You have no control over what cryptocurrency they choose to invest, nor do you control the amount.
In fact, they may decide to stop holding any cryptocurrency at a moment’s notice. Or the company may choose to purchase more when you think that the timing is wrong. You have no control over when the company makes this decision, even if it affects your investment.
Stock price can move many reasons
While your goal may be to hold the stock to get some cryptocurrency exposure, there are many other reasons why the stock price might move. There can be periods when cryptocurrency is on an upswing, but the company is not doing well for different reasons. You will have to risk all these things that can cause stock price movements.
Investing in Cryptocurrency as a beginner
There are many ways to invest in cryptocurrency or get exposure to cryptocurrency.
At the end of the day, you need to decide your appetite for this risky asset class and how much you can afford to lose your investment if the bet on cryptocurrency doesn’t work out.