Analysts Claim Indirect Investment in Cryptocurrency and Blockchain helps Manage Massive Risks
There has been an extra amount of negative sentiment directed towards cryptocurrencies in the last few weeks as Bitcoin slowly winded down from $8500 to $6800 over the course of a month. Many wealth managers believe it is better to gain exposure to this space by investing in publicly listed companies that are working with blockchain and multiple cryptocurrencies, reported by LifeHacker, December 8, 2019.
Examining the case for Equity Investments
Putting capital into Bitcoin and Ethereum is not akin to investing in the equity market. Equities are an ownership claim against a fraction of the company, while investments in most cryptocurrencies is buying the native asset of the blockchain.
Retail investors have been the main beneficiaries of the cryptocurrency boom, but they have also been the most heavily affected by sizeable losses. Certain wealth managers believe it is time for retail to stop exposing themselves to so much risk by directly sinking money into public ledger cryptocurrencies.
In an interview with CNBC in April, 2019, Peter Mallouk, CIO at Creative Planning, told viewers that investing directly in cryptocurrencies is risky, and there are much safer ways to expose yourself to the upside of blockchain. By investing in companies like IBM, Accenture, and Walmart, an investor has their money in a diversified business that could see wealth creation by using blockchain to improve their operations.
On the other side, there is also the opportunity to invest in stocks like Overstock, Hut8 Mining, and Canaan which are publicly listed and are majorly focused on blockchain and cryptocurrency, giving them a higher chance of an upside if all of this plays out successfully.
Critically Assessing This Viewpoint
It definitely makes sense for a retail investor with a low risk appetite to invest in IBM instead of sinking money into cryptocurrency. That being said, low risk equates low reward, so don’t be expect to adequately capture the euphoria of this space by investing in large tech companies with some skin in the game.
But investing in Overstock, or a loss making business like Hut8 Mining is a direct contradiction to the claims of “reducing risk”. These companies have lost far more for investors than they have made; the same cannot be said for Bitcoin or Ethereum, which, by the way, have actual value as a medium of exchange and multi cycle store of value.
When people call Bitcoin a store of value, traditional proponents are quick to use the volatility card to write off this narrative. However, a quick look at the long term chart would evidence the claim that Bitcoin is a wealth creator – not just a store of value – over long periods. Keeping that in mind, any investment in cryptocurrency should be made with the knowledge that it is an extremely risky asset that is likely to appreciate over biennial cycles at minimum.