Investing in crypto: Pros, cons, and ways to invest
Over the last decade, crypto has managed to capture the interest of investors around the world. The first cryptocurrency, Bitcoin (BTC), launched in 2009 for mere pennies. Today, it’s the largest blockchain-based digital coin with a market cap over $740 billion.
Since then, hundreds of cryptocurrencies, such as Ethereum and Litecoin, have attracted both early adopters and mainstream investors. Even meme coins—cryptocurrencies created around a pop culture reference or internet joke, like Dogecoin—have garnered media attention and dedicated fans.
Before investing in crypto, it’s important to research, know your risk tolerance, and consider your investment strategy. This post shares the fundamentals of crypto, our current crypto offerings at M1, and how to factor it into your financial planning.
What is cryptocurrency?
Cryptocurrency is a decentralized, peer-to-peer digital asset that runs on blockchain technology without the need for a bank or payment processor to audit transactions. Blockchains maintain a continual, verifiable record of every transaction that takes place between peers using public-key cryptography.
Because digital currencies are managed on blockchain networks, they’re not issued or controlled by a traditional financial system, like a government or central bank. Instead, they operate on a network of computers running free and open-source software that enforce the accounting rules.
Given the growing interest, expanding market capitalization, and the proliferation across retail and institutional investor base in cryptocurrencies, it’s impossible to ignore its potential as a tool to diversify investments and your overall portfolio.
Options for investing in crypto on M1
Since last year, anyone with an M1 Invest brokerage account can have exposure to cryptocurrency holdings through exchange traded funds (ETFs), trusts, mining firms, and public companies that hold Bitcoin.
Bitcoin futures ETF
In October, the ProShares Bitcoin Strategy ETF (BITO) listed on the New York Stock Exchange. BITO invests in cash-settled, front-month bitcoin futures. “Front-month” refers to the futures contracts that will soon mature. When that happens, the ETF buys contracts for the next month—and the process repeats.
Owning crypto ETFs does not mean you own the digital currencies. Instead, futures contracts provide derivative exposure to the underlying asset. In this case, Bitcoin. They’re a gauge of what people think the price could be in the future, not the actual price.
Investing in BITO is attractive to some investors because it opens access to cryptocurrency through a regulated exchange traded product. Keep in mind, ProShares collects 0.95% in fees.
Blockchain ETFs
Another way to get diversified exposure to the emerging crypto industry is through blockchain ETFs. These ETFs invest in hundreds of companies developing or using blockchain technology, ranging from large established public companies to smaller blockchain focused companies. While this technology is most popularly known to power cryptocurrencies like Bitcoin and Ethereum, many companies are working on several applications beyond this.
You can invest in blockchain ETFs on M1, including:
- Amplify Transformational Data Sharing ETF (BLOK)
- Bitwise Crypto Industry Innovators ETF (BITQ)
- First Trust Indxx Innovative Transaction & Process ETF (LEGR)
- Global X Blockchain ETF (BKCH)
Cryptocurrency trusts
The Grayscale Crypto Trusts are virtual currency investments that trade on over-the-counter (OTC) markets. You can invest in several Grayscale trusts, including the following in your M1 brokerage account.
- Grayscale Bitcoin Trust (GBTC)
- Grayscale Ethereum Trust (ETHE)
- Grayscale Ethereum Classic Trust (ETCG)
- Grayscale Litecoin Trust (LTCN)
- Grayscale Digital Large Cap Fund (GDLC)
While these trusts are susceptible to tracking error and require fees, they offer exposure to cryptocurrency investing in an easy-to-understand trust investment structure.
Mining firms
Mining firms are companies operating data centers that process and verify transactions on the blockchain. These firms are sensitive to cryptocurrency volatility and are considered high capital expense businesses, but they offer indirect exposure to cryptocurrencies and regulation protections.
You can invest in a number of publicly traded crypto mining-related companies on M1, including:
- Riot Blockchain Inc (RIOT)
- Marathon Digital Holdings Inc (MARA)
- Bit Digital Inc (BTBT)
- Hut 8 Mining Corp (HUT)
Explore more options in this Digital Mining Pie.
Public companies
Certain publicly traded companies, such as Tesla (TSLA) and Square (SQ), hold bitcoin in their balance sheet. Others are crypto exchanges, such as Coinbase (COIN).
By investing in companies or exchanges that hold cryptocurrencies, you get indirect exposure to crypto assets within the portfolio of a company with business lines unrelated to crypto. This exposure is more muted than other crypto investments, and it doesn’t necessarily indicate a company’s larger corporate strategy as it relates to crypto.
Pros and cons of investing in crypto
While cryptocurrency is seen as having great potential, it’s still considered a volatile asset compared to more traditional investments and asset classes. The pros and cons of cryptocurrency depend on who you ask, but here are the major arguments:
Pros
- Crypto enables online transfer of value without the need for a middleman like a bank. This allows for the transfer of value globally with low fees, near-instantly, 24 hours per day, seven days per week, and no holidays.
- Crypto provides exposure to an uncorrelated asset class.
Cons
- Crypto holdings can be very volatile compared to other asset classes.
- Crypto hasn’t yet been proven in the long-term.
- Cryptocurrency exchanges are not yet regulated in the same way as centralized exchanges.
Before investing in crypto, it’s essential to evaluate how these digital coins can affect your portfolio when considering your long-term personal finance goals.
How much of your portfolio should be in crypto?
Cryptocurrency investing is a personal decision. Like many investors and institutions, we’ve shared hesitations around the validity of certain cryptocurrencies. But this digital asset class is asserting its place among long-term investors. When conducting a recent survey, we found about one-third of long-term investors plan to invest in cryptocurrency over the next 12 months.
After learning the fundamentals, you can analyze your risk tolerance, factor in volatility of the underlying asset, and decide if getting exposure to cryptocurrency is right for your investment strategy. Some experts suggest starting with a 1-5% asset allocation, while cryptocurrency enthusiasts suggest higher.
As with all investments, we recommend doing your own market research and deciding based on your financial goals.
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