Thematic investing: cryptocurrencies

Investments

Cryptocurrencies are the focus of our latest thematic investing guide. Should you be putting your money in cryptocurrencies? What are your options? Have a read to find out.

A look at cryptocurrencies

What is a cryptocurrency?

Cryptocurrencies are digital currencies that can be exchanged online for goods and services. Another name for a crypto coin is a token. Cryptos are bought using real currency via exchanges or are tradeable via contracts for difference (CFDs).

Blockchain technology powers cryptocurrencies. Think of this a bit like a digital ledger. It manages and records crypto transactions. A blockchain is decentralised and is spread across many different computers. New tokens are generated using a process called mining. It’s essentially a complex computational algorithm that, when solved, creates a new token.

Over 10,000 different digital currencies are traded. The current total market cap, as of June 3rd, 2021, is above $1.5 trillion. While there is no such thing as the best cryptocurrency, some tokens are much more popular than other. Bitcoin is the world’s most popular and acts as a market bellwether. When its price rise, so too do other important tokens. The opposite is also true, as we’ve recently seen a big crash in Bitcoin prices.

As of June 3rd, 2021, the top five cryptocurrencies by market cap are:

  • Bitcoin – $706.1bn
  • Ether – $317.5bn
  • Binance Coin – $62.1bn
  • Tether – $61.7bn
  • Cardano – $56.4bn

Cryptocurrency prices & volatility

Cryptocurrency prices are some of the most volatile of any tradeable asset. This cannot be stressed enough. Just recently, the price of Bitcoin collapsed following outside influence. Elon Musk and Tesla’s decision to U-turn on accepting Bitcoin as payment, plus a crackdown on crypto mining in China set prices spiralling.

Bitcoin reached an all-time high in April when it broke above $64,000. Just a couple of weeks later, the world’s most popular cryptocurrency was trading below $31,000 for the first time since 2020. Its total market cap went from April’s $1.2 trillion reading to the $706bn figure mentioned above.

This kind of volatility is inherent to cryptos. There is a lot of supply and demand at play here, but digital currencies are certainly less stable than say gold or equities. Potential profits can be very high, but the losses can be huge.

Always do your research before you commit any capital. Trading and investing is inherently risky, but more so with cryptocurrencies.  Only invest or trade if you are comfortable taking any potential loss.

Investing or trading cryptocurrency

A couple of options are available to you.

Firstly, there is physically buying the tokens to store in a digital wallet in the hope they grow in value. Many investors are turning to cryptocurrency as a store of value, turning away from traditional assets like gold.

You must be very careful with this approach. Crypto investing can be a rollercoaster ride. One minute prices are nudging all time highs; the next billions have been wiped off open crypto positions.

If you do not wish to own any coins, but still want to trade cryptocurrencies, you may wish to look at contracts for difference. CFDs allow you to trade cryptocurrencies without owning any underlying assets. You instead trade on margin. This can allow you to open a position for a fraction of its total value – but you would be susceptible to higher losses.

You may also want to look at stocks based around the crypto industry as well. For instance, Coinbase went live with its initial public offering in April. Coinbase is the largest US cryptocurrency exchange, where users buy and sell bitcoins in a similar fashion to stocks listed on various global exchanges.

Volatility has struck again here, though. Because Coinbase is so tied in with the performance of cryptos, and especially Bitcoin, its share price rises and falls in line with the wider cryptocurrency market.

For example, when it went public, Coinbase’s initial share price was above $400. It’s currently trading at around $235. Despite this, according to Marketsx’s in-platform sanalyst tool, Coinbase is still considered a “buy”. It has a lot of potential to gain value alongside a recovery in cryptocurrency prices.

There is no best cryptocurrency. There are no best cryptocurrency stocks. What is a good or bad choice for your portfolio depends on your individual capital and your attitude to risk.

Remember: cryptocurrency prices are subject to high volatility, so only invest or trade if you can afford any potential losses.