Introduction
Crypto currency has become a popular investment option, with Bitcoin, Ethereum, and other digital assets attracting interest from investors worldwide. While crypto can be volatile, the investment appeal is certainly there, firstly as a high-growth asset, and secondly as a diversification instrument. As with any investment, there are many ways to gain exposure to this asset class:
1. Buying crypto assets directly
The most common way to gain exposure to cryptocurrency is to buy digital assets directly on a crypto exchange. Investors can purchase popular cryptocurrencies like Bitcoin, Ethereum, and Solana on major exchanges such as Binance, Coinbase, and Kraken. Owning crypto directly can be compared to owning a company share directly and the buying and selling rests with you as the investor. The pros of buying and selling crypto directly means direct ownership, generally the ability to take custody of your own assets, and the potential for higher returns. The cons being increased volatility, increased risk (if doing self-custody), and the required investor knowledge of when to buy and when to sell, as well as single asset exposure.
2. Investing in crypto companies
Investing in listed crypto companies is a good option for investors looking to gain exposure to cryptocurrency without directly holding digital assets. Companies such as Coinbase (COIN), Strategy (MSTR), formerly known as MicroStrategy, and Marathon Digital Holdings (MARA) provide indirect exposure to crypto price movements. The pros associated with publicly-traded crypto companies includes less technical involvement on the crypto asset front, regulated markets, and access via traditional brokerage accounts. The cons include pricing not correlating directly to crypto price movements as well as company-specific risk as investors still need to understand the underlying company they are investing in.
3. Buying single-asset crypto ETFs and unit trusts
Recent years have seen the regulatory approval and listing of specific crypto exchange-traded funds (ETFs), which provide exposure to specific single-crypto currencies, as well as professional fund managers launching crypto-related unit trusts. These vehicles provide exposure to a single asset like Bitcoin, where ETFs are listed and can be bought and sold directly on a stock market, while units in a unit trust need to be acquired through a financial service provider like FNB. One advantage associated with this kind of investment is that investors can easily obtain exposure to crypto assets through the same platforms that they access other traditional investments; however, the cons would include the fees charged by product providers, as well as the fact that the investor owns units in the collective investment vehicle rather than units in the underlying asset itself.
4. Buying diversified crypto baskets and unit trusts
Diversified crypto collective investment vehicles offer investors exposure to crypto in a more diversified manner, either through a passively constructed basket of assets, or where exposure is actively managed by a professional asset manager. These financial products track the performance of chosen crypto currencies or crypto-related companies. These vehicles can provide investors with exposure to a diversified basket of crypto assets or companies through one transaction. One advantage associated with this kind of exposure is that investors can more easily and cheaply obtain exposure to a diversified basket of assets; however, similarly to single-asset vehicles, disadvantages would include the fees charged by product providers and platforms, as well as the fact that the investor owns units in the collective investment vehicle rather than units in the underlying assets themselves.
5. Crypto staking and mining
For investors looking to earn a passive income, staking can be an attractive option. Staking involves locking up cryptocurrencies like Ethereum (ETH) or Cardano (ADA), which are cryptocurrencies that use the Proof of Stake consensus mechanism - and offer a reward for helping to secure the network by locking up your assets into the protocol. Unlike money market funds, which invest in low-risk instruments, staking still exposes investors to the high price volatility of the underlying asset. While the potential benefits include passive income and enhanced exposure to crypto assets, the main downside is that the value of the staked asset can decline, which may offset any reward earned. There is also the risk of so-called "slashing" and other punitive measures, which can be applied if not staking assets correctly or using the correct software to stake and for this reason many exchanges offer clients the ability to stake on their behalf - to minimise these risks. There are also decentralised finance (DeFi) protocols like Lido (on the Ethereum blockchain) which provide a similar service in a decentralised way. Investors can also gain exposure to crypto currencies by mining, where they use specialized hardware to validate blockchain transactions, secure the network, and earn newly minted coins as rewards.
In closing:
Gaining exposure to crypto currency can be achieved in many ways. Investors can choose from direct crypto exposure to ETFs and crypto stocks. However, as with any investment, due diligence is crucial, as the crypto market is still evolving and carries inherent risks. Research and obtaining diversified exposure is always recommended for high-growth, high-risk investments.
