What is Cryptocurrency?
Cryptocurrencies are digital assets designed to function as a medium of exchange and store of value that can avoid the pitfalls of government-issued “fiat” currencies such as inflation, and may make certain new kinds of transactions possible. Many cryptocurrencies use new technologies including blockchain, cryptographic encryption, and smart contracts.
These currencies can be used to buy and sell goods and services, and many people invest, trade, and speculate in cryptocurrencies whose prices can increase significantly. Bitcoin and Ethereum are two of the best-known cryptocurrencies, but others include Binance Coin, Tether, Polkadot, Cardano, and XRP.
Working outside the traditional financial system and news frameworks, many of the best sources of information and analysis about the price momentum of cryptocurrencies are on non-traditional information channels such as Youtube, Twitter, and Redditt. This may change over time as cryptocurrencies become more mainstream.
Investors can use websites such as Coinbase, Binance, Square’s Cash App, or another “wallet” to hold, buy and sell currencies. Until recently, security was a primary concern for investors seeking to buy, hold or trade currencies, but the record of success of the largest exchanges has made many people more willing to participate in crypto markets. Likewise, large investment banks, brokerages, and advisors are beginning to recommend that clients allocate a portion of their assets to cryptocurrencies.
The simplest way to share in the returns from the growth and development of cryptocurrencies is to simply buy some of the currency. Bitcoin and Ethereum, for example, have both appreciated by 1,000% over the last year (but those returns are starting from the low point of the financial markets crash related to Covid-19).
Crypto ETFs (exchange-traded funds) such as the Grayscale Bitcoin Trust (GBTC) can also provide access to cryptocurrencies. These ETFs trade like stocks through a brokerage account, which some investors may prefer to opening a wallet or exchange account. However, ETFs can trade at discounts or premiums to the value of the underlying assets and may charge additional fees that eat away at the value of the investment.
Crypto such as Bitcoin may also provide opportunities to earn returns by “mining” coins. Miners dedicate computer time and effort to either creating new coins or tracking the process of transferring currency, and are rewarded in kind. In many cases, the best returns from mining coins go to those who can obtain computing power and electricity at the lowest prices, but many individuals have also been successful, especially as prices appreciate.
Top Opportunities in Cryptocurrency
The stock market has also provided a number of opportunities for investors who want to participate in the asset class indirectly. One less risky option would be to buy stock in companies such as Square (SQ) or Coinbase (COIN), which earn transaction fees from other people’s use of cryptocurrencies. While these companies may earn large and growing profits as crypto becomes more broadly used, they will not benefit from changes in the value of cryptocurrencies. For more direct exposure to bitcoin, companies such as Microstrategy (MSTR) are positioning themselves to invest in Bitcoin. Analysts are bullish on Microstrategy, with large and growing price targets:
As you can see, the lowest price target is from months ago and probably does not account for the appreciation in the price of Bitcoin or the company’s change in strategy.
Companies such as Riot Blockchain (RIOT), Marathon Patent Group (MARA), and Hive Blockchain (HVBTF) are three publicly traded mining companies. Investing in a crypto mining stock may provide outsized returns from large exposure to the crypto assets, but it can also be fraught with problems, as the management of the companies compensate themselves and invest in equipment or buy and sell stock.
One analyst following Riot Blockchain is optimistic about the stock with a $64 price target:
The same stockpicker has a dim view of Marathon Patent Group, thinking the stock could be slightly overvalued:
Crypto Pros and Cons
Investing in Cryptocurrencies also has traps for the unwary and a number of new cryptocurrencies proved to be frauds. Investors should take additional care around new cryptocurrencies and ICOs (“initial coin offerings”) and avoid cryptocurrencies that seem to have paid promotional advertising.
That being said, the growth in cryptocurrencies over the last several years has been substantial, and could continue as more and more users adopt the new technology.
How to Find Stocks Related to Cryptocurrencies
TipRanks provides information on the hottest stocks in the digital currency market. You can find stocks related to Bitcoin, Ethereum, Dogecoin, and any new digital currency in real-time.
On the cryptocurrency page, you will find the best stocks in the crypto market, based on the forecasts of Wall Street analysts.
Cryptocurrency investing may not be for everyone, but as more large companies, institutions, and investors come to adapt to a world where crypto is a reality, it is important for investors to understand the role crypto assets could play in their portfolios.