INVESTING IN CRYPTOCURRENCIES

Without doubt, people are investing in cryptocurrencies and they can be traded like any other financial instrument, albeit they are not as accessible as traditional products, plus they can carry greater risks from volatility, lack of methods to analyse them and because they are un-regulated, you will have no recourse for financial compensation if you lose and or they are stolen.

The other problem with cryptocurrencies is that they are not particularly easy to hedge, and given the fact that most people want to buy them and not sell, it makes trading them slightly more interesting! Yet, more recently both the CBOE and CME exchanges, released futures contracts on the main larger market capitalisation cryptocurrencies, with more regulated exchanges also applying to list them as futures products.

In terms of futures though, investors must be careful as the main trading volume is coming from institutions and not individual investors. The alleged reason for this is that larger institutions try and push the futures price lower, in an attempt to get the coins cheaper. When using this strategy they can hit stop-loss triggers, so for novice traders it can be quite daunting to get involved in large swings. When the market is strategically pushed lower, it can give the impression of a market crash, but it is at these lows where buyers can pick up the coins cheaper, in the hope of another huge price rise in the coin. As with any futures product, the driver is the underlying product and this is also the case with crypto futures, so if the underlying Bitcoin goes up or down generally speaking the futures price follows.

Due to the popularity of cryptocurrencies, there are also managed crypto funds, which allow investors to let a fund manager invest their funds in various crypto matters such as ICOs, direct purchasing of coins and or alternative investments in mining companies and projects. Investors may prefer this method due to potential expertise by the fund manager and the potential to diversify their portfolio. However, like traditional funds, investors should realise that there are more than likely fee’s involved which can erode the portfolio’s value. The main risk to investors is that they don’t own the private key for the funds, so they are at a higher risk of being stolen and traders can make mistakes.

There are advantages of investing in cryptocurrency and that reason generally comes from the fact that there are major advantages in the technology rather than traditional currency or assets. Like gold, which is often called a ‘safe haven’ asset i.e. investors buy gold during economic instability or global disasters, rather than invest in riskier products such as shares which are sensitive to economic conditions.

Cryptocurrencies can be used for example against political instability, because the cryptocurrencies are not influenced directly by politics or regulation unlike traditional currency. So for countries where there is instability and the local currency is worth less or is eroding, then cryptocurrencies appear to be a sensible investment choice rather than wealth erosion or depletion. Cryptocurrencies are also directly immune to the effect of inflation, which generally decreases the value of fiat currency.

Investors will need to open an account to begin trading and are expected to provide due diligence as you would when you open a traditional trading account.

Lastly, investors also purchase coins through ICOs which they can do directly with the company doing the ICO. Investors will generally get good value for money if the ICO is legitimate and not a scam or fraudulent. Company’s offering ICOs always have websites and generally you can register prior to the sale of tokens, as all investors must complete due diligence and compliance checks prior to owning the ICO coins.