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Crypto Investment -What It Means

Crypto Investment

Published on December 20th, 2021

By now, everyone has at least heard of Bitcoins. It informed the world about blockchain or distributed ledger technology. But Bitcoin is not the only aspect of all this.

In fact, multiple crypto assets were created just to support different use cases and applications working in verticals like identity management, gaming, banking, data storage, lending, and streaming.

Since Bitcoin was the initiator of the industry, almost every crypto asset is known as an alt coin. You can categorize alt coins in multiple ways.

Protocol Tokens

Protocol tokens or Level 1 tokens are specific to a blockchain and are required for operating any platform.

For example, Bitcoin which is a protocol token not just because the users send and receive them over the network but also because of how the miners get rewarded as they are providing their computing power. The market is full of speculation about bitcoin prime which causes volatility. It is essential in a market where a coin’s value can be reduced in half and then rise to new heights in a matter of hours.

Another protocol token is Ethereum, and it is also the most popular of all alt coins. Its market cap is the second largest, standing at $513 billion, being just behind bitcoin.

It was launched in 2015 by Vitalik Buterin, who wanted to create a blockchain platform that could operate any application or software program.

Bitcoin is comparatively rigid which plus, and the functionalities offered by Blockchain also make it vulnerable to security breaches.

Ethereum also operates the same way as Bitcoin. Here also the miners expand huge amounts of computer power to introduce transactions to the network.

There are other blockchains that have their protocol tokens like Solana, Algor and, Cardano, Binance Smart Chain, Avalanche, EOS, and Polkadot

Application Tokens

If the base layer of any blockchain is an operating system, then dapps or decentralized applications are programs that run on them.

Many such applications have their self-tokens or dapp tokens that you can freely trade on other exchanges, The Dapp tokens gained popularity in 2017 and 2018 when the craze for Initial coin offering started.

Many of the founders raised millions and billions through token sales and hence funded their product development. Here we would like to mention that a lot of such ICO projects failed, and their asset value was reduced to zero.

Still, many dapp tokens have market caps ranging in millions or billions and who underpin the apps with real utility and business operations that churn money and are headlined by the Decentralized finance or DeFi tokens. Some noteworthy ones here are Compound, AAVE, Uniswap, SushiSwap, Curve, PancakeSwap, and Maker.

DeFi is a broad term that is used to contain traditional financial applications like banking or lending that can be replicated on the blockchain through smart contracts and dapps.

Smart contracts are easily executable code pieces that get activated when all the conditions are fulfilled. You can think of smart contracts as the if/then statements that are built into the blockchains.

For example, you could place an order on any decentralized exchanges to purchase bitcoin if the price reaches a certain level. At present, there are more than $270 billion that are locked into blockchain apps and DeFi tokens.

In the end, we have to talk about the latest crypto development that is the non-fungible tokens or NFT’s. An essential aspect of money or crypto is that every asset must be valued in the same way by every investor, and each of these should be fungible.

However, NFT’s are the opposite of this. They operate on top of any blockchain just like a protocol or dapp tone; they have many unique properties that make them stand out. If Bitcoin is the first representation of a low digital value, then the NFT’s should succeed it.

Staking And Passive Income

For most investors, the exposure to spot the market price is risky, but offering a reward makes them want to enter the crypto market.

However no the industry is maturing, and we are seeing the ways that the investors could use to earn passive income on the holdings.

This kind of strategy helps them to top up the gains or protect themselves against the price risk. The top two strategies in this regard are staking and yield farming.

Staking

Staking is the act by which you can post certain crypto assets as collaterals and take part in the working of a blockchain. As a return for locking your holdings, users get rewards just like interest payments.

Staking is helpful in blockchain that operates as a proof of stake consensus mechanism. This is different from proof of work which is an intensive and expensive mechanism that Bitcoin Cash, Litecoin, and many tangents of the blockchain employ.

Though POW has proven that it is very secure and effective, there are still concerns regarding its energy usage and the carbon footprint it generates.

Apart from that, the POW Blockchains also suffer from scalability and throughput woes. On the other hand, the POS platforms could handle hundreds of thousands of transactions every second.

Some major stakeable protocols comprise of Solana, Algorand, Cardano, Polkadot, and Tezos.

Apart from that, while Ethereum is still a POW blockchain, you can stake its native asset, i.e., ether. That is because Ethereum at present is showing a multi-year transition from being a POW to a POS mechanism so it can support the increase in demand for its computing resources.

Note that the POS consensus mechanisms are not homogenous in nature. Each blockchain network uses multiple ways of calculating the staking rewards, which depends on factors like:

  • The Minimum staking requirements
  • Lockup periods
  • Pay-out schedules
  • Reward amounts
  • Yield Farming

Instead of purchasing DeFi tokens, you can also earn them through the yield farming process. You can think of yield farming as DeFi 2.0.

Earlier, when you provided liquidity to any lending protocol or decentralized exchange, you could earn a fee or interest.

But last year, Compound launched a new trend where it awarded the users with governance tokens. COMP here is an incentive program.

In matching with the decentralized ethos of the space, the governance tokens can be known as the mechanisms for the protocols founders to leave control of the platform to the users.

In return for that, the token holders could use the ownership shares and get additional rewards or vote on the governance decisions that differ between the protocols.

In fact, many governance tokens and yield farming opportunities and a group of DeFi portfolio managers were created just to shift the user funds between various opportunities.

This was done to maximize the rewards and reduce the transaction fees. One of the prominent ones in this is Yearn finance, whose token YFi holds value at $28,000.

COIN, Crypto Stocks, And Other Crypto Securities

When Coin base went public last year with the largest direct listing, many investors thought this was their chance to get enough crypto exposure through the brokerage accounts.

But many publicly traded securities offered exposure to the crypto space. Here are two primary categories that you must know of.

Exchange-Traded Products

An ETP could be thought of as packaging over an asset or assets like Bitcoin and cryptocurrencies that trade on an exchange; ETF’s like State Street’s SPDR S&P 500 Trust ETF are the most common ones in this regard.

Some other exchanges where the crypto ETP’s are found are OTCQX by OTC Markets, Nasdaq Nordic, CME Group (for crypto futures and options), Deutsche Börse’s Xetra, Swiss SIX Exchange, and Canada’s Toronto Stock Exchange.

The funds that are traded on such foreign exchanges are accessible to most discount brokers like Fidelity, Charles Schwab, or TD Ameritrade.

The biggest ETP provider remains Grayscale, whose trust (GBTC) is the largest fund that the investors have by AUM (asset under management), a vast US$36.6 billion.

Having said that, while these GBTC traded at a premium to its NAV, the entry of competitors has led the shares to come down to a discount in double digits.

Grayscale provides structured products that can track other assets like Ether, Litecoin, Ethereum classic, and other indices.

But the crypto ETP market is much vast in comparison to Grayscale. For example, Switzerland’s SIX Swiss Exchange has many crypto ETP’s that exceed 40 tickers, and the largest in trading volume is WisdomTree Bitcoin (BTCW.SW) and 21Shares Ethereum ETP (AETH.SW).

Canada’s Toronto Stock Exchange launched North America’s first crypto ETF’s at the beginning of 2021. This was the Purpose Bitcoin ETF (BTCC, AUM $1.4 billion) which started off rather well and raised almost US$1 billion in the first month of launch itself.

It also launched Evolve Bitcoin ETF (EBIT, AUM US$198 million) and CI Galaxy Bitcoin ETF (BTCX, NAV $484.5 million).

October saw the launch of the US’s first bitcoin ETF’s. But they do not show the spot price of Bitcoin, but that of the futures contracts that trade on different platforms like the Chicago Mercantile Exchange, The first one to get launched in October was the Pro Shares Bitcoin ETF (BITO, AUM $1.25b billion.

This was followed by other offerings like Valkyrie Bitcoin Strategy ETF (BTF, AUM $98 million) and the VanEck Bitcoin Strategy ETF (XBTF, AUM $14.6 million).

Bitcoin Proxy Stocks

Here we would want to mention that some of the stocks are seen as bitcoins proxies. The Business analytics firm MicroStrategy is considered a leader in this space, considering its status as the largest holder (corporate) of bitcoin in the world with 121,000 bitcoins.

But many other publicly traded bitcoin mining firms have shown interest in the same during the surge in bitcoin prices. Some of the major ones in the US are Marathon Digital Holdings and Riot Blockchain.

How To Buy And Hold Crypto

Apart from making investment choices, a large number of you will raise questions about the mechanics behind crypto investing. This is new to the industry as there are only a few options to buy any crypto asset from brokerage or wealth management accounts.

But it is easy to buy and sell crypto than before. In the beginning days of bitcoin, the buyers had to wire the money to unregulated exchanges with no guarantee that they would get the bitcoin or the refund. Nowadays, many providers have crossed all barriers to make these products easy to use.

For example, in the US itself, many regulated exchanges provide simple onboarding procedures for a new client.
Some of these exchanges are Coinbase, Kraken and Gemini. All of them have easy-to-use websites and mobile apps.

In addition to that, as the space grew, many other non-crypto native platforms and financial apps like PayPal, Square, Robinhood, Revolut, etc., have allowed crypto trading. The benefits of using these platforms are that you do not have to do additional onboarding if you are their client already.

After you have brought crypto, you have to ensure its safety. Virtually all the platforms provide first-time buyers’ software wallets that are considered to be entirely secure.

You can be assured that only experienced developers and security professionals can create these wallets. You can take the following steps to enhance the security of the apps.

  • Choose a unique and challenging to guess password.
  • Use two-factor authentication or 2FA for second-level checking when logging in to the account.
  • For the institutions, there is an increasing number of OTC desks, prime brokers, and service providers like Fidelity that can support the individual trading, reporting needs, and security for the buyers.

In the end, there are some questions you must ask when you decide to buy crypto:

  • Why do I wish to buy crypto?
  • How long do I intend to hold my crypto?
  • Which different types of crypto assets do I want to buy?
  • How much crypto do I desire to buy?
  • Do I have any plans to borrow against this crypto?
  • Will I be interested in earning passive income on these holdings like interest or staking fees?
  • How much responsibility will I want to take for the security of my crypto?