How to trade cryptocurrency without actually buying crypto coins
Earlier this month, the UK Financial Conduct Authority (FCA) concluded that cryptocurrencies are too dangerous for the public. So dangerous are these digital coins that the regulator institutes an outright ban on the sale of crypto-derivatives to retail consumers starting next year. ‘Retail customers,’ the regulator concluded, ‘might suffer harm from sudden and unexpected losses if they invest in these products.’ How much might these losses be? £53 million is the amount the FCA estimated it will save unsophisticated investors from losing.
Due to these concerns, the UK public will soon unable to speculate on crypto prices, which is notorious for their volatility.
The boom and bust of the Bitcoin bubble in 2018 did not help the sector either. Warren Buffett thinks cryptocurrencies ‘have no value’ because of its non-productive use. ‘You can’t do anything with it,’ observed the sage, ‘except sell it to somebody else.’
However, the market and development of the wider digital asset is continuing to grow. While the UK public may be not able to dabble on crypto-currency prices, the coming mass adoption of digital payment technology is real. So where else, apart from crypto currencies, can investors participate on the digital asset boom?
Where is the digital asset market heading?
To understand future trends in the digital market, we have to look at the interaction between crypto-currencies and its background market. A flow chart helps enormously to elucidate the linkage.
Earlier during the bubble phase (2016-2018), where crypto prices rose exponentially, the speculative frenzy was concentrated in the Primary Market. Entrepreneurs flocked to issue as much as crypto coins as possible due to the strong buying interest and fast rising prices. From one Bitcoin in 2008, the number of digital coins rose to more than 1,600 in 2018. It is akin to tech IPOs during the DotCom bubble. Digital coin mining went through the roof. Then the bubble burst. Nobody was interested in buying any more crypto coins.
But the technology behind the transactions – Blockchain – remains active. Bitcoin’s distributed ledger technology is fast maturing and is on the cusp of being introduced into the mainstream market.
What is blockchain ledger technology about and why it is developing fast?
Blockchain ledger technology is a form of decentralised transaction recorder. Instead of storing information in-house (say a bank’s server), blockchain is a form of distributed ledger that time-stamped transactions that are immutable to changes. It relies on peer-to-peer network. Blocks of data are bound together with cryptography methods. A graphic explanation of blockchain is showed below. (See here for a further summary.)
Transactions that occur using this method may use Bitcoin as the medium of exchange.
The key to blockchain, however, lies with its growing integration with the mainstream financial sector. Central banks, banks, and multinational financial payment companies are staking interest in it. For example, the JP Morgan Coin.
Example: JP Morgan Coin (Prototype)
JPM Coin (weblink) is a digital coin aimed at facilitating instantaneous payments using the latest blockchain technology. After institutional customers passed JP Morgan’s compliance requirements, they can use JPM Coin to pay or receive these coins, which is pegged to the US Dollars. As JP Morgan is a regulated entity, they can vet users of these coins, thus satisfying the Know-Your-Customers (KYC) condition of digital users. At this early stage, the bank only redeems these coins against the greenback. Once the popularity of this digital coins grows, they may be pegged to other mainstream currencies, which may further increase user adoption.
Another example of the blockchain adoption is Fnality (formerly known as the Utility Settlement Coin, see Wiki for more). This 15-bank backed project is an international peer-to-peer distributed ledger-based system for the wholesale banking market.
Crypto is still viewed suspiciously by authorities. This is understandable. Volatile pricing, unproven technology, policy inertia, and cyber thefts all contributed to bans and delays. But the underlying technology is marching forward regardless.
So unlike the earlier phase where investors concentrated on crypto currencies, interests are now growing on users of these crypto-tech such as blockchain.
Broadly speaking, there is no direct play on blockchain because it is not ‘invented’ by a single entity. There is no patentable business. Rather, corporations are capitalising on the evolving tech for their own payment and transaction businesses.
If you search around, you will find ETFs like the Blockchain ETF (BLCN, see below), which is based on Reality Shares Nasdaq Blockchain Economy Index. Dig deeper, you will find this ETF holds mostly existing tech companies like Square (SQ) and Microsoft (MSFT).
Others like the Amplify Transformational Data Sharing ETF (BLOK), which, according to its website, searches and invests in ‘equity securities of companies actively involved in the development and utilization of blockchain technologies‘. Holdings include Galaxy Digital (GLXY CN) and Z Holdings (4689 JP).
The benefits of investing in ETFs are that they hold a portfolio of stocks (diversification) and are tradable during a market session.
Related Guide: How to invest in ETF: A 10-Step Guide
What are the best cryptocurrency stocks for getting exposure to crypto coins?
Moving away from ETFs, investors can buy individual stocks that ride the crypto boom. Earlier beneficiaries of earlier mania was Nvidia (NVDA, see below) and AMD (AMD), which sourced their profits from selling their products to computing-intensive applications like crypto mining. For example, NVDA rose 10x in as Bitcoin prices took off in 2016. These semiconductor companies will continue to benefit from Bitcoin’s long-term rally.
Other tech companies like Facebook (FB), Shopify (SHOP), Paypal (PYPL), Amazon (AMZN) are all experimenting with the ledger technology one way or another. Paypal, for instance, just recently allowed users to transact Bitcoins and other crypto currencies using their PayPal accounts, aiming to cement its position in the digital wallet space.
Financial companies like JP Morgan (JPM), Visa (V), and MasterCard (MA) are also potential users of the blockchain technology. But there is no pure crypto plays and the ETFs based on the blockchain concept are small.
Geographically, the bulk of the potential investments in this new tech is found in the US.
Related Guide: How to invest in Stocks: A Quick Guide
Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.