Cryptocurrency can be a high-reward investment. But for that reward, you also have to bare higher risk.
Cryptocurrencies are notorious for being extremely volatile. Bitcoin, for example, can have a $1,000 price swing in a single day. For comparison, some of the most volatile stocks may rarely experience a $100 price swing.
But if you can stomach the up and down swings, cryptocurrency can have a place in a diversified portfolio. Plus, there are ways to invest in cryptocurrency that don’t involve such high levels of volatility risk. In this article, we’ll look at a few different ways you can invest in cryptocurrency.
How To Invest In Cryptocurrency Directly
With direct cryptocurrency investing, there’s no middleman involved. You’re holding the actual cryptocurrencies in your digital wallet. To purchase cryptocurrencies directly, you’ll need to go through one of the exchanges that specialize in trading cryptocurrencies.
A few of these are Coinbase, Robinhood, Uphold, and Binance. If you’ve never invested directly in cryptocurrencies, it’s important to understand the difference between base coins and alt coins.
Bitcoin and Ethereum are base coins. These coins can be purchased directly with fiat currency (i.e., US dollars deposited into your exchange account or through a debit card).
There is often a fee for exchanging fiat currency for cryptocurrencies. This might be in a commission or a spread on the bid/ask price of the cryptocurrency.
Alt coins can’t be purchased directly. Zcash, XRP, Monero, and Litecoin are all alt coins. To trade alt coins, you first exchange fiat currency for a base coin. Then you exchange the base coin for an alt coin.
Purchasing alt coins might sound like a convoluted process. But, for many people, they have plenty of base coins to trade and don’t have to worry about the fiat to base conversion.
Binance is a great place to invest in alt coins.
How To Invest In Cryptocurrency Funds and Futures
Holding a fund with exposure to cryptocurrencies can reduce volatility. You also don’t have to worry about exchanging from fiat currencies into a cryptocurrency or maintaining a digital wallet.
Grayscale Bitcoin Trust (GBTC)
GBTC is a fund that does hold Bitcoin. The fund does not track Bitcoin 1-1. Whereas Bitcoin is several thousand dollars, GBTC is currently only $10.86. GBTC is not nearly as volatile as Bitcoin.
However, GBTC’s 2% management fee is much higher than you'll pay for the typical index fund or even actively-managed mutual fund.
The Chicago Mercantile Exchange (CME) has a futures product called the Bitcoin Futures Contract (BTC). It tracks Bitcoin 1-1.
A futures contract doesn’t make the best investment since it expires periodically and must be rolled into the next contract. But if you want to hold a position in BTC using a futures contract short-term, CME’s BTC product may be ideal.
The difference in using CME’s BTC is that you aren’t relying on a cryptocurrency exchange. Going from one cryptocurrency exchange to another can mean liquidity issues and differences in margin requirements.
But CME is a reliable exchange that has been around for decades. There’s also plenty of liquidity with BTC and CME sets the margin requirements.
How To Invest In Cryptocurrency Companies
Some companies are involved in cryptocurrencies through microprocessor technologies that power crypto mining, developing their own cryptocurrency, or creating a platform that powers cryptocurrencies (i.e., blockchain).
Each of the companies listed below have publicly-traded stocks. To invest in them, you simply need to open an account with an online stock broker and buy the number of shares you want to own. To reduce costs, look for brokers that offer free stock trades.
Except for RIOT, none of the stock tickers below are for companies that wholly rely on cryptocurrency-related technologies as their sole revenue driver. Rather, they have integrated cryptocurrency into their other revenue streams.
AMD, INTC, And NVDA
All three of these companies create microprocessors and are involved in cryptocurrencies by helping to supply crypto mining technologies. NVDA is leading the pack in this category. Its popular GPUs are used to mine Bitcoin.
Salesforce has created a blockchain (Sales Blockchain) that utilizes its platform’s metadata. It includes apps and can be shared with network partners.
V And MC
Visa and Mastercard control the flow of digital credit to and from credit cards and debit cards. They do not issue these cards directly but instead depend on different companies to handle issuing cards and providing customer support. The networks provided by V and MC make digital cash possible.
Both companies have jumped into the cryptocurrency space. V has partnered with Coinbase to issue debit cards linked to Coinbase digital wallets. MC has done something similar through a partnership with Bitpay.
Riot Blockchain, Inc. is a true cryptocurrency pure play company. It is a small company that is focused on building and supporting blockchain ecosystems. RIOT is risky, however, as the company isn’t yet producing any revenues.
There are many ways to invest in cryptocurrency, from direct investments to more indirect routes using funds and stocks. The route you choose depends on your risk tolerance and what you’re most comfortable with.
Some people may want to avoid opening up an account at a cryptocurrency exchange and are fine buying a fund or cryptocurrency-related stock. But others may feel that the potential high reward of investing directly in cryptocurrencies is worth the high risk.
Still others may be prefer to avoid cryptocurrency investing altogether. If diversification and minimal volatility are your top investing priorities, you may be better off sticking with index funds and ETFs or computer-managed portfolios with one of the top robo-advisors.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.