By Roger Baird on Tuesday 28 May 2019
This asset class is for sophisticated investors who have thoroughly researched the sector.
Any investor should be acutely aware of the market they are about to make bets on - this could not be more true of cryptocurrencies. This market is a major gamble, where daily swings of 20 per cent or more are a regular occurrence.
Just one example of the volatility of this sector is Bitcoin, since its launch in 2009, its price has swung from less than 1 cent to $20,000 per coin, set two years ago.
1) Am I a sophisticated investor?
Investors in this market should have an understanding of market trends and a general idea of investor behaviour in a market dominated by wild swings. In other words, an ability to keep calm under pressure. Players in this market should also keep up to date with general tech news and developer announcements.
2) Why am I attracted to cryptocurrencies?
The lure of superprofits is an obvious answer. For example, Ripple rocketed almost 16,000 per cent over 2017 from $0.0063 to $1. However, over the following months in lost 90 per cent of its value. Those that got in on the upswing and got out in time made a lot of cash.
But apart from this, some cryptocurrency investors compare the asset to gold, in that both are a store of wealth, not backed by government, that have unclear inherent values. They see it as a way to transfer value without involving the government, and refer to it as the future of money. Which of these are you?
3) How do I invest in cryptocurrency?
There are over 2,200 cryptocurrencies on the market. However, the first thing to do is set up an account on an exchange. This will allow you to buy cryptocurrencies with fiat money, such as sterling, the euro or the US dollar.
Popular exchanges include Coinbase, Coinmama, Bittrex and Binance. Once you are set up, there are a wide selection of cryptocurrencies to choose from ranging from Bitcoin, the first such currency founded ten years ago, and by far the most used. But there are scores of rivals such as Ethereum, Litecoin, Ripple and Monero.
You can also gain exposure to cryptocurrency by buying Exchange Traded Funds, but here investors own firms that deal in these assets, rather than the underlying cryptocurrencies themselves.
4) How much should I invest?
The answer for any investment, is that you should only put in cash you are prepared to lose. This means a low percentage of your net worth. If the worst happened and all of your investments crashed, you should be able to pay your bills the following month.
5) How do I store cryptocurrency?
Once you have bought a cryptocurrency it is important to buy a secure wallet, such as Ledger or Trezor, and store your coins offline. Your asset is at risk if left on an exchange, there are a number of cases of hackers getting into a site and emptying any coins left on it. These wallets typically cost less than $70.