How to invest in crytocurrencies

The new gold

Bitcoin is the most ubiquitous cryptocurrency on the market, given it’s used as a store of value and is therefore comparable to other assets such as gold and silver. This also means it has gained more interest with institutional investors than other cryptos.

“Buying bitcoin is a call option on the digitisation of the financial system. The uses of blockchain solutions are massive and the adoption is increasing exponentially,” says Vimal Gor, Pendal Group’s head of bond, income and defensive strategies.

“Gold and maybe silver are pretty much the only assets out there you buy as a store of value,” he adds. “Bitcoin is the new gold but it’s better than gold because it has a finite supply and it’s instantly transferable. Also, gold costs you to own it, bitcoin doesn’t.”

The second largest cryptocurrency, ethereum, is a utility platform as opposed to a store of value. It is often used as the basis for decentralised financing operations and has been used by the Royal Bank of Scotland to build a clearing and settlement mechanism.

Cryptocurrencies such as Ripple are used mainly as payment platforms, allowing cross-border transactions or payments between financial institutions, with negligible wait times and low fees.

The divergent purpose of each cryptocurrency means each needs to be carefully considered as an individual investment, given each has a different risk profile.

“There are around 7000 cryptocurrencies so far,” Gor says. “[All of the] coins are [either] there for specific use cases or scams. A very small minority of these alt-coins will generate massive returns while most will disappear.”

He says bitcoin and other cryptocurrencies have become increasingly popular in the low-rate environment as investors seek alternatives to fixed income and term deposits.

“I like it because it offers a new, innovative asset class in a world where asset classes [where you can get a decent return] are disappearing because interest rates have gone to zero,” he says. “The government bond market is largely irrelevant now. You have trillions of government bonds which aren’t going to move and offer minimal returns.”

But he warns investors to be very cautious about which cryptos they choose.

“As well as bitcoin, we also like ethereum because the usage case is amazing. But we don’t look at any of the other coins as it’s difficult to learn about new cryptos because there’s no one to call,” he says.

“You need to look at the code and understand its use case. It’s a lot of work to understand why specific coins have value.

“But if it’s difficult, that’s why it’s so well rewarded. I personally have bitcoin and ethereum but I wouldn’t invest in anything else right now because I don’t understand them.”

‘It’s quite nuanced’

Crypto exchanges such as BTC Markets and Bit Trade allow users to buy and sell cryptocurrencies and have become increasingly popular, especially among self-managed super funds.

“We saw a five-fold increase in SMSF accounts coming on board in 2020,” Bowler says. “The investor profile for the SMSF is for the longer term and that speaks to the confidence they have in the asset class.”

But even some of these exchanges come with a warning.

“It’s quite nuanced,” says Arian Neiron, VanEck managing director and head of Asia-Pacific. “The exchanges are not typically subject to regulatory oversight and you have to set up an account with them. It’s not straightforward, it’s not like logging into your bank account or online broker.”

Crypto funds have also sprung up in the last few years, delivering big returns for clients, but a number are domiciled offshore and are largely closed off to retail investors.

“At the moment it’s difficult to access bitcoin,” Gor says. “It’s messy and sometimes dangerous, but the market is going to be offering products soon. And then it will be very easy to access it.”

An institutional investor survey conducted by JPMorgan in December revealed 30 per cent of asset managers, owners and hedge funds surveyed planned to invest in digital assets in the year ahead.

Bitcoin ETFs are set to enter the market at some point in 2021, allowing retail investors an easier way to access bitcoin and other cryptocurrencies.

VanEck has launched an exchange traded note in Europe that invests in bitcoin, allowing investors to trade the crypto in the same way they would trade an ETF. And micro-investment fintech Raiz is set to launch a bitcoin retail fund in the first half of 2021.

Don’t bet what you can’t afford to lose

But while bitcoin and other cryptocurrencies are gaining traction in the investment community, it’s unlikely every fund manager will be clamouring for them.

Investors Mutual’s head of investment research Hugh Giddy dismissed the bitcoin craze earlier this week, saying it was simply a product of easy money being pumped into markets.

“It doesn’t really behave like money because it’s so volatile, it’s not underwritten by any government. There are plenty of cryptocurrencies so there’s no rarity value,” he says.

Even those who are backing cryptocurrencies offer warnings over the potential to lose everything.

“If you don’t like bitcoin, don’t buy it. But if you do want to buy it, it offers great value as it’s like an option where you can risk a small amount of money to make a significant return,” Gor says.

“You could lose all of your money in it, there’s no question. It’s best to put a small proportion of your money in it and money you can afford to lose.”