Jan. Legitimate, 2018 1:54 PM
I have faith te cryptocurrencies ter the long term.
I believe ter diversifying my portfolio spil a means of risk mitigation.
Investing te different assets with varying degrees of exposure to the crypto market can help stengel one’s portfolio during hard times while still permitting for upside during good times.
Te light of the major correction presently occurring, the below is especially relevant. How can you make money and mitigate risk te cryptos even when the overall market is down?
One of the problems that I have bot wrestling with recently is my belief that while blockchain technology and cryptocurrencies are certainly destined for the future, it is difficult to capitalize on that belief without incurring big amounts of risk. The options for investment te the space are essentially limited to investing te individual coins and hoping that they get through whatever correction and market compels occur ter the future. This strategy is flawed for a number of reasons. Because the industry is so youthfull, investing ter individual coins gives LESS exposure to the underlying market than it does to the risks associated with that individual coin. How can I build up exposure to blockchain and cryptocurrencies te general without exposing myself to undue risk associated with individual coins?
Let’s imagine that wij’re back ter the 1990s.
The internet is just reaching consumers for nascent commercial use. Spil an educated investor, I’m certain that the internet will be around ter Ten, 20, 50 years and I want to invest te it. I determine to invest te companies that having promising ideas. Flash forward Ten years. The dot com bubble has wiped out the majority of dot com wealth and a large portion of dot com companies. Maybe I wasgoed fortunate and bought Amazon at under $Two vanaf share. More likely, I wasgoed unlucky and bought Pets.com at $11 vanaf share (or higher) and have nothing to display for it.
With that skill te mind, how could an investor te the 1990s (retrospectively) have invested te internet technology without directly investing ter dot com companies?
Invest ter companies that facilitate access to the internet. Think companies like HP, Dell, and other laptop manufacturers that permitted users to access the internet and engage ter commerce. Similar to the crypto market today, the enhanced number of knots on the internet network made the internet exponentially more valuable.
Invest ter companies building the infrastructure around the internet. This means telecom and hardware companies that were building the physical networks that permitted the internet to exist.
Not invest ter anything and wait for the winners to emerge.
Let’s bring it back to cryptocurrencies: I am certain that blockchain and cryptocurrencies will succeed and I want to invest te them. I am worried that by investing ter individual cryptocurrencies, I am less investing ter the ecosystem spil much spil I am te those individual coins or companies and at the same time incurring lots of other risks spil well. You’re investing te something that uses blockchain but is also relying on lots of other things to pauze the right way.
Spil a crypto investor I’m worried about two things:
How do I ensure that my investment does well when cryptos do well?
How do I ensure that my investment don’t do poorly when cryptos do poorly?
I’ve come up with a few ideas that can help diversify your portfolio while still maintaining exposure to cryptocurrencies.
Podium coins are cryptos that permit other cryptos to be built through the use of their protocols. While they can be held spil straight currencies, their main upside is their potential to host other coins and become the “internet” for cryptocurrencies. Having other coins built on their protocol conveys two major advantages:
Explicit commerce of the underlying asset. Spil more coins are built on the verhoging, request for that podium increases.
Implicit recognition that this toneelpodium/coin is stable and reliable.
Ethereum (ETH) is not only a good store of value, but is also the gold standard for toneel coins. Its wise contract functionality and protocolization of tokens has permitted it to become the fundament for 60% of all fresh coins that are created. When fresh coins are launched, they often utilize ETH because its protocol provides trust and security for both investors and coin founders. This multifunctionality will ostensibly permit ETH to better weather corrections spil well spil providing further sources of investment and capital generation.
Cardano (ADA) is effectively an offshoot of ETH. It wasgoed created by Ethereum’s former CEO. Much te the way that Litecoin attempts to improve on Bitcoin’s functionality by taking what it does and iterating, Cardano attempts to improve on ETH by taking what it does and iterating. It builds upon the benefits of the ETH toneelpodium while improving aspects of scalability and sustainability. Prospectively, ADA remains a speculative purchase (like other cryptos) but has the potential to muscle ter on some of the territory that ETH has carved for itself. If it manages to become a verhoging for other coins, for decentralized applications, and for wise contracts, ADA can become a major player te the crypto space.
Exchange coins are proprietary cryptocurrencies released by cryptocurrency exchanges that have differing utility depending on the service. Depending on the coin being held, investors build up two benefits:
- Lower trading fees on that podium
The problem with thesis coins is that they are entirely dependent on their exchange for value. If their exchange collapses, the proprietary coin vanishes spil well. While I consider this to be a major risk, I also consider exchanges to be inherently more stable than other crypto ventures because they have actual revenue generation not dependent on cryptocurrency technology (merely the trade of cryptos).
Coss and Kucoin both provide dividends based on the following formula:
# coins held/#coins ter circulation * fees generated through trades * % of fees collective to coinholders
The promise of passive income just by holding a cryptocurrency is enticing. Realistically, however, the yield is fairly puny at just a few percentage points for each. Still, the capability to make money even when the market is losing value is an advantage and an chance for diversification (since even when the market is losing money, people are trading).
The other promising thing about thesis coins is that spil the exchanges become more popular, the value of the coins should increase. This appreciate te value adds another source of value generation.
I choose Coss overheen Kucoin for a number of reasons.
- Coss is based ter Singapore while Kucoin is based ter China. Thus far, Singapore has bot much friendlier to cryptocurrencies while China has repeatedly limited them.
- Coss is integrating fiat exchange, essentially making them a competitor to Coinbase. This will increase the number of users, increase the trading fees being generated, and increase the price of Coss. Spil far spil I can tell, Kucoin has no such aspirations.
- Kucoin seems interested ter promoting giveaways and contests which always makes mij feel uneasy.
- Binance offers another proprietary coin. Unlike Coss and Kucoin, however there is no dividend. The advantage of the Binance Coin (BNB) is that users trading on the Binance verhoging can determine to pay their trading fees with BNB and build up a 50% trading toverfee discount. Spil a toneelpodium, Binance is the third largest exchange by volume. Similar to Kucoin, it is based ter China, but seems to have a more solid user base and foundation. Spil more users budge to Binance to trade, the value of its coin should increase.
There are also several companies that maintain exposure to cryptocurrencies through the manufacture of mining hardware. They appeal to mij because albeit they have cryptocurrency hardware spil one stream of revenue, they are not fully reliant on that revenue stream to sustain. The companies listed below have diverse clientele for their products but have benefitted from the cryptocurrency boom.
Cryptocurrency mining remains an integral opzicht of cryptocurrencies that rely on Proof of Work. Te brief, miners validate transactions, ensuring that the party sending the currency is the true proprietor and that they have the amount of cryptocurrency that they are attempting to send. This process of validation is reliant on ingewikkeld cryptographic mechanisms that require big amounts of electric current and processing power. Different types of mining hardware are more efficient at solving this cryptographic proofs depending on the algorithms being used.
Generally, there are Two categories: GPUs vs. ASICs.
- GPUs are used by coins like Ethereum and ZCash.
- ASICs are used for coins like Bitcoin and Litecoin
Taiwan Semiconductor (TSM) is a large Taiwanese company that produces chips for a number of different companies and applications. Its chips are found ter cell phones, computers, and Bitcoin mining software. TSM is one of the largest foundries that produces ASIC mining hardware. ASICs are specially designed chunks of hardware that effectively solve the SHA256 cryptographic. Ter addition to producing ASICs, TSM also produces hardware for companies like Apple, Qualcomm, Nvidia, and AMD. Te addition to its year overheen year revenue growth of 12% from 2015 to 2016, TSM also sports a Two.70% dividend yield.
Nvidia (NVDA) and AMD (AMD) are well known GPU manufacturers. Nvidia’s 1080/1070/1060 series chips and AMD’s RX580/570/560 series chips serve spil the backbone for many GPU miners. While the chips were primarily designed for gaming and graphics processing, they’ve found an arguably larger market for miners. While neither Nvidia strafgevangenis AMD are fully dependent on miners for request, the proliferation of cryptos te general have driven up prices for both manufacturer’s chip sets. Nvidia’s stock price has doubled overheen the last year and maintains a dividend yield of 0.27%. AMD has seen its stock price increase by about 20% overheen the last year but does not provide a dividend.
Those hoping to reap the benefits of the cryptocurrency market but are afraid of the volatility have options. Each of the above mentioned avenues provide their own risks and potentials for upside, but none have the precies same exposure spil a unspoiled investment ter Bitcoin. Holding some of the assets that I’ve mentioned can help mitigate the risk associated with store of value cryptocurrencies.
Disclosure: I am/wij are long BITCOIN, ETHEREUM.
I wrote this article myself, and it voices my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned ter this article.
Extra disclosure: I have no positions te Nvidia, AMD, TSM and have no plans to initiate a position te the next 72 hours.