While cryptocurrency is known to be highly volatile and prone to major fluctuations, in the last couple of years the merits of investing in crypto have also been highlighted by experts. They have shown tendencies to have a negative correlation with the market and can pose as a safe yet high-growth asset during market volatilities if it wasn't due to their unreliability.
A report by Bitwise goes so far as to state that holding even 1% of crypto (regardless of whether crypto is having an up or down cycle) can increase earnings by 123% as opposed to portfolios that have none.
Luckily, there are newer and safer ways to hold cryptocurrencies that are emerging in the market, let’s explore some of these:
Crypto Mutual Funds
Mutual funds can hold a variety of assets and commodities and AMCs now want to venture into holding a percentage of cryptocurrency as well. Besides this, mutual funds that only hold a different variety of coins are also emerging as an option globally. However, SEBI hasn’t approved of such funds just yet.
Another safer and less riskier option to investing directly in cryptocurrencies is crypto ETFs.
ETFs generally track an index or basket of assets and similarly a crypto ETF tracks the price of one or more cryptocurrencies. These crypto ETFs can be traded like any other stock on the market.
One of the most popular Crypto Etfs is Bitwise’s Crypto Industry Innovators Etf which invests in companies that run or generate majority of their revenue from crypto business activities. It trades under the name BITQ and was one of the first movers in the crypto etf space.
The benefit of Crypto ETFs is twofold- 1, that they allow an investor, the opportunity to hold cryptocurrencies at a significantly lower cost and 2, they eliminate the need for expertise required while investing in such a risky asset through passive investing channels.
Crypto Index funds
Crypto index funds track and emulate the performance of the top traded coins or digital tokens or any other benchmark indice that they may choose. Many global indices now include cryptocurrency subsets, which include so many coins that they practically give an insight into the entire cryptocurrency ecosystem.
Bitwise’s 10 Crypto fund is one such fund that tracks the 10 most highly valued cryptocurrencies, its mainstay holds include Bitcoin and Ethereum but the fund includes other cryptos based on their performance as well.
In India, the first crypto index fund, IC15 was announced by CryptoWire in January 2022. It is a rule-based broad market index by market capitalisation, that tracks the performance of the 15 top-most widely traded liquid cryptocurrencies in the world.
Cryptocurrency trusts are similar to ETFs in the way that they can be traded on the stock market. Cryptocurrency trusts such as Bitcoin Trust or Ethereum Trust - are designed to track the performance of a single underlying coin and can be traded in shares. Cryptocurrency trusts remove the hassle of owning, holding, and safekeeping your crypto investments directly- while still offering the benefit of high-growth. For instance the Bitcoin Investment trust by GrayScale, was first introduced in 2015 has seen a growth of 137% in 2021 alone.
Similar to how traditional FDs hold physical currency and offer an interest in return, Crypto FDs hold your digital tokens and cryptocurrency for a pre-meditated mutually agreed upon lock-in period and offer interest on the same. Lock-in periods for Crypto FDs can range from as little as 1 month and their interest also marks higher than traditional FDs. They also pose the dual benefit of keeping your crypto safe, eliminating the need for digital wallets as long as they are invested. Liquidity can become an issue with Crypto FDs though.
Many platforms such as ZebPay, Cashaa, offer services like Crypto FDs. While they do offer returns almost 4X higher than traditional bank FDs, investors must exercise caution. Crypto FDs are more akin to lending crypto holdings than actual fixed income instruments. Moreover, many such schemes offer returns in the form of coins, which would then be subject to crypto price fluctuations again, defeating the intended purpose altogether.
It is imperative that investors read and consider the operations of such crypto FDs thoroughly before moving forward.
Investing in crypto-forward companies
If you are truly interested in investing in crypto without holding any coins then another option is to buy stocks of companies that are heavily involved in developing blockchain technology, mining crypto, or have large amounts of crypto on their balance sheets.
For instance, if you invest in Tesla, you are actually investing in a company that holds millions of dollars worth of Bitcoins and accepts Bitcoins as a form of payment.
In this indirect way, when prices of cryptocurrencies go up these companies and in turn, investors in these companies, are poised to reap the benefit of the upturn.
While this may still be a bit risky, index funds that include blockchain development and related companies can be a safer option.
Whether you chose a crypto Etf, FD, or choose to invest in companies that develop their technology- it is suggested that you allocate only 5% of your overall portfolio for speculative investments such as these.