Thinking of investing in cryptocurrency? These days, it’s certainly an enticing idea—a new type of digital money that is (at the moment) exempt from government regulations. Financial experts agree that it is feasible to invest in crypto—as long as you can afford to lose that principle and you’re in it for the long haul. But before you put your entire savings into the latest crypto craze, ask your financial advisor how adding these digital assets fit into your overall strategies.
What is Cryptocurrency?
There are lots of would-be cryptocurrency investors who aren’t entirely sure what it is. In simple terms, cryptocurrency is a digital form of payment that is exchanged online for goods or services. Crypto, as it’s called, functions outside traditional banking systems—it’s created using blockchain technology in a distributed ledger system. In real terms, this means that cryptocurrencies are controlled by computer codes.
Bitcoin and Ethereum are the most well-known types of cryptocurrencies; others you may have heard of are Dogecoin, Polkadot, USCoin, or Tether.
How Cryptocurrency is Valued
Cryptocurrencies are a great example of Econ 101—any given digital currency is valued by the simple principles of supply and demand. That’s great, you’re thinking, but who decides how a digital coin or token is introduced to the market, and at what cost? Most cryptos are issued by privately-held, blockchain-related corporations. The underlying value may be tied to a fiat currency, such as the US dollar or the Euro. Or it may be tied to a stablecoin, which is itself pegged to a fiat currency at a 1:1 ratio. Or it may be valued based on the perceived value of the company that’s issuing the currency.
Is Cryptocurrency a Good Investment?
Most financial experts recommend not investing any money in crypto that you can’t afford to lose. It is certainly a risky investment, considering that it’s an asset class that is intangible and basically conjured out of thin air, or at least conjured out of computer code. Since crypto is currently unregulated by the Australian government (although the Australian Prudential Regulation Authority has developed a policy roadmap for regulating any financial entities trading in the cryptocurrency markets), many investors avoid this particular investment as they feel it has the slightest whiff of crypto being associated with money-laundering criminals.
That said, over a million Aussies have added cryptocurrencies to their portfolios. The industry is evolving into a legitimate asset class as more businesses accept crypto as payment. It’s no surprise that quite a few international brands, such as Microsoft, Starbucks, and some Gucci locations accept crypto. Even credit card companies like Visa and American Express are jumping on the digital bandwagon.
Diversification is Key
Smart investors know that diversification among asset classes is the best way to hedge against market fluctuations, so that when some sectors fall, others rise. There is no such thing as a perfect investment strategy, but a well-balanced portfolio—equities, cash, real estate, bonds—should see you through the rough times. Gold has long been the standard for hedging against market pullbacks, but many investors are now moving towards crypto as that hedge. There is no question that cryptocurrencies are high-risk, exceptionally volatile investments. Given this volatility, your crypto exposure should not exceed 5% of your total assets.
ETFs Introduce Investors to Cryptocurrencies
Cryptocurrency exchange-traded funds (ETFs) are not like mutual funds that directly hold stocks. Rather, they are backed by physical cryptos or derivatives. These ETFs are similar to mutual funds in that they own assets besides the cryptocurrencies whose prices they track. ETFs in this market are divided into a few broad categories.
Companies that own digital assets outright
Exchanges and miners—mining is the process that verifies and safeguards blockchains.
Traditional financial services firms—some banks are financing blockchain enterprises and developing their own applications.
Tech companies build the hardware that supports highly sophisticated blockchain systems; software companies are developing blockchain-driven businesses.
Investors who are new to cryptocurrency investing have several ways to get into this asset class—as there are many ways besides buying Bitcoin or Luna outright.
How to Invest in Cryptocurrency
Within your 5% stake in cryptocurrencies, how do you determine which digital assets best fit your strategy? There’s a rule of thumb in crypto investing, 80/20, that is basically this: don’t put all your eggs in one basket. Diversify your crypto as you would your cash and bonds.
Large Cap Crypto
Crypto is like any other asset in that there are small, mid, and large cap risk/reward categories. As with blue-chip equities, large-cap crypto investments have the lowest risk, the largest market cap, and are not the wild west of investing.
So, how is the market cap calculated when there’s no underlying product? Here’s the math—multiply the number of coins or tokens in circulation by the current market price of a single token. So if one coin is worth $30,000 AU and there are 1,000,000 in circulation, the market cap is $30 billion. Bitcoin and Ethereum are large-cap assets but not the only larger players. You may have also heard of Tether, Binance Coin or Binance USD, USD Coin, Cardano, or XRP.
Mid-Caps
Companies with a valuation between $1 and $10 billion are considered mid-cap—somewhat risky but with a decent chance of developing into a large-cap. These cryptos have a track record indicating the asset’s fundamentals are strong.
Small Cap—High Risk
Any currency with a market cap below $1 billion, or outside the top 50 cryptos by market cap, are the super volatile, higher-risk investments. As with any other investment, the greater the risk, the greater the reward opportunity. However, this scenario is what financial experts have in mind when they talk about the importance of limiting your crypto exposures.
Getting Started
There’s nothing wrong with putting some money into cryptocurrency, as long as you’re smart about it. Being smart, in this case, means working with your financial advisor to determine how you should structure your digital portfolio. Your chances of making money with cryptocurrency are as strong as with any other investment, but you should be ready for a wild ride.
Speaking with a financial advisor at Super Network will help you develop a plan for your digital portfolio. For a free, no-obligation discussion on how to conservatively invest in cryptocurrency, contact Super Network today.
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