How best to gain cryptocurrency exposure
The cryptocurrency space has exploded over the last year, with an exponential increase in assets, providers, products and available platforms, as well as investors in the space. From exchange-traded products or exchange-traded funds to CME futures, cryptocurrency exchanges and derivatives, the choice of products emerging in the most recent wave of adoption can be overwhelming for an investor looking to gain cryptocurrency exposure.
Cryptocurrencies have moved from being obscure and private assets to now being adopted by hedge funds and institutional money. However, this rush to cryptocurrencies has not corresponded with the same level of growth in understanding of the cryptocurrency market.
In fact, a recent study by the UK’s Financial Conduct Authority showed that while the profile of cryptocurrencies has risen, the overall understanding of cryptocurrency has declined, suggesting some cryptocurrency users may not fully understand what they are buying. The well-documented volatility in the cryptocurrencies market makes it attractive for directional, event-driven and technical traders. Likewise, we also see longer-term investor types of clients increasingly taking a more long-term position through either exchange-traded funds or even physical cryptocurrencies.
Regardless of the short- or long-term investment profile, cryptocurrencies are still a largely unregulated space with high volatility. Investors looking to enter the world of cryptocurrency would be wise to apply the same principles of risk management, as they would do with any other investment product. How to enter the cryptocurrency space depends on an individual’s investment priorities, risk appetite and personal view on the future of the cryptocurrency market. However, here are three ways retail investors are gaining exposure to the market:
The risk-averse approach
Perhaps the most straightforward approach to cryptocurrency trading is through exchange-traded products or exchange-traded funds. These securities, which track the performance of an asset and can be bought or sold via an exchange, may be a good entry point for investors looking for a long-term, lower-risk investment. Cost-efficient and low complexity, exchange-traded products or funds have an expense ratio to be mindful of, but they give cost efficiency over the longer term. These products are popular with investors as they offer diversification and low cost, with a fund manager to take care of the wallet and rebalancing, leaving the investor to simply buy the products and let the fund track the market.
Short-term focused trading
Foreign exchange products are a popular option for risk-tolerant investors looking at short-term opportunities. Foreign exchange products allow traders to speculate on an uptrend bull market, and also for those expecting a correction, but they do have a higher risk profile to be mindful of. Products such as over-the-counter derivatives allow trade and leverage both ways, long and short, and are appropriate for traders with a high-risk appetite.
Many investors will want exposure to the physical cryptocurrency market. The option of opening a wallet and performing a blockchain settlement has real appeal to individuals who are looking for a decentralized option and a hedge against government action and inflation. It can also be attractive to latecomers still seeking early adopter status. But going it alone in this space requires a high level of technological sophistication, and an appetite for risk — this is a different beast altogether from exchange-traded funds, which somewhat insulate the trader.
Activity in the physical cryptocurrency market can be challenging with many regulatory and risk considerations. There are no guarantees in the physical cryptocurrency space, compared to the licensed, safe and adequately regulated environments of the exchange-traded fund and foreign exchange products.
Finding the best option
On a global level, the cryptocurrency space has reached a scale that is difficult to ignore. The rising popularity of cryptocurrencies can be in no doubt after the successful listing of Coinbase on Nasdaq in April, but investors need to consider their own risk profile when looking at exposure.
The dial swings quite dramatically between exchange-traded funds, foreign exchange products and physical cryptocurrencies.
On top of the risk considerations, tax reporting and other regulatory considerations will have a bearing on investor appetite.
The decentralized finance space is booming and leaves an investor open to all, but an electronic funds transfer account or even a cryptocurrency foreign exchange account with a broker such as Saxo will give the investor reassurance over jurisdiction, compliance, and execution within a traditional trading infrastructure.
Investors looking for exposure to cryptocurrency might want to consider diversifying into a selection of baskets with different risk levels, based on personal risk appetite and expectation.
• Stanislav Kostyukhin is commercial owner — Trader Segment at Saxo Bank.