Cryptocurrency investing has become very popular over the last few years.
For many investors, despite all the talk and hype, cryptocurrency still remains a closed book. It may be that their personal risk tolerance does not stretch that far, or they just don’t understand how the concept works. In this case, crypto stocks are a great alternative, allowing access to the sector using traditional financial routes. Below, we dive into how you can trade crypto stocks.
Trading Cryptocurrency
Cryptocurrency is digital money, which is recorded on a decentralised ledger. Initially, it was created to move finance away from the oversight of regulatory authorities after the 2008 financial crash. However, it has now become a much-used financial instrument and has risen exponentially in value. The most well-known cryptocurrency is Bitcoin, but there are others grouped under the umbrella of altcoins, such as Ether and Sol.
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Some of the largest crypto stocks include xStocks. These are tokenized stocks backed 1:1 by the underlying shares, designed to provide on-chain price exposure to specific publicly traded equities and ETFs. They are backed by assets that underlie the stock price. They can then be used in decentralised finance for yield or trading at a later date. Growing quickly in popularity, they have now reached $25 billion in Total Transaction Volume.
Each currency works differently, but they can all be bought and exchanged on most cryptocurrency exchanges. At their heart, they are all extremely volatile, shooting up and down in price erratically. This makes for great gains, but with a high level of risk. Many people choose to offset this by investing in crypto indirectly. This means they don’t hold the currency itself, but have a stake in businesses that do.
Buying Stock in Cryptocurrency Companies
This method of buying crypto stocks involves buying stocks of publicly listed companies that work in the cryptosphere. These may include exchanges, mining companies and hardware manufacturers.
Exchanges are the places where people buy and sell cryptocurrencies and digital assets. There is a mix of companies, some of which concentrate solely on crypto and others that use it as a small part of their business model. These companies gain money based on how much their services are used, as with any other business.
Similar to this are mining stocks. These companies generate revenue from the creation of cryptocurrency. There has been increased pressure on these companies in recent years, mainly due to AI increasing the demand for the hardware they use, the falling price of minting Bitcoin, and energy costs. However, many are looking into innovative new ways to deal with this, such as employing cleaner and cheaper energy.
Companies That Hold Cryptocurrencies
The next option is to buy into companies that hold a large amount of cryptocurrency. In the past few years, these have risen exponentially. Many of them gained inspiration from Michael Saylor’s Strategy. Formerly a small software enterprise, they changed their business model to one that buys cryptocurrency and holds it. As the price rose over the last five years, so did the companies’ balance sheets.
Other companies have followed suit, such as MetaPlanet. This Japanese hotel chain was on a rocky financial footing before it changed to a treasury firm. There are now companies as far-flung as Spanish café chains to Gamestop that have tried.
If you do invest in one of these companies, you must check its NAV value. To buy Bitcoin, many companies have sold off shares, which have weakened their value. Many are now trading below the value of the cryptocurrency they hold. This makes further growth and funding hard to come by. However, some are very astute and can still provide strong investment opportunities, particularly those with diversified portfolios.
The Benefits of Crypto Stocks
The main benefit is that you can gain from the cryptocurrency market, though without the inherent danger of its volatility, as you don’t hold the asset directly. As these companies become more intertwined with traditional finance, this will become less of a concern, and they will become even safer.
As many are listed, they also have a significant regulatory oversight attached to them. They must adhere to legal standards and financial reporting, which is often different to the wider world of decentralised finance. While cryptocurrency does have freedom, it comes at a cost, with many currencies artificially inflated or being prey to rug pull scenarios.
Finally, investment in these companies diversifies your portfolio. Cryptocurrency and digital assets are based in a different world, which does not always respond to the changes happening around the globe. Thus, socioeconomic or political factors may wreak havoc on many stocks, but those dealing in digital assets may stay firm.
By no means are crypto stocks free from risk. They still have volatility, and many companies have viewed digital asset acquisition as a golden ticket to alleviate financial woes. Yet with the right research and strategy, you can benefit from them if you take the time to find the right one and invest sensibly.
