Cryptocurrency Catch up
So far, in Part 1 & Part 2 we’ve looked at what is a cryptocurrency, their history and how they work. We then examined the characteristics that they have in common with traditional currencies and those that are unique to cryptocurrencies. Then we highlighted the main ones you may want to invest in and took a brief look at each of them.
Now we are going to explore ways to invest in cryptocurrencies and how this has developed. We are also going to look at some of the costs of using cryptocurrencies for transactions and when you invest.
In the Beginning
At first cryptocurrencies came about more out of convenience and cost saving. For many of us me included they were the domain of the tech world. Their scope for day to day use was limited and they weren’t embraced by the investment world. Some tech savvy entrepreneurs began to realise their potential and began taking positions. People started to understand the full scope of what a cryptocurrency was and their potential for change. They were being attracted by the decentralised structure of bitcoin and the freedom from abuse by government.
As people were attracted in the price started to climb and in turn this brought vendors. More companies started to accept them as a valid form of payment even more people started to use them. This was the beginning of the snowball effect the momentum that we see today. Cryptocurrencies on the rise and the early adopters sitting on vast fortunes Bitcoin Billionaires!
From an investment perspective, there is a big issue with Gold and that is there’s no income. You buy it hold it and hope that the price keeps on going up. It’s a one-dimensional investment, there’s nothing for you in the lean times. We know why we should have it and when the good times come boy do they come. The problem is that the lean times can be long and hard. There is an element of this with cryptocurrency currency also. Though there are interest bearing accounts becoming available with bitcoin which we will touch on later.
Ways to Invest
There are three ways of getting a stake in cryptocurrencies which are as follows:
3. Cryptocurrency Investment Trust
The main difference between exchange and broker is how hands on you want to be and just how important regulation is to you.
Using an exchange means you are dealing with an unregulated entity. There is so much growth in this sector and competition that services are improving all the time. Companies are starting to provide add on services, some of these are free whilst others you pay a fee and the general focus is increasing security. This may help to reduce the risk of dealing with an unregulated organization. The point is if anything does go wrong with the exchange you have nowhere to go and get help. It happened in 2014 with the collapse of Mt Gox.
Also there is more work when it comes to setting up your account. You will need to meet anti-money laundering requirements. This means providing certified copies of ID and acceptable proof of address and possibly prove source of funds that you invest. Once you have done this it will probably take several working days to get your account approved. There’s no regulation on cryptocurrency or the exchange I here you say and you are correct. The money you use to buy the cryptocurrency and receive if you sell it is regulated. In addition to this, exchanges don’t want people buying cryptocurrency with stolen credit cards or illegal money. After all trades are irreversible.
Picking A Platform
Choosing an exchange will initially depend on the cryptocurrency you want to acquire. Not all exchanges trade in all currencies so you will need to narrow down the ones that do. If it is bitcoin that you are looking for then your The next hurdle is finding an exchange that operates in the country where you live. Not all exchanges operate in all countries. Once you’ve established the options available to you then move onto your preferences.
Exchanges will differ mainly through cost and the interface they offer. Some provide add-on services such as insurance against hacks at additional cost. Competition is driving improved service and innovation across exchanges. Finally, the main consideration is reputation, make sure your choice is credible and is known for providing great service. This applies to coming out and not just going in make sure when people have sold and taken their money service has just been as good.
|Trade Fees||0-8%||Some have single trade fee others split between Maker & Taker fees|
|Credit Card Deposit Fee||3.5 to 8%||Not available on all platforms|
|Credit Card Withdrawal Fee||$3.80 to 2%||Not available on all platforms|
|Bank Deposit Fee||0 to 1.5%|
|Bank Withdrawal Fee||0 to $50|
If you want a more hands-off experience then a broker may be for you. Most brokers will also deal with traditional currency which means that they will answer to a regulator. This means that is something does go wrong in your dealings with the broker you can get help. Brokers also offer ancillary services such as leverage, short selling, volatility trading or the movements between currency pairings. This means that if you want to actively trade cryptocurrency then you may also want to look at a broker.
Also, if you do have an issue then dealing with a broker should be a much more personable experience. You’ll have someone that you can talk to who can hopefully help you resolve any issues. If you have an issue when dealing with an exchange then everything will be via e-mail and a bit robotic which can become frustrating.
The parameters for choosing a broker are very similar to those for choosing an exchange. Currencies available, availability in your location, service preferences and reputation.
Fees will vary from one broker to another and may also vary with trading volume. This may vary with your trading volume as well as the market in general. You may just pay a spread which is the difference between the buying and selling price. You could also pay a commission or a flat dealing fee. If you want leverage or other services these will come at an additional cost. As these fees are subject to change along with prevailing market conditions it isn’t easy to put hard figures on them.
When bitcoins were first launched the best way to make money from them was by mining them. We’ve already touched on this process so we’re not going to go over it again. In the early days, also it was pretty easy to get into essentially all you needed was a computer and some idea what you were doing.
Increased numbers and competition mean it isn’t as easy these days. Solving the confirmation puzzles is more difficult as more tokens circulate due to the natural progression of the code. This is without question true for bitcoin. Today you will need specialist hardware and will most likely need to join a mining pool. These are large groups of miners who share the spoils of their efforts.
Other cryptocurrencies that are at the earlier stages of their evolution may provide more opportunities for mining. The issue is that you don’t know what the value of the token is going to be once you’ve mined them.
The biggest reason for using an Investment Trust, Exchange Traded Fund (ETF) or Mutual Fund/Unit Trust is you don’t need to buy cryptocurrencies. Someone else will invest in and store the cryptocurrency, you simply buy units in the fund.
Some funds have a percentage of the total allocation in cryptocurrency related assets. These could be mining companies, exchanges or even other cryptocurrency trusts. Other funds devote themselves fully to cryptocurrency assets and may include shares of companies and direct currency holdings. There are also funds that invest purely in cryptocurrency with positions in different tokens. Some of these will actively trade positions whilst others may take a more passive approach. Given the high volatility of cryptocurrencies you may also find that some managers take long and short positions in their portfolio.
Each of these carry with them differing degrees of risk the more exposure to pure token you have the higher the volatility you will experience. It is therefore important that you invest in something that suites your risk profile. Having said this if you are an extremely conservative investor you probably shouldn’t be investing in cryptocurrencies at all.
The big issue with cryptocurrency funds at the moment is their cost. Specialised funds tend to be expensive and whilst they have made great returns, you pay a premium. If you bought tokens you would have made these gains anyway, in fact you would have made even more. As more entrants come into the market you will find that these costs come down. This should make cryptocurrency funds a more viable prospect. Though at the moment it is probably the most expensive way to invest in this sector.
One consensus of opinion is that once you’ve bought your cryptocurrency, don’t store them on the exchange. Many people also think that it isn’t a good idea to store any significant value on digital wallets that are connected to the internet. A hardware wallet is a much better option, more secure and provides better protection. These are hard drives or thumb drives which have additional security features to help protect your tokens. They respond to limited commands and should not get infected by malware which would compromise their security. A hardware wallet offers additional security over and above storing your tokens on a thumb or hardrive.
Bitcoin Savings Accounts
Up until relatively recently the investment options for cryptocurrency has been limited. You either trade or hold and wait for the value to increase. Over the past 18 months other opportunities have become available. One of these it the Cryptocurrency savings account which pay the investor interest on their balance.
These accounts are predominantly focused towards bitcoin as one may expect. They are designed for those investors who are in it for the longer term and would like to get a bit more from their investment. More providers are popping up all the time so the options available are on the up.
Accounts like these help expand the banking options available with bitcoin. They help facilitate loans and short selling in bitcoin.
The downside is that you are entrusting your tokens to a third party. As we mention earlier this will expose you to additional risk and possible loss. Be very careful in choosing a provider should you go this route make sure you are diligent in your research. Also, be prepared to take a lower interest rate for higher security features such as deposit insurance.