Malta: Buying Into Cryptocurrencies- Without Buying Cryptocurrencies

Last Updated: 5 February 2018
Article by Kyle Debono

Many people have asked me about what I think about the whole cryptocurrency world and whether I think they should invest into such virtual currencies. I have attended interesting seminars that discussed the topic in detail and have done my own research on the subject to understand how it all works. Although it is not too complicated to understand the mechanics of what cryptocurrencies are and how they work, one must first put in a fair amount of research to understand their universe. Given that cryptocurrencies are a relatively new concept, they cannot really be compared to other assets, although they will share some traits with other new/disruptive technologies. 

Fad vs Serious Investment

One of the first things that people think about is, 'is this just another fad that is in the news today but gone tomorrow? or is this the best thing since sliced bread that is destined to change the world as we know it?' 

In reality, nobody can truly say. What is certain is that cryptocurrencies have grown in importance to a level where even your local butcher is talking about it. Hence, there is no doubt that virtual currencies are being talked about and people are eager to get a slice of the pie by finding the best way to invest into this world. 

This creates a dilemma for potential investors since, on the one hand, they see the returns that were registered over a small period with virtual currencies – this creates the biggest psychological problem, i.e. the lost opportunity. On the other hand, people are also aware of the high volatility of such currencies when they read headlines that this or that virtual currencies went up or down 20% in one or two days. This high volatility usually scares away potential investors, especially those that are not that interested in getting to know how virtual currencies work or how they could be used, but just want to make a quick return like that guy on the Facebook ad did. Their normal course of action would be to ask their investment advisor. 

Of course, their investment advisors have their own issues with virtual currencies. Knowing that the product is not easily understood by most retail clients the issue of complexity comes up. This means that it is difficult to prove that a client truly knows what he/she is getting into if they were to invest into virtual currencies. Coupled with the complexity issue you have the high volatility issue which means that the instrument is a highly risky one. So, the main issue is basically that from a business risk point of view it does not really pay off for a licensed investment firm to recommend to ordinary retail clients to invest into virtual currencies. 

Does this mean that there is no safe way to try and ride the cryptocurrency wave? Is there no way that clients can get exposure to virtual currencies at an acceptable level of risk? Is there no way that investment companies could give recommendations to their clients to invest into cryptocurrencies? Like in many such situations, there is always a way.

How to invest in virtual currencies, without investing in virtual currencies

Although doing it directly presents a number of hurdles for both investors and financial advisors, going the indirect route is still an option. One thing that will come to mind for most when thinking of an indirect route is to invest through a fund or an ETF. This is one option that has the advantage of adding diversification by investing in many different currencies and not just buying one or two currencies. Thus, the logic would be that if crypto 1 issued by ABC Tech was a flop and ended up with no value, crypto 2 – 100 are still in existence and the risk has been spread. This sounds good, but in reality, this just helps with the risk affecting just one virtual currency. In real life we expect bad news on one of the currencies to drag down all the rest. Therefore, this might still not be the best option, especially since such a fund would be expected to have a high level of volatility (risk) given the high level of correlation (similarity) of the currencies. 

One needs to go a step further and think more broadly. Of course, investing into the shares of the companies that have issued virtual currencies is not really an option most of the time since they would have issued their "shares" through an initial coin offering (ICO) and not by issuing traditional shares. Thus their "shares" are basically the virtual currencies they have issued. This has led me to conclude that the best way for most investors to invest into virtual currencies is to invest into the shares of companies that are somehow exposed to this market. So the logic would be to invest into shares of well-established firms, that are highly liquid, that trade on reputable stock exchanges and that already have a track record. 

One may look into the shares of certain technology companies that are involved in the production of the virtual currencies. Alternatively, one may look at marketing companies that are involved in the Initial Coin Offering or Initial Token Offering markets since no cryptocurrency can be launched without having a good marketing strategy. 

Alternatively, the area that is intriguing me the most is to look into firms involved in the payments sector. In order to buy cryptocurrencies most people would need to send a payment using a hard currency such as the US Dollar or Euro, and, to send their "real" money, they need a payment company to do the transfer for them. Hence, such companies have already experienced good growth directly linked to the cryptocurrency world and still have more to gain as demand for such currencies keeps growing. 

The Bottom Line

There is a safer way of getting exposure to the cryptocurrency world without having to take on the high risk associated with directly investing into such currencies. The ideal portfolio of companies to invest into to get this indirect exposure will depend on several factors. But the important thing is that there is a solution to the dilemma and it is a solution that investment advisors can more confidently help their clients with. 

As usual please take note that nothing in the post is to be interpreted as investment advice. The views are my own and I would urge anyone considering investing into anything discussed in this post to get professional financial advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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