Cryptocurrency investing has been all the rage over the last six months, with Bitcoin trending at over $4,000 and Ethereum hovering around the $300 level. The market is incredibly volatile, losing and gaining massive amounts of market cap, often in a matter of only hours.
One startling thing about the current investing trend is the current lack of a robust toolset for investing. There are a number of major challenges associated with being a successful crypto investor.
Difficult to Diversify
For one, it is not simple to diversify in the cryptocurrency world. If you just want to invest in Bitcoin and Ethereum (or Litecoin), Coinbase is a great option. But if you're looking to spread your risk among the leading cryptocurrencies, you typically have to sign up for a bunch of different exchanges and purchase each token individually. This can be a somewhat cumbersome process. If you want to have any basic portfolio re-balancing, you’ll need to do it yourself.
You also typically need to learn the ins and outs of cryptocurrency wallets, as keeping money in an exchange can be risky. Typically, it is wise to transfer tokens out of an exchange directly after purchasing them.
There have been several well-known breaches of leading Bitcoin exchanges (Mt. Gox is the leading example), so it’s best to keep your tokens in a wallet. But storing your cryptocurrency is no simple matter—requiring extensive research on the best hardware wallets or secure cloud vaults.
Lastly, there’s just a plethora of information (and misinformation) about cryptocurrency out there—Reddit posts, Github pages, slack groups, etc. It’s hard to know what to trust, as scams are everywhere. It takes a keen eye to be able to distill the useful information from the noise.
All of these factors make it somewhat difficult to be a passive investor in the cryptocurrency space. Most passive investors who want to get exposed to cryptocurrency will hold Bitcoin and Ethereum, but doing so is putting your eggs in a couple of baskets. A better approach would be to hold a number of cryptocurrencies, gaining exposure to small, mid, and large cap coins.
Currently, there are no Bitcoin Exchange Traded Funds with regulatory approval. Nevertheless, there are several funds for passive investors who are willing to entrust a third party. Here’s a quick overview of the options:
ICONOMI’s goal is to offer “Digital Asset Arrays”—which are combinations of digital assets. Each manager can create his own assortment of specific digital assets and offer them to the community of supporters. Two of the major funds are the BLX (Blockchain Index), which is a passively managed fund, and the “Pinta”, which is actively managed. The BLX has had a 392% return over the last six months. The “Pinta” has gleaned a 427.49% return over the last six months. I have yet to try these, so definitely do your research before investing.
Bitwise Investments is the fund I’m most excited about. They recently launched the HOLD 10, a passively managed index fund with a 2-3% investment fee. The team is backed by several high profile cryptocurrency investors and hedge funds, so it will be exciting to see what they come up wiht. Unfortunately, this fund is only available to accredited investors.
The Token Fund
The Token Fund appears to be one of the earliest attempts at creating a diversified portfolio of cryptocurrencies for the average investor. They publish periodic reports on their adjustments to their holdings. Unfortunately, this fund is currently only open to non-US residents, which is a significant limitation. The performance was 360% return over the last six months, with a 5% withdrawal fee.
Shapeshift Prism is offering fundamentally new technology that will allow investors to construct bundles of tokens. These will be built using smart contracts on Ethereum, and is still in the early beta stages.
Investing in cryptocurrency is still in it’s very early stages. Interestingly, because of the high barriers to entry is that big institutional money has yet to come in. This means that there are significant opportunities for small players in the coming years. If you’re willing to put in the extra effort, it could well be worth it. But keep in mind that investing in cryptocurrency is incredibly risky. Invest at your own risk!