Blockchain has taken the world by storm, with promises to revolutionize how we do business and perceive digital assets. As a result, many have come out as die-hard fans while others still share their skepticism. Regardless, the technology itself continues to be adopted by many and make some very wealthy. For fear of missing out, you might have now decided that it’s time to make an investment of your own.
Traders have two options to support these initiatives. First, they might choose to invest in a cryptocurrency directly. Others have decided they’d rather invest in the blockchain technology that cryptocurrencies are built on. Since there are benefits and drawbacks to each, it is crucial to consider both options when creating your own diversified portfolio—investing in the underlying technology. With a few ins and outs to each, here are a couple of tips to keep in mind when deciding to invest in crypto vs blockchain.
Investing in cryptocurrency is said to be similar to exchanging your money in a foreign country. The only difference is the foreign country is actually an international community.
At a basic level, cryptocurrencies are digital assets that can be used to make purchases and as investment opportunities. Fiat currency like the USD, CAD or GBP can be exchanged for crypto or coins in this new currency. Among the most common are Bitcoin and Ether; however, several other altcoins (crypto that isn’t bitcoin) have also seen tremendous growth as of late, catching the attention of businesses and investors alike.
Like any investment, there are several potential benefits and a few risks to keep in mind. Here is a brief overview.
Cryptocurrencies are known to have extreme fluctuations between highs and lows, making it appear riskier as an investment. While many look at this factor unfavorably, since cryptocurrencies are not affiliated with the government and aren’t backed by anything at all, their volatility can actually result in high returns for the investor. A high-profit potential shouldn’t be the sole reason you decide on an investment. Instead, many choose to invest in cryptocurrency since they believe there is a future. Many believe by hodling for the long haul; their investments will pay off as the assets continue in an upwards direction with greater adoption by the masses. Many recent ICOs have continued to see huge returns in a short amount of time, at times seeing 13000% increases.
ICO’s offer great opportunities for investing in something at the ground level. In fact, consider how an investment in bitcoin in 2010 has taken off. That said, it isn’t too late to invest in bitcoin either. Many large organizations still predict that bitcoin has a huge profit potential, even spiking to highs of $150,000. Investors can start small by purchasing fractions of this cryptocurrency as small as the Satoshi.
That said, necessary research is still needed since cryptocurrencies may stay niche just as quickly as they could become mainstream. There is also a chance they may vanish completely and without warning.
Another reason why many invest is to support a social issue. This form of investing has since become so popular that the concept of investing to achieve a positive social or environmental impact (in addition to a financial return) has been coined social impact investing. There are now more cryptocurrencies that address real-world issues than ever before.
One way to do so is by purchasing tokens that support fundraising efforts for an organization that is supporting a cause you agree with. Tokens are a method used for fundraising and can provide investors with fractional ownership of a company. In some cases, this investment might be as low as $1, such as the case of Sun Exchange in Africa.
Decentralized finance refers to financial services using smart contracts. These contracts are automatically enforceable agreements that don’t need intermediaries like a bank or lawyer and use online blockchain technology as instruments to recreate loans and insurance. To support these initiatives, users can purchase something referred to as “governance tokens,” or the fuel that powers the blockchain-based voting process. With each token, users have the ability to vote on new changes to the cryptocurrency protocol. In most cases, one token is worth one vote, so the more tokens available, the more votes.
While this form of investment gives traders a say in the growth of a new project, the main drawbacks include smart contract failures and potential DeFi token schemes. Research becomes of the utmost importance since DeFi tokens can be created on a permissionless DEX like Uniswap, where no ID verification is needed. The result is that an investor with limited knowledge on the underlying project may find themselves buried in a classic pump and dump scheme.
The correlation for these options might be less direct, but investors also have the option to invest directly into angel funding startups. Doing research and selecting the right company can ensure that you get into a company at the beginning, one that might be the next Google, at least in the blockchain world. The major drawback, in this case, is purchasing equity with a startup also results in less liquidity since there may not be many investors lined up to buy your shares back from you.
Even worse, without a significant network of users, the currency might fall off the map altogether. Unfortunately, this has been true for many ICOs that weren’t able to gain the necessary momentum.
After hacking incidents like Mt.Gox, exchanges are now more secure than ever before. That said, it is still not recommended to store large volumes of cryptocurrencies on the exchange where they were bought. Cold storage options such as hardware and paper wallets are believed to be the most secure but do come with their own challenges. Among the most common are the loss of a paper wallet with a user’s private key. Unfortunately, without the private key, coins stored in the wallet may never be restored. If you want to learn about how you can protect your crypto with cold storage, be sure to read Bitbuy’s Cold Storage Guide.
Another word of caution should be applied to cryptocurrency startups. The white paper is a document that should be reviewed when researching investment opportunities. This document highlights the problem being solved, the solution and a detailed description of the cryptocurrency. Unfortunately, these ideas might sound good on paper but may never be executed if the founding team lacks the necessary skills. For a cryptocurrency to avoid network stalling, the team’s background needs to be well-versed in business strategy for a clean execution of the project.
As an investor, while you should be well-versed in the contents of their whitepaper, don’t take the promises outlined at face value. Consider the team you will be investing in and do some LinkedIn research if necessary.
Blockchain is a new technology with unknown impacts on the world as we know it. The concept can be hard to grasp but can loosely be defined as a ledger of transactions. This ledger of transactions is stored on several devices or nodes for added security. Data is stored in blocks and connected on a chain-like structure to ensure data cannot be altered.
Specific benefits include blockchain becoming more efficient, unlocking higher profitability over time and continuing to be adopted by other large organizations.
Investing in the technology underlying crypto is expected to be the safer and less risky option. This is believed to be true for several reasons, namely that these businesses can provide technology for several use cases, not just one.
As a more risk-averse strategy, investors may decide to invest in companies that will benefit from blockchain technology but do not rely on blockchain technology to make a profit. Some examples include Amazon (AMZN), Square (SQ), Paypal (PYPL) and Intel (INTC). Blockchain has been around for a decade already and is still being worked into the existing strategy of businesses from a variety of areas. That said, the widespread adoption of blockchain may still be a few years away, so investment plans should take this factor into account.
Another option to safely invest in blockchain projects is through an ETF that specializes in investing in companies that have exposure to blockchain. Two examples are Amplify Transformational Data Sharing ETF and Reality Shares NASDAQ NextGen Economy ETF. Research continues to be the best way to select a promising basket of stocks regardless of the industry; however, new investors might not know exactly what to look for or may not have the time to do so. Blockchain ETFs provide benefits against hand-selecting stocks and offer more consistent growth than a cryptocurrency fund, which is still under consideration by the Securities and Exchange Commission (SEC), pending the demonstration of consistent security.
In many cases investing in a blockchain project through the purchase of stocks can be done through an existing brokerage account if you are already using one. Therefore, the learning curve will be significantly less than is required to identify a reputable cryptocurrency storage, learn the basics about crypto, and determine safe storage practices. For those with less time to properly research and understand how crypto works, it can be daunting to get started. In many cases, new blockchain projects have also released their initial public offering (IPO) and are already available on stock exchanges.
Alternatively, if you plan to invest in a foreign market or a lesser-known blockchain company, a little more heavy lifting will be needed, and special arrangements with your existing broker (if you are working with one) may be required. A couple of companies you might consider in this case are Limelight Networks (LLNW), HIVE Blockchain (HVBTF) and Riot Blockchain (RIOT).
While price volatility is seen as an unattractive trait by some, the flip side is also true. Warren Buffet’s “get rich slow” concept is not appealing for many who want to see profits soon and be involved in high growth opportunities. High risk/high reward is the trade-off that needs to be made when considering both options. While stocks, especially well-established companies, offer more stability, they also don’t give you the opportunity to “buy low” and wait for prices to surge.
While cryptocurrency is viewed primarily as an investment tool by many, popular coins can also be used to make purchases. Companies like PayPal have since made provisions for merchants to accept cryptocurrency. Other reports have shared that large ticket items like homes have been purchased with crypto alone, providing users benefits such as the avoidance of fees associated with cross border payments. Greater Property Group in Canada has even announced itself as one of the first Bitcoin-Friendly Real Estate Brokerages. While a stock is still a good investment, it is just that, a stock. Crypto coins can represent so much more, especially as businesses continue to adopt their use in their own daily transactions. Many worry if they don’t get in now, it will be too late.
After carefully weighing the pros and cons of investing in crypto vs. blockchain, you might decide there is no right answer. Investments are supposed to be diverse, and spreading your eggs out in multiple baskets, even across a single industry, can be beneficial.
If purchasing cryptocurrency is a part of your strategy, you might decide to proceed and can use an online broker similar to that of a stock exchange. Platforms like Bitbuy are easy to get started on and only require a few steps. Once an account has been opened, funds can be deposited into your brokerage account, which can be used to buy bitcoin (or another altcoin). The money can be held in this account until you are ready to trade it and hopefully make a profit. These steps may differ slightly depending on the trading platform you decide to use but should generally not be more complicated than that.