Cryptocurrency burst into the mainstream in 2021 as Millennial and Gen-Z investors bid prices of digital currencies to stratospheric levels. Led by Bitcoin, the granddaddy of all crypto, fortunes were made overnight as the thought of get rich quick schemes invaded the consciousness and sensibilities of young investors worldwide. That euphoria lasted a scant year as prices plummeted when Sam Bankman-Fried was arrested for fraud and his cryptocurrency exchange FTX declared bankruptcy. This caused a run on the exchange which in turn ignited a cascading downturn in crypto prices globally. It was like the 2000's DOTCOM implosion redux and spawned a "crypto winter" where prices have languished the past few years for the majority of digital assets.
So why should you have any interest in crypto, either as general knowledge or as an investment? Because blockchain, the underlying technology of crypto, has ushered in a new generation of the Internet known as Web 3.0. The first generation of the World Wide Web was stagnant consisting of text, hypertext links and photos. The second iteration of cyberspace included social media, video, and online shopping and banking. Web 3.0 is decentralized, eliminating the middleman with machine learning and smart contracts on a blockchain platform. Blockchain technology is running in the background, so you don't know it's there, but it's here already and it's here to stay.
As an example, California's Department of Motor Vehicles recently put 42 million car titles on a blockchain to fight fraud. In addition, the banking industry is beginning to tokenize assets. Tokenization is when you digitize sensitive information such as social security numbers and account information to be placed on a blockchain. Lastly is the porn industry which now accepts crypto payments. Finance and pornography are usually ahead of the curve in adopting new technologies. Mainstream adoption is soon to follow.
So what is this blockchain? Blockchain is a decentralized, distributed database that is used to record transactions in an immutable, transparent fashion. Immutable means that it can't be changed over time without alerting the network which makes it more secure and eliminates fraud. The two largest Blockchains by market cap are Bitcoin and Ethereum. Bitcoin can be described as a commodity much like digital gold, an innovative payment network without the intermediary of a bank. Ethereum is a blockchain used for Decentralized Applications and Smart Contracts. Decentralized Applications run on a peer-to-peer network which is what blockchain is, as opposed to a single computer. Smart Contracts are digital covenants that execute on the blockchain when predetermined conditions are met.
As an end user, you may not care about the technological minutia of this next generation Internet, but as an investor, the consensus fifty percent compound annual growth rate for blockchain until 2032 will get your attention. Programmers are flocking to blockchain to try and cash in on the rush to become the next crypto multimillionaire. There are about 9,000 crypto "projects" that you can invest in if you belong to a crypto exchange. Except for a handful of companies, the majority of these bootstrap projects are speculative at best.
I tend to be a conservative investor, especially at an advanced age, and primarily invest in S&P 500 index funds. That said, I relegate a small percentage of my portfolio to riskier assets and am a former account holder at Coinbase, a major crypto exchange. I do not recommend using a crypto exchange unless you understand you are not investing, but gambling when you buy small cap crypto.
If you're considering an exchange, here are some of the shortcomings. First, they're not easy to use. Coinbase is the most user-friendly of the exchanges and it's far from plug-n-play. Secondly, crypto on an exchange is not insured such as FDIC with a bank account or SIPC with a stock broker. Third, Customer Service is notoriously bad if it even exists. Lastly, you have to worry about getting hacked. I'm a Reddit enthusiast and have read countless posts of people losing their crypto through hacking or being lost in transfer. Although I stored my crypto in a secured digital vault on Coinbase, the thought of losing everything from hacking was always in the back of my mind. Not conducive for a good night's sleep.
Although investing with an exchange is difficult and dangerous, the Securities and Exchange Commission has recently approved new financial products that make investing in some cryptocurrencies safe and easy. Gary Gensler, Chairperson of the SEC and former professor of blockchain and digital currencies at MIT, ushered in a new era for crypto investors with the approval of spot price exchange traded funds for both Bitcoin and Ethereum.
These new financial instruments are held in a stock brokerage account and protected by SIPC. Although these ETFs trade only during market hours, plus the pre and post market, their net asset values increase and decrease 24/7 with the correlated crypto.. If Bitcoin goes up 5% during a 24 hour period, the corresponding ETF will also rise the same amount and this holds true for the downside, too. They don't necessarily go lock step with each other during trading hours, but they're very close. If the New York Stock Exchange begins trading nights and weekends, you'll be able to liquidate your positions or purchase more shares just as if you were on a crypto exchange. In any event, your assets are much more protected with these instruments and you're also only investing in crypto "blue chips".
Many companies have issued spot price ETFs for Bitcoin and Ethereum, but there are only two I feel comfortable investing with, Blackrock with their iShare funds and Fidelity. These two White Shoe firms have long track records of excellence. There are a few companies with similar offerings with lower expense ratios, but they aren't as established as Blackrock and Fidelity. Both organizations spot price instruments have expense ratios of about 0.25%, or twenty-five basis points. This means for every $10,000 invested, you'll be charged $25 per year. Very reasonable. The Blackrock products are iShares Bitcoin Trust (IBIT) and iShares Ethereum Trust (ETHA). Fidelity has Fidelity Wise Bitcoin Fund (FBTC) and Fidelity Ethereum Fund (FETH). If you can stomach the volatility of the crypto market, these ETFs are the way to go.
If you wish to dabble in crypto other than Bitcoin or Ethereum, you're very limited unless you go with a crypto exchange. One alternative option is to open a Robinhood account. The fairly new discount broker enables users to invest in fifteen popular cryptocurrencies such as Avalanche, Chainlink and Dogecoin along with Bitcoin and Ethereum. Although Robinhood was instrumental in ushering in the commission-free phenomenon in discount brokerage houses, it's still a young company with growing pains. Buyer beware. Another option tentative crypto investors have is to utilize Exchange Traded Notes which Grayscale Investments sells. I don't endorse these either. Although Exchange Traded Notes trade much the same as Exchange Traded Funds, they're not spot priced, they trade based on futures contracts, otherwise known as derivatives. Warren Buffett famously said derivatives are weapons of mass destruction. That's good enough advice for me. I'd stay away.
I'm a firm believer that whatever the administration is in the White House next year, government policies about cryptocurrency will be much more favorable for the industry. Additional spot price ETFs will be introduced in the not so distant future if my hunch is right. We're in the beginning stages of a new technology era. It's like back in the day when we were listening to Lynyrd Skynyrd and Steely Dan and then Blondie and the B52's erupted onto the scene. A new generation ensued. We're at that juncture now. Invest carefully and always use limit orders.
No comments:
Post a Comment