Investing in cryptocurrency: is it so dangerous?
Skeptics consider investing in bitcoin and other cryptocurrencies unstable and risky decisions. Despite this, a huge number of users favor investing in digital currency. Bitcoin is one of the most secure systems in terms of technology. Amy Arnott, portfolio strategist at Morningstar, says that cryptocurrencies can be included in your diversified portfolio.
«Cryptocurrency, of course, is becoming more and more authoritative as a separate asset class and is increasingly entering the investment mainstream. This is definitely something that long-term investors should consider if they are more risk tolerant.».
At the same time, the expert gave the standard advice - the size of the cryptocurrency relative to the entire investment package should be no more than 2%. This is due to the high volatility – cryptocurrency needs to be monitored more closely than standard investment instruments.
Is cryptocurrency so dangerous as a means of investment
The number of different cryptocurrencies on the market is continuously growing. Today it is more than 2.6 trillion dollars. Bitcoin is volatile, but in some cases has shown lower correlation with major asset classes such as stocks and bonds, and has sold less with other assets at risk when markets fall.
You need to buy cryptocurrency directly through crypto exchanges and platforms, Arnott advised. In turn, Isaiah Jackson, the author of the bestsellers "Bitcoin and Black America", says that bitcoin is a long-term asset and will remain so.
«If you want to be a part of this, you have to think about the long term».
Jackson argues that there is volatility in any such market. There are no guarantees and schemes to get rich with the usual purchase of shares, this requires time and patience. With long-term investment, the volatility loses its power on the potential of the instrument.
Arnot compared investments in digital currency with the boom of investing in the Internet in the 90s. At that time, in order for someone to start investing in your company, it was necessary to create a company website.
«Consider it a growth asset and really a play on the long-term transition to digital money and the ongoing revolution in financial technology», — объяснила Арнотт. «You are not investing directly in the underlying technology, but you are getting an indirect impact on it».
The strategist studies the market, blockchain, NFT and other things that have been appearing more and more in the financial market lately. The Bakkt exchange (BKKT) recently announced a collaboration with Mastercard (MA) to facilitate users to pay using cryptocurrencies.
«We want to provide an opportunity to use cryptocurrency in everyday transactions», — Bakkt CEO Gavin Michael said in an interview Yahoo Finance. «The partnership with Mastercard includes the opportunity for us to provide crypto rewards, another way to gain ownership of assets in this space in a fairly simple way».
ETFs vs. Exchanges
Investing in cryptocurrency is only growing every month. Last week, the SEC approved the first ETF, an exchange-traded fund for bitcoin futures. This may have made it easier for investors to access information, but it will not necessarily be the best way to invest.
Arnott says that ETFs provide transparency and easy accessibility through an existing brokerage account, but they may not accurately track the price of BTC, which leads to investors not getting the full benefit of the digital asset..
ETFs buy a futures contract for the first month. As these contracts are rolled over, funds may have to buy futures at a higher price. Arnott estimates that profits could decline by 5% or 10% each year. This makes buying real cryptocurrencies through crypto exchanges a real chance to earn compared to investing in ETFs.
«I think we will eventually see a crypto ETF that tracks the spot price», — Arnott says. «But at the moment, if you want to add cryptography to your portfolio, you're probably better off buying it directly through a crypto exchange or platform».
Bakkt made it possible to trade bitcoin futures before the advent of ETFs. Michael also believes that ETFs will eventually be allowed to invest in real cryptocurrencies, not just futures contracts. He says that, in his opinion, bitcoin ETF futures will really help smooth out volatility over time..
«We expect that the evolution in this space will lead to a shift from cash-settled prices through futures contracts to physical delivery contracts, as has been the norm for other ETFs that have been tracked based on the commodity.», — he said.