How to Invest in Crypto: A Guide for Professional Investors
May 25, 2023
Crypto assets have emerged as an attractive new asset class for a diverse range of investors looking to invest in alternative assets. Fortunately, the crypto markets offer a variety of investment opportunities, allowing any type of investor to take part in the growth of the crypto ecosystem.
Read on to learn how to invest in crypto in this beginner’s guide for professional investors.
What is Crypto? The Birth of a New Asset Class
Cryptocurrency is a decentralized form of digital money created to enable peer-to-peer value transfers over the Internet. The “crypto” in the term cryptocurrency comes from the use of cryptography in securing the transactions and maintaining the integrity of the ledger.
Unlike fiat money which is issued and backed by a government, cryptocurrencies operate without a centralized authority on distriubbuted, peer-to-peer blockchain networks.
The first cryptocurrency, Bitcoin (BTC), was created in 2009 to provide the masses with intermediary-free digital money. Banks and other third parties aren’t needed when two parties transact directly with each over the Bitcoin network.
Other cryptocurrencies, referred to as altcoins, were created with the aim of solving different issues, like the speed at which money can be transacted or the privacy of money transactions. The first altcoin, called Namecoin, was launched in 2011. Litecoin, which is still around today, followed in the same year.
While cryptocurrencies are yet to succeed as money or alternative payment rails, they have birthed a vibrant new asset class, allowing investors to speculate on the performance of a range of crypto assets with different use cases. This is reflected in the exponential growth of crypto assets: in a little over a decade, the market capitalization of crypto assets increased from zero to more than 1 trillion dollars, highlighting investor interest in this budding new asset class.
While some investors are speculating on the success of specific blockchain networks, others are using crypto assets to mitigate risk through diversification, particularly when certain cryptocurrencies have proven to be uncorrelated to other assets in their portfolio.
How to Invest in Crypto Assets: 4 Investment Options
Now, let’s take a look at how you can invest in crypto using a range of different investment vehicles.
The most obvious way to invest in crypto assets is through purchasing and holding them directly. To buy crypto outright, you will need a crypto wallet and a crypto exchange account, and then buy the crypto asset of your choice. After purchasing a crypto asset, move it to a personal, non-custodial wallet for safekeeping.
Since crypto assets perform differently, it’s essential to research the crypto assets you plan to invest in. Most people typically gravitate towards Bitcoin, the top crypto asset by market cap. Compared to other traditional asset classes, Bitcoin was the best-performing asset of Q1 2023, recording a 72% gain and outpacing Nasdaq 100, S&P 500, and iShares 20+ Year Treasury Bond ETF, which reported gains of 20.5%, 7%, and 6.7%, respectively.
Moreover, Bitcoin’s price growth over a longer time period is staggering. If you had invested $1,000 in April 2013, your investment would have been worth $357,718.45 as of March 31, 2023.
If you don’t want to hold crypto directly, you could buy crypto stocks, shares in public companies that have added crypto assets to their balance sheets, or those that operate in the crypto industry.
For instance, you could consider stocks in public Bitcoin mining companies like Hut 8 Mining, Hive blockchain technologies, Marathon Digital Holdings, or Riot Platforms. Another option is stocks in public companies holding a large amount of Bitcoin on their balance sheets, such as MicroStrategy, Tesla, and Coinbase.
Just like traditional stocks, crypto stocks are purchased using a broker and are accessible to all types of investors.
Traditional investors will feel right at home when investing in crypto through passive vehicles like ETFs, ETNs, ETPs, mutual funds, investment trusts, and index funds. The only difference between crypto and traditional funds is the underlying asset or basket of assets.
However, publicly available crypto funds may only be available for a few crypto assets, as most of them only cover the most popular ones like Bitcoin and Ether.
Some of the most well-known crypto funds are the Proshares Bitcoin Strategy ETF, Bitwise 10 Crypto Index Fund, Grayscale Ethereum Trust, and the Bitcoin Strategy Profund mutual fund. These funds can be bought via brokerage accounts or the fund’s website.
Besides directly buying crypto assets on crypto exchanges or indirectly through passive investment funds, investors can also buy crypto derivatives like CFDs, futures, and options on different platforms.
Crypto derivatives enable investors to speculate on the price of Bitcoin (or other crypto assets) without having to own the underlying asset.
To trade crypto derivatives, you will need a broker that provides you with access to derivatives exchanges, or you can sign up for crypto derivatives trading platforms, such as ….
Active vs. Passive Crypto Investing
In the crypto markets, you have the choice between actively managing your crypto asset exposure by buying and selling crypto to meet your investment needs or purchasing index tracker funds to invest in the wider crypto markets.
Moreover, since the market tends to track Bitcoin’s price movements, you could also invest in Bitcoin (either directly or through a Bitcoin ETP) as a proxy for crypto as an asset class if you prefer to invest passively.
Crypto Investing Risks
While crypto assets have the potential to generate high returns, they are a high-risk asset class with a range of different risks to be aware of.
Crypto assets are highly volatile. This makes them a high-risk asset class only suitable for investors with a high-risk appetite.
That said, the volatility of crypto assets isn’t the same across the board. Lower market cap digital assets that are less established may experience higher volatility than high market cap assets that have been around for longer. For example, Bitcoin’s 24-hour price change at the time of writing was about 2% compared to Zilliqa’s 5%. Bitcoin is the top asset by market cap, while Zilliqa is ranked 87th on CoinMarketCap at the time of writing.
Despite the increasing popularity of crypto asset investing, there’s still significant regulatory uncertainty across the globe in this space.
For example, the United States SEC says all crypto assets apart from Bitcoin, including Ether, are securities. Conversely, the CFTC has said Ether is a commodity, not a security. This means regulators haven’t clearly defined and agreed on which crypto assets are securities and which are not, adding to the uncertainty around digital assets.
For investors, this uncertainty and confusion put their investments at risk. As we’ve seen in the past with ventures like Ripple, investors can lose money when regulators choose to sue project founders for selling an unregistered asset that they’ve suddenly decided to label a security.
Risk of Losing Crypto
The lack of trusted intermediaries means investors are responsible for safeguarding their digital assets. If mistakes are made, like failing to back up a wallet, investors could end up losing all of their holdings.
Moreover, the security of different blockchains varies. While Bitcoin has proved to be the most secure blockchain by far, other blockchains haven’t been so lucky to earn this reputation, as some have had security issues in the form of 51% percent attacks. That means buying crypto assets running on less secure blockchains could also put your investment at risk.
Unforeseen Market Changes
Ten years ago, Bitcoin was largely uncorrelated to gold, stocks, and long-term treasuries. In the past year, however, the correlation between Bitcoin and these assets has increased.
This is a major change since one of the key reasons experts encouraged investors to add crypto assets to their portfolios was because they were uncorrelated to traditional assets.
Should this change and hold over a longer period of time, investors may have to re-evaluate cryptocurrencies as diversification assets.
The Bottom Line
Crypto is a high-risk, high-reward asset class. Yet nothing is guaranteed, and investors must apply adequate risk management strategies to reduce risk while maximizing returns.
As the crypto markets mature, volatility is slowly declining for leading crypto assets, and the entire crypto investment ecosystem is becoming more secure and robust, giving more investors comfort as they venture into the brave new world of crypto.
How do I know what crypto to invest in?
There’s a reason why “do your own research” (DYOR) is a common phrase throughout the crypto space. Research allows you to analyze the historical performance of crypto assets, the security of their respective blockchains, the project’s vision, as well as the project’s ongoing development.
By conducting thorough research and ensuring the assets in which you invest are aligned with your risk/return profile, you will likely find the right crypto assets to add to your portfolio.
Is crypto a risky asset?
Yes. Crypto is a high-risk asset class due to price volatility, regulatory uncertainty, the challenges of secure asset custody, and other factors. Before investing in crypto, ensure that you are aware of all the risks involved.
Is crypto riskier than stocks?
Generally speaking, crypto is riskier than stocks. While there are also highly volatile stocks, if you compare the volatility of the top 30 crypto assets with the volatility of the 30 largest stocks in the S&P 500, you will find that cryptocurrencies are more volatile.
Moreover, crypto asset investors have to consider regularity risks and the risk of losing funds due to hacks or errors in asset custody.