Although weakness has recently stymied what has otherwise been a remarkable run in bitcoin (CCC:BTC-USD), that alone won’t stop enthusiasm in the cryptocurrency sector. After breaking above the $20,000 level in December, bitcoin breached $40,000 in a matter of weeks before settling down to the low $30,000 territory. But is now a time to get into crypto assets?
Shedding about a quarter of its newfound lofty price gains, the correction invariably attracted critics, calling bitcoin and the virtual currency complex a dangerous asset class. To be fair, I understand the blowback. To the uninitiated, crypto sounds like magic fairy money, like something crafted out of thin air. And if it’s created that easily, it can be destroyed just as quickly.
While I don’t want to go into a university thesis as to why people can trust crypto assets, one of the most important factors to keep in mind is double-spending, or the ability to use a digital token in more than one transaction. Of course, such a concept would imply unlimited inflation, which would make bitcoin and other cryptocurrency coins worth as much as a billion-dollar Zimbabwean note during the underlying country’s hyperinflation struggles.
And accusations of such sent a shock wave through the crypto community recently, which contributed to the decline of bitcoin and other crypto tokens. However, as Coindesk.com points out, a double-spending incident did not occur. Instead, it was a misunderstanding of the nuances and intricacies of the bitcoin network.
However, that didn’t stop the entire cryptocurrency complex from correctly sharply. This has led people to consider diversifying how they are exposed to the blockchain markets. Fortunately, the burgeoning crypto arena offers multiple ways for all investors to participate.
- Buy the crypto assets directly
- Acquire shares of GPU manufacturers
- Get broad exposure through exchange-traded funds
- Purchase stock in mining companies or mining-equipment producers
- Invest in companies which utilize the underlying blockchain technology
- Consider solar energy firms
- Regional investments where crypto or mining is popular
Each approach has their distinct pros and cons, which we’ll explore. But the important takeaway here is that you’re not limited to just one methodology. Indeed, the cryptocurrency market is much more diverse than many critics suggest.
Buying Crypto Directly
Many years ago, if you were to mention bitcoin, let alone alternative crypto coins (altcoins), you’d get a blank stare. At the dawn of blockchain technology and integration, it was difficult to understand how you get such assets in the first place.
Does bitcoin accept credit cards? Or do you have to mine the crazy things themselves? And how exactly do you cash out? What are the jurisdictional regulations regarding such transactions? So many questions.
Today, the process of acquiring crypto assets is much, much simpler. With ultra-popular exchanges and digital wallets like Coinbase, there’s never been a more conducive time to buy cryptocurrency coins directly. Better yet, once you’re satisfied with your profits, cashing out on these popular exchanges is remarkably quick and intuitive.
However, that doesn’t mean buying crypto coins themselves doesn’t have its drawbacks. For one thing, this asset class is incredibly volatile. Elation and despair are separated by mere hours, sometimes minutes. If you can’t handle stomach-churning chop, you better stay away.
As well, you generally have very little protection regarding your virtual currencies. Consider the case of a man who accidentally threw away a $275 million fortune in bitcoin. Things like this don’t happen with regular stocks because of the custodial safeguards in place.
Now, there are custodial crypto platforms available. However, if something happens to the platform, you could be up a creek without a paddle. Just something to think about before getting too heavily involved.
Limited Risk Exposure with GPUs
As you probably know, the process of cryptocurrency mining is extremely intensive. Essentially, various computers which are plugged into a target blockchain network (called a node) compete to solve an algorithmic problem first. The winner has the right to validate a block of transaction data into the blockchain, with crypto tokens as the reward for one’s troubles.
And those troubles are troubling indeed, especially if you walk away with nothing. Because your utility provider doesn’t give a ship what you used your energy for; the mere fact that you did is enough to slap you with a hefty bill. Nevertheless, this is a game of probabilities. With the right equipment, patience and commitment to the process, dedicated miners can make profits despite their astonishing overhead.
But to win consistently and with a measure of predictability, miners need the best equipment. That’s where graphics processing units or GPUs come into play. Companies such as Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) are always at each other’s throats, striving to develop the best GPU. Of course, this is great news for miners, which benefit from better products and lower costs.
Still, the main drawback for buying shares of NVDA or AMD is that these are diversified semiconductor businesses. Their fortunes are not tied to the crypto market; otherwise, they would be all over the map. But if you can’t handle all the pitfalls of virtual currencies, this may be the most risk-mitigated approach.
Diversify with ETFs
No matter what your investing style, exchange-traded funds offer valuable exposure. Rather than betting everything on one name, ETFs allow both investors and speculators to get broader coverage on a particular sector. Given the dramatic popularity of bitcoin in recent years, crypto-centric ETFs have popped up.
One of the most well-known crypto ETFs is the Grayscale family of offerings such as the Grayscale Bitcoin Trust (OTCMKTS:GBTC). Such a platform appeals to those who really believe in the cryptocurrency revolution but are nauseated with the risks of being directly exposed to the digital markets and would prefer the relative safety of the stock market.
In addition, there are ETFs that are levered to the underlying blockchain technology. An example is Siren Nasdaq NexGen Economy ETF (NASDAQ:BLCN), which feature crypto-friendly companies like Square (NYSE:SQ).
Certainly, the performance of many of these ETFs have been astounding. However, a key risk is that you’re purchasing quite a bit for the shares relative to how much crypto each equity unit represents. Also, ETFs trade under Wall Street rules whereas cryptos trade 24/7/365 across the world.
Therefore, if something happens in Asia, you can’t just dump out of your portfolio. You’ve got to wait for the falling knife to hit the ground and hope that you’re not in its trajectory.
Buying the Mining Operations Themselves
Although crypto proponents celebrate the remarkable rise in prices lately, the real “heroes” of this space are the miners. With few exceptions, virtual currencies are decentralized. And that means people have to participate in the mining process to validate transactions and to keep engagement within the target blockchain network.
Therefore, many astute investors have diversified their risk-on portfolios with companies that are connected to mining operations, such as Marathon Patent Group (NASDAQ:MARA) or the manufacturing of specialized mining equipment like Canaan (NASDAQ:CAN).
Fundamentally, it’s a compelling idea. You don’t have to worry about the administrative concerns of crypto investing. For instance, if you forget your password or throw away your hard drive, flash drive or even your computer, you don’t have to fret. Since stocks are basically custodial, you can just go to your broker and explain what happened.
As well, mining companies and manufacturers enjoy enormous upside when the underlying crypto assets are on fire. And let me tell you, they are on fire!
However, please be aware that in some cases, this approach could be riskier than buying blockchain tokens directly. Recently, a class-action lawsuit was filed against Bit Digital (NASDAQ:BTBT), alleging that it is “a fake cryptocurrency business” which is “designed to steal funds from investors.”
Bottom line: always perform your due diligence and be skeptical of outlandish claims (or even reasonable ones).
Stock Up on Companies Using Blockchain
Another potentially safe approach to gain exposure to crypto markets is buying shares of companies that utilize blockchain technologies in their business. At the end of the day, reward tokens will feature fierce debate – and if they don’t, that means we could be in a bubble! But there’s no debating the groundbreaking utility of the underlying blockchain.
What makes bitcoin so powerful is that it de-levered payment transactions away from the staid global financial infrastructure – which is tied to human intermediaries – and instead introduced the concept of decentralized payments without the need of such middlemen.
Later, the Ethereum (CCC:ETH-USD) blockchain came along and introduced the idea of smart contracts, which forges the path to potentially remove intermediaries in other industries, such as law and real estate.
Even better, publicly traded companies like Lemonade (NYSE:LMND) are rapidly integrating blockchain into their daily operations. One of the features that makes Lemonade so successful is its rapid-fire payments for claims. Well, that comes about through the company’s usage of smart contracts.
So long as you’re investing in fundamentally sound companies, this approach doesn’t have as much risk as many other methods. However, you’re limiting upside potential so it’s not great for growth-seeking speculators.
With the controversial election of President Joe Biden, the U.S. will enter a new phase in how it approaches climate change and the environment. This has been recently demonstrated by Biden’s executive order to return our nation to the Paris Agreement.
Naturally, Biden’s election and the Democrats securing control of Congress has been a boon for renewable energy stocks. But it can also be a catalyst for crypto assets. As I mentioned earlier, the process for mining cryptocurrency coins is extremely energy intensive. But with solar panels improving in efficiency and coming down in cost, mining becomes a more attractive proposition.
I explored this idea in December, which proposes that with solar panels running – particularly in the hot parts of the U.S. – crypto miners can possibly save 10% to 20% off their utility bills. Savings like that may not matter to the average household. But if your utility bill is in five-digit territory or more because of your mining operations, 10% to 20% adds up very quickly.
Though creative, the risk here is that this is a limited-use application for solar energy. Therefore, I would primarily invest in solar energy companies which have upside in their core business, not because a few of their clients are mining cryptocurrency tokens.
While the U.S. is a world leader in multiple industries, when it comes to crypto markets, it lags many other countries. For example, the Securities and Exchange Commission’s lawsuit against Ripple Labs – the developer of the ripple (CCC:XRP-USD) payment protocol – for essentially sidestepping regulations of securities and initial public offerings may send a chill to crypto and blockchain-related enterprises.
On one hand, I can appreciate why the federal government is so severe with their stance on virtual currencies. You can’t just let companies sidestep laws that others have to abide by simply because the platform of choice is a crypto coin and not the U.S. dollar. As well, Uncle Sam needs his tax revenue.
But on the flipside, regulations can stifle growth. And that brings us back to the age-old debate of capitalism versus socialism. Fortunately, not every country has a stick up its hind end regarding the cryptocurrency complex. For example, Japan views XRP as a cryptocurrency, not a security. Thus, if you really believe that cryptocurrencies will change the world, you might look into Japanese stocks or ETFs.
Similarly, cold climates like Sweden may be more efficient in mining crypto tokens because the equipment won’t heat up as dramatically in hotter climates, possibly presenting cost-saving opportunities. Indeed, many are using the heat emitted from cryptocurrency mining in very creative ways.
Of course, this is a super-long approach to investing in virtual currencies. Thus, the risk again is limited upside potential. However, you will have the personal satisfaction of being a blockchain futurist.
On the date of publication, Josh Enomoto held a long position in BTC, ETH, and XRP.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.