Cryptocurrencies are inherently cryptic – it’s right there in the name. And if you take Warren Buffett’s advice to never invest in companies you can’t understand, it can be difficult to justify investing in a currency that is made out of mathematics instead of gold.
But it’s also hard to ignore the astonishing performance of some cryptocurrencies: the price of a bitcoin has risen from just under $ 5,000 in March 2020 to over $ 60,000 in April.
The excitement surrounding digital currency may leave some investors feeling like the lonely kid at the pool party, wanting to join their friends having fun in the deep end, but too nervous to get started.
For investors who are cautiously curious, here are ways to gain exposure to cryptocurrency without buying it, and if you do decide to buy, how to reduce your risk.
INVESTING IN COMPANIES HELD IN CRYPTO-CURRENCY
Think of this strategy as an investment in cryptocurrency once it is phased out. Some publicly traded companies have holdings of cryptocurrency. And because they bet on its success, so can you, as these companies act as a buffer.
“When you’re considering investing in a business because it’s exposed to crypto, it really covers the gamut of your degree of direct or indirect exposure,” says Douglas Boneparth, certified financial planner and president of Bone Fide. Wealth in New York. “It just depends on how much of their crypto balance sheet is.”
Checking a company’s balance sheet can be revealing: As of June 30, 2021, Tesla had $ 1.31 billion in digital assets. And while the tech giant has received a lot of media attention for its investment, that $ 1.31 billion currently only represents about 2.4% of Tesla’s total assets. But if those assets skyrocket, as cryptocurrency sometimes has a habit of doing, the value of Tesla’s shares could as well.
INVESTING IN CRYPTOCURRENCY INFRASTRUCTURES
Another way to gain exposure is to invest in companies that have a stake in the cryptocurrency industry. Coinbase is a platform where investors can buy and sell cryptocurrency – and it’s publicly traded.
“Just like you did with gold, you can either invest in the raw material itself or in the infrastructure around it, the miners, the materials needed for mining, the same for the ‘energy and oil,’ Boneparth said. “And there are some state-owned companies that operate specifically in the blockchain space, but there aren’t many.”
Riot Blockchain Inc. is one of the few publicly traded companies that focuses on mining cryptocurrency. Riot Blockchain, among others, helps build cryptocurrency infrastructure and provides another investment opportunity adjacent to cryptocurrency.
PREPARE FOR A CRYPTOCURRENCY ETF
While there are currently no cryptocurrency exchange traded funds approved by the Securities and Exchange Commission, there is demand for them. A cryptocurrency ETF would work like any other ETF, but instead of following a market exchange like the S&P 500, it would follow a cryptocurrency. For example, a bitcoin ETF would track the price of bitcoin.
“There have been many different ETF attempts and a lot of them have been rejected. There are ETFs in other countries for bitcoin that have been licensed, and I think that’s just one thing that will happen over time, ”said Tristan Yver, chief strategy officer at FTX.US, a U.S.-regulated cryptocurrency exchange. “I don’t have an estimate of when this will happen, but I think it’s something that will happen, and I think it’s something that will allow people who aren’t comfortable invest directly in digital assets to gain exposure to bitcoin and other cryptocurrencies. “
There have been many applications for cryptocurrency ETFs, and the SEC is expected to decide whether or not to approve investment manager VanEck’s bid for a bitcoin ETF, which could be the first such fund in the states. United, November 14, 2021.
BE CAREFUL IF YOU INVEST DIRECTLY
If you are ready to invest directly in cryptocurrency, there are several ways you can mitigate your risk. One way to do this is to reduce the amount of money you invest. Some credit cards offer cryptocurrency rewards in the same way as cash back or miles. If you decide to add cryptocurrency to your wallet as rewards, you don’t even have to use your own dollars to do so.
Another way to lower your risk is to invest in stablecoins, which are similar to traditional cryptocurrencies but are backed by real-world assets, making them less prone to significant drops in value.
This article was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Alana Benson is a writer at NerdWallet.
NerdWallet: Stablecoins: what are they and how they work https://bit.ly/nerdwallet-stablecoin