Should You Put Out Feelers For Bitcoin and Other Cryptocurrencies?
Institutional investors are showing more interest in cryptocurrencies following long-term price appreciation and increasing mainstream adoption.
Asset managers increase their exposure by either directly buying cryptocurrency or investing in cryptocurrency-related stocks.
In this article, we address some of the popular questions that many new investors have. To begin with, should you even dip a toe into the world of bitcoin and other cryptocurrencies?
For a long time, the major players in the cryptocurrency industry were retail investors, but today, professional asset managers are readily adding digital assets to their portfolios as well.
Several factors contributed to this change of heart. Traditional finance, historically, has been unfriendly to crypto – an asset class designed to disrupt the financial status quo. Ten years ago, most hedge funds didn’t consider cryptocurrency as a viable investment option. Contrary to the perceived stability and manageable risks offered by the stocks and bonds that they were used to, bitcoin seemed too complicated and extremely volatile.
It wasn’t that trust managers were averse to new technologies; it was just wise to avoid new, untested, highly volatile assets following the burst of the dot-com bubble a decade earlier. Bitcoin didn’t conform to the norms of traditional finance, and although its potential was much touted by enthusiasts, support and global adoption were not commensurate with this sentiment at the time.
Today, a lot has changed in the industry. For one, adoption has improved significantly. There is widespread usage of cryptocurrencies for cross-border payments, and an increasing number of people see bitcoin as a store of value and a hedge against inflation, especially against the backdrop of the pandemic-induced weakness in traditional currencies. Monthly crypto trading volume hit $2.3 trillion in May 2021, up from the high of $346 billion recorded in December 2017, figures from TheBlockCrypto show.
In addition, more mainstream corporations have embraced cryptocurrencies and are providing crypto services to their customers. Big firms like Tesla hold bitcoin while Microsoft, Overstock, and Starbucks now accept cryptocurrency as a payment method. Payment services such as Paypal and Square also allow users to buy cryptocurrencies via their platforms, and the US Office of the Comptroller of the Currency (OCC) has granted banks permission to offer crypto custody services to their customers.
There’s also more coverage of cryptocurrencies in mainstream media. Tech bigwigs Elon Musk and Jack Dorsey openly state their support for bitcoin, and a number of crypto critics have changed their minds about the technology.
Getting started with cryptocurrencies is easier than ever today. The cryptocurrency ecosystem has expanded significantly, but there are still serious risks inherent in crypto investments, mainly due to the digital asset market's volatility and vulnerability to speculations.
However, cryptocurrencies have posted steady, positive growth throughout their brief existence, potentially making them a suitable option for long-term investors. It was only a matter of when, not if, institutional investors would start giving cryptocurrencies serious thought.
Should I invest in crypto?
Indeed, some people have made solid money with cryptocurrencies. Bitcoin’s year-to-date price has risen almost 400%. From just over $9,000 in mid-2020 to $32,000 in July 2021, after hitting an all-time high of more than $64,000 in April 2021. An investment of $1,000 during this period, if timed perfectly, would have yielded close to $3,000 in profits alone. But that, of course, is the benefit of hindsight.
Recent events indicate that asset managers and hedge funds have realized this opportunity for profit because there has been a fresh inflow of institutional money into cryptocurrencies since the start of the year.
An annual report by PwC and Elwood Asset Management says that half of the hedge funds around the world are now invested in cryptocurrencies. The total value of crypto assets under management by hedge funds increased globally from US$2 billion in 2019 to nearly US$3.8 billion in 2020, the report said. It added that the average crypto hedge fund made a 128% return in 2020 against +30% in 2019.
MicroStrategy, GrayScale, Tesla, and Galaxy Digital Holdings have all extended their portfolios to include cryptocurrencies, and a sizable number of institutional investors who were experimenting with crypto assets plan to increase their exposure, research of wealth managers commissioned by European investment firm Nickel Digital Asset Management says.
In the international survey of 100 institutions, 82% said that they will increase their holdings of digital assets by 2023. Fifty-eight percent of respondents cited long-term capital growth prospects as the main reason they’re increasing their allocation; 38% said they’d become more comfortable holding cryptocurrencies and 34% put it down to the improving regulatory environment surrounding cryptocurrencies.
These noteworthy findings are a testament to the impressive journey cryptocurrency has taken since Satoshi Nakamoto published the Bitcoin whitepaper, but it is also obvious that cryptocurrency is still in its early days.
Recent figures compiled by The Carfang Group showed that US corporations had cash holdings amounting to $3.82 trillion on their balance sheets at the end of 2020. If only 1% of this total, $38.2 billion, were allocated to cryptocurrencies, it would be an almost 600% increase from the current $6.5 billion in corporate Bitcoin holdings.
Furthermore, even if corporate, hedge fund and institutional investor crypto accumulations remain less than 5% for years to come, inflows could significantly outstrip the $38.2 billion previously mentioned.
How much should I invest?
Although cryptocurrencies have indisputable profit potential, their prices are still volatile and vulnerable to speculations despite improving in several areas over the last decade.
The ideal amount an investor should put into cryptocurrencies depends on their tolerance for risk and capacity to absorb losses. Most asset managers who invest in crypto on behalf of their clients recommend sticking to a small allocation, say, 0.5-1% of the total portfolio. Considering that the entire crypto market is worth just 0.5% of global stocks and bonds, anything above 2% looks aggressive.
Those who feel confident about handling the risks can start small and buy a fixed amount of cryptocurrency at regular intervals until they have accumulated enough crypto assets to fill their targeted quota. This method of crypto investment, called dollar-cost averaging (DCA), helps you accumulate your target asset while mitigating the effects of short-term price volatility.
Also, having substantial knowledge about the crypto sphere and exposure to best practices in the industry goes a long way in helping to manage the risks associated with this volatile asset class.
What should I buy to get exposure to cryptocurrency?
The easiest and quickest way to gain exposure to cryptocurrencies is to create an account on leading cryptocurrency exchanges like Binance and buy bitcoin or any other digital asset. You can also use a trading platform that offers crypto services, such as eToro or Robinhood.
To buy $1000 worth of bitcoin on Binance, an investor would have to pay about $1 in fees, and if they choose to pay the fees with BNB, they will get a further discount. Users can fund the transaction with fiat via a debit card or a bank deposit.
Another way to get exposure to cryptocurrencies is to purchase shares of crypto-related enterprises or funds that invest in cryptocurrency. Grayscale Investments LLC holds nearly 650,000 BTC, which allows investors to treat its shares, to a certain extent, as a proxy for BTC. The trust charges a 2% annual fee and can trade at a premium or discount to the value of the BTC it holds.
Big brokerage firms like Fidelity Investments don’t allow their clients to purchase cryptocurrencies directly, but they can purchase crypto-related stocks and shares. This way, they will get an asset whose value is correlated with the value of cryptocurrencies while avoiding the risks associated with holding digital assets directly.
Investors can also get exposure to cryptocurrency through BTC futures. These can be purchased from derivatives providers CME Group and CBOE. They are a useful way for investors to test the crypto market using a regulated product trading on a reputable exchange. Asset management firm BlackRock has a small percentage of its holdings – 0.03% – in Bitcoin futures.
Should I diversify exposure across cryptocurrencies?
Some crypto buffs only deal with bitcoin because of its superior network size and first-mover advantage. Others take a lesson from the dot-com shakeout and choose to see the good in crypto projects that came later.
As scams are common in the crypto space, it is wise to conduct adequate research and invest just a token in relatively unknown cryptocurrencies.
According to a PwC report, 92% of crypto hedge funds trade bitcoin; 67% are interested in ether, while 34% and 30% trade litecoin and chainlink, respectively.
To make the most from crypto diversification, it is pertinent to know key industry players and understand the linkages between BTC and macro fundamentals, while also keeping an eye on investor sentiment and BTC's correlation with other crypto assets through price cycles.
How often should I rebalance?
The dominant approach to managing a diversified portfolio is to buy and hold assets while rebalancing them annually after a performance evaluation. But it is wiser to rebalance more often if volatile assets like cryptocurrency are a part of the portfolio. Rebalancing consistently – say, monthly or when your allocation drifts away from your target by one percentage point – looks ideal.
The crypto industry moves at a very fast pace, and although no one can predict for certain how things will pan out next month or even tomorrow, many will agree that digital asset adoption will continue to go up.
With adoption and recognition fueling value, more institutional money will flow into cryptocurrencies for the foreseeable future. However, for those bold enough to dip a toe in, making maximum gains depends largely on making use of the best trading infrastructure available and getting important information about the industry.
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The article has been edited on July 27, 2022.
Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.
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