Investing in cryptocurrency seems profitable and replete with fast profits. After all, during the past six months, bitcoin (BTC-USD) bottomed out in mid-March near $5,000, only to rebound to over $9,400 this week. That’s nearly a 100% profit in three months. Yet, in mid-March the crypto markets were scared due to the novel coronavirus pandemic and the closing of U.S. and global economies.
Bitcoin was priced so low because investors feared for the health of the economy and its people.
Identifying the market bottom is difficult, if not impossible. That recent March low followed a mid-February price peak of over $10,000. Not only is it difficult to pick an investing valley but doing so requires solid confidence during times of uncertainty.
Unlike investing in stocks and bonds, which are regulated by the U.S. government, investing in cryptocurrency is nebulous. There are thousands of distinct cryptocurrencies, while bitcoin and ethereum are the most recognizable.
What is Cryptocurrency?
It is a digital currency that is tracked on a ledger. It is decentralized and encrypted. Cryptocurrency is based on blockchain technology, which is a chain of digital information that isn’t controlled by a centralized institution. Blockchain and cryptocurrency are not a part of any centralized banking system.
Although investing is one use of cryptocurrency, there are other reasons to buy the asset:
Cryptocurrency investing is speculative. Prices are extremely volatile, and the risks are distinct from investing in conventional assets. For example, the currency is typically stored in a digital wallet — and that means it may be stolen by savvy hackers.
If you’re interested in investing in cryptocurrency, here are three of the best ways to invest.
Ways to Invest in Cryptocurrency: Robinhood App
At present, Robinhood is the only broad investment app that offer users the opportunity to invest in cryptocurrency. Most states, although not all, allow commission-free investing in crypto with the Robinhood app. This lets users buy and sell:
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Bitcoin SV (BSV)
- Dogecoin (DOGE)
- Ethereum (ETH)
- Ethereum Classic (ETC)
- Litecoin (LTC)
Robinhood is appropriate for investing in specific crypto assets, but not for using the digital currency to buy goods and services.
Other crypto investing platforms do offer apps, including Binance, Coinbase, KuCoin and Changelly. But, unlike Robinhood, these apps trade crypto only, not other types of investments.
Arguably, the most popular bitcoin exchange is a full-service cryptocurrency firm. Before investing in crypto, there are a few preliminary steps to take.
First, since bitcoins aren’t physical assets, you need to secure a digital wallet. Coinbase offers a digital wallet, and the crypto secured on their servers is protected by their insurance policy. Their process is simple — create an account, link your bank account, and begin buying and selling.
Coinbase has a large base of available crypto assets for trading, as well as a library of education resources.
As with any investment, investigate the fees before selecting a crypto exchange. Coinbase has been charged with having higher fees than some competitors.
Other competing and popular digital investment platforms include Kraken, Coinbase, Cash App and Binance.
Exchange-traded funds have made investing in a variety of assets as easy as buying and selling a stock online. To answer the need for more seamless crypto ETFs are filing with the SEC. The Securities and Exchange Commission is moving slowly with this new asset class.
Unfortunately, at present only institutions and enormous investors can participate in the following cryptocurrency funds.
Launched in September the VanEck SolidX Bitcoin Trust is currently available only to institutional buyers like a bank or hedge fund.
Coinbase offers an index fund with exposure to four of the largest digital currency. The Coinbase Index Fund is also available only to large investors with a minimum of $250,000.
In the meantime, smaller investors can purchase blockchain ETFs. These funds invest in companies involved in developing and using blockchain technology. They also track the performance of Bitcoin or other cryptocurrencies through futures contracts or by owning the underlying currencies.
The three largest blockchain ETFs are:
- Amplify Transformation Data Sharing ETF (NYSEARCA:BLOK)
- Reality Shares Nasdaq NexGen Economy ETF (NASDAQ:BLCN)
- First Trust Index Innovative Transaction & Process ETF (NASDAQ:LEGR)
The ETFs are volatile, like their underlying assets.
Like any other investments, do your homework before investing. Understand what you are investing in as well as the risks and returns. With speculative investing, it is wise to invest only a small portion of your net worth. That way, should the crypto investment disappoint, you’ll have other assets to offset the loss.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.