With all the buzz about the crypto market, you may ask “what are some of the considerations for investing in digital currency? Is it just a fad or something with lasting potential?” Several factors may be worth considering if you’re thinking about digital assets as a long-term investment.
Diversification has always been a key component of portfolio construction. When one asset class falls, there is often another one that rises. If capital preservation is an aim or objective, this means overall portfolio losses can be softened even when one asset class has fallen. Similarly, price volatility may also create a potential opportunity to buy or sell assets at preferred prices.
The COVID-19 pandemic was a big stress test for digital currencies which rose while stocks fell. Columbia Law School cited a 640% rise in Bitcoin’s value when the pandemic began. This shows that investors may see cryptocurrency as an alternative asset class during declining confidence in the traditional stock and bond markets.
Even though we may see media headlines reporting digital currency prices rising, it is still very early for this market. And investors, and businesses are still discovering uses for digital currency. Cryptocurrency isn’t just a new form of “currency” or asset. It’s connected to blockchain technology, and part of its value is tied to computer processing power being made available to new applications. As more industries use blockchain to improve their security, speed up data transfers, and create novel applications, the value of digital assets has the potential to grow.
“Fabriik’s goal is to make the financial system more democratic and open to a much wider cross-section of people – not just the wealthy – so everyone has an equal opportunity to thrive. Our Exchange gives even the smallest investor access to digital assets – and eventually beyond that to shares, bonds, futures, derivatives and even NFT’s [digital tokens].” — Daniel Skowronski, General Manager of Fabriik Exchange
If you’re curious about digital currency, you may also be wondering what can be done with it. Bonds can provide regular dividends and can turn into cash when they mature. Stocks may pay dividends, and stock funds may also pay out capital gains. Digital currency seems to sit there until you sell it.
While it’s true, cryptocurrencies don’t generally pay out regular cash payments, it may provide more versatility. For a saver, they can choose to hold their digital currency investments in the hope that they will grow, in a similar way that someone with traditional stock and bonds may choose to reinvest their dividends automatically.
If spending funds is an objective, digital currency can provide more flexibility. With a traditional investment, the usual process is to place a buy order, wait for the trade to execute, wait for the proceeds to settle, and finally transfer the money to an account. Many businesses now accept cryptocurrencies as a direct form of payment.
Instead of selling, it is possible to instantly transfer the digital currency to the business in the same way as the cash transaction. The business chooses whether to offer a fixed price in digital currency, which is how some companies, such as Newegg, set up their payments. Other companies offer varying prices based on the current equivalent in dollars. PayPal is one such company that currently accepts Bitcoin this way. It works similarly to doing business in a foreign currency.
Historically, investing has been a closed world of high transaction fees and limited access to markets.
While investing, in general, has become more open over time, digital currency is unique in that it has been highly accessible to individual investors from the beginning.
According to Corporate Finance Institute, approximately 99% of all digital currency transactions go through a centralized exchange. Examples of centralized exchanges include:
1. Fabriik Exchange is the new kid on the block. Fabriik says its Exchange is “a unique, fresh, and intuitive trading environment, to help you buy and sell digital currencies faster in a regulated environment.” Fabriik Exchange is part of the organization’s full digital financial services, which offers customers the ability to transform, hold, trade, and grow every asset they own, all in one accessible place.
2. Coinbase and Coinbase Pro
3. Kraken
4. Gemini
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