Investing in cryptocurrencies, such as Bitcoin and Ethereum, tends to attract people’s attention due to the great movements they experience. Cryptocurrency investment funds try to make investments in these assets easier. This is due to its ability to diversify. Not only will we find Bitcoin funds in the market, there are funds that incorporate other cryptocurrencies, other assets, related businesses, etc. The truth is that, so far, investing in cryptocurrencies through mutual funds is the only sensible option for the average investor, if we take into account the risks that direct investments present.
What to Expect When Investing in Ethereum & Bitcoin?
- Is it advisable to invest in Bitcoins?
- Can cryptocurrencies become the currency that sustains the financial system?
- What does a cryptocurrency investment fund bring us?
- What are the benefits of diversification?
- Why invest in cryptocurrencies?
- How to know the risk is adapted to your profile?
If you want to know the answers, keep reading.
The Rise of Cryptocurrency
Cryptocurrencies have the potential to become the base currency of the future. They have all the necessary elements. Could they be the basis of the monetary system? Only time will answer this question. The point is that these digital currencies have two characteristics that make them similar to the store of value that throughout history has performed this function: precious metals; with gold as a standard bearer.
How are they similar?
It is a limited asset. Curiously, cryptocurrencies are extracted by a mathematical algorithm solving process, which is called “mining”. And it is actually about extraction, like precious metals, only in this case we are talking about “digital mining”. The amount of money supply in the market depends on these mining processes. Therefore, there is a limited amount of supply until more coins are mined. If for example we refer to Bitcoin, only a total of 21 million monetary units can be mined, this amount is the entire monetary mass. It could be likened to all the gold on Earth, whether mined or not. Bitcoin is a limited resource. It will finish being extracted and there will only be a certain money supply. Any currency can be printed by a Central Bank. It is not a limited asset. There is a limited amount of precious metals on the planet, this has given them the value they have. In the digital world there is also a limited amount of Bitcoin and other cryptocurrencies. Upon reaching 21 million Bitcoins, no more can be mined. On the other hand, Ethereum is an unlimited asset, the amount that can be mined is infinite; but the trend of the cryptocurrency market forces it to trade accordingly.
Investing in Ethereum and Bitcoin through mining
Indeed, you can invest in cryptocurrency mining. All you need is a computer with sufficient graphic power (there are cryptocurrencies that are more demanding than others in terms of mining). However, the competition is fierce (plus the need for high-performance material) and it does not usually pay to invest in Bitcoins, Ethereum and other digital currencies through this strategy. When mining Ether (the currency of the Ethereum network) or Bitcoins, you get a reward in the form of these coins. It is like a salary for putting the computer equipment at the service of the network. For example, in the case that we want to invest in Ethereum through mining, about 5 Ether would be obtained for each mined block.
It is Not Controlled by Monetary Policy
Like gold, cryptocurrencies do not depend on a specific monetary system, therefore, they cannot be subject to “manipulation” by Central Banks, as is the case with the currencies they issue. Any currency is under the control of a Central Bank. It is this body that decides to set the interest rates and the amount of supply in the system. This is called “monetary policy” and its objective is to control inflation. If inflation rises to worrying levels, the Central Bank applies a restrictive monetary policy. It raises interest rates and absorbs money in circulation through operations in the market.
As there is less money in the system and also with a higher interest rate, inflation is reduced due to the reduction in purchasing and investment capacity. The same can be done in reverse, when there is a risk of deflation, as is the case in Europe. This never happens with gold or precious metals. They are not controlled by a Central Bank and at the expense of a specific monetary policy. Not even at the levels of inflation in an economy, for this reason it has been a safe haven value. It turns out that cryptocurrencies also have this same feature. They cannot be affected by monetary policy, therefore, their value depends solely on what the market freely assigns. This issue makes speculating with Bitcoin and other cryptocurrencies more complex.
How to Speculate With Bitcoin?
To speculate with Bitcoin you just have to buy and sell in the market. The key to all speculation is “buy low and sell high.” However, what is cheap and what is expensive? Cryptocurrencies do not have a simple method of fixing their target value, they depend on supply and demand. Apart from mining, one of the most classic ways to invest in Bitcoin, Ethereum or any other financial asset is its cash purchase, that is, its physical purchase. There are platforms that act as virtual wallets, from which cryptocurrencies can be bought, sold and stored. In this way, it is not necessary to speculate with financial derivatives that require financial leverage and increase the risk of the investor. In any case, virtual wallets are not exempt from theft. In fact, the case has already occurred (there have even been thefts that have led to the closure of virtual wallets). In recent times there has been a new theft of Ethereum, worth 48.7 million dollars.
Futures on Bitcoin
For the rest, you can speculate with these financial assets through CFDs (contracts for difference). There are also financial futures on Bitcoin. Being financial derivatives, it does not require the physical purchase of cryptocurrencies. There is no doubt, cryptocurrencies are very volatile. It is not a mature market such as the Euro-Dollar or the Pound-Dollar. This means that the purchase and sale operations are capable of moving prices a lot, even on the same day. The investor must decide when to invest in cryptocurrencies in a precise way. Market entry and exit prices are the key, but analysis becomes difficult. See the risks of speculating with Bitcoins. In addition to investing in Bitcoin or Ethereum, there are many other cryptocurrencies. What cryptocurrencies to invest in now? It depends on which ones are gaining the most weight in the market. There are cryptocurrencies that rise like foam, then fall: it is a matter of fashion. Its capitalization (price per outstanding assets) must be taken into account.
Here are some other Important Cryptocurrencies
- Bitcoin Cash
Cryptocurrency Investment Funds
Cryptocurrencies are booming. Despite the strong ups and downs that they have suffered in the market, they represent a store of value and an inflationary refuge. They are useful for international trade and some of them, such as Ethereum, allow transactions to be carried out through so-called “smart contracts”. So, if you wonder why invest in cryptocurrencies, the answer is: because it can become the currency of the future. To combat the risks of investing in a specific digital currency, with its own risks, cryptocurrency investment funds have been created that take these assets in their portfolios, but diversify them with other assets to mitigate the risk. When the Bitcoin bubble exploded and its plummet took place at the end of 2018 (as we have observed in the previous graph), many investors of this cryptocurrency have seen how much of their assets have suffered, even losing everything and / or getting into debt. However, if we participate in a cryptocurrency fund with a portfolio of Bitcoins, Ethereum and other cryptocurrencies, some precious metals and equities (in their fair proportion, with their correlation measures, strategically selected sectors, companies with some fundamental adequate, etc.) we would hardly suffer the risk of the fall of Bitcoin. We would be covered even if the entire cryptocurrency market was blown up.
If we add the benefits of diversification, the possibility that a robbery advisor manages our investment well and the cost savings that all this implies, investing in cryptocurrencies goes from a high-risk operation to an investment adapted to the average investor. Fund managers know perfectly well that this is possible with cryptocurrency investment funds. That is why cryptocurrency investment funds are appearing on the market. These new appearances in the world of investments are tremendously useful, because it is possible to access these very aggressive markets. Now it is a reality, we can invest in cryptocurrencies without being risk specialists. Investing in Ethereum or Bitcoin becomes easier.