Portfolio investments in cryptocurrencies
Over the past two years, we have witnessed the rapid growth of the blockchain industry and seen the countless projects it has spawned — some worthy of attention, others not so hot, and many frankly fraudulent. Frequent cases of investor fraud, tax evasion and money laundering have prompted regulatory authorities to start taking action. They have either begun developing or are already rolling out the legal framework for cryptocurrencies, mining and fundraising (ICOs).
Search engines and social networks are battling against aggressive ICO fundraising ads for yet more questionable blockchain startups; nevertheless, many people are losing money because they are physically incapable of digesting such huge amounts of information.
In this article, we consider possible options for investment in cryptocurrencies and take a look at some approaches to risk reduction.
Bitcoin and all, all, all
Bitcoin was the first digital currency on the blockchain, and it is still the leader in terms of capitalization and turnover. For many, it is the entry point to the world of cryptocurrencies as it is the easiest one to buy for fiat money.
The shortcomings of bitcoin gave rise to a second wave of crypto projects designed to solve the problems of scalability, performance and anonymity, and to expand functionality through smart contracts and other technologies. Ethereum, Ripple, Monero, Zcash — these cryptocurrencies deservedly took their places at the top of the listings.
The third wave is thousands of blockchain startups, financed by crowdfunding (ICOs). Decentralized cloud computing, storage, oracles, application platforms, marketplaces, investment services, and payment systems — these are just a very few of the areas where distributed registry technologies can be applied, and in which new cryptocurrency projects appear.
When buying cryptocurrencies, whether online or off, you have to put your trust in third parties (exchanges, investment platforms, p2p sites, etc.), which, for large investors, can be too much of a risk.
A safer method is to become part of the mining process; in other words, helping to maintain the network’s operational capacity for a particular cryptocurrency. Investing in equipment and infrastructure pays off in the shape of rewards for the work done.
Most conservative investors can invest in the shares of mining equipment manufacturers or other well-known global companies actively involved in developing blockchain technology. The next option might be the purchase of bitcoin futures or investment in cryptocurrencies through funds working with this asset category.
Need for diversification
Most investments in the blockchain industry are made for the following reasons:
- Blockchain technology has a wide range of find extensive applications in the future;
- Cryptocurrencies are currently very far from the stage of mass acceptance.
History shows that the early stages of development of any technology are accompanied by the emergence of numerous new projects as well as companies exploring every possible angle for its application. New projects stand a good chance of gaining a significant share of the emerging market in the future. As the total capitalization of the industry grows, a small number of successful companies share it amongst themselves. This is exactly what’s happening in the blockchain industry.
Let’s turn to statistics for a clearer picture of the processes taking place in the cryptocurrency market.
Figure 1 presents a graph showing the percentage of total market capitalization occupied over time by the largest cryptocurrencies. We see a steady loss of the market share occupied by Bitcoin. If five years ago, bitcoin occupied about 94% of the market capitalization, today it owns less than 40%. In other words, during this time, the market capitalization of alternative cryptocurrencies has grown 10 times more than the capitalization of Bitcoin.
It should be noted that this does not mean that any cryptocurrency is growing in value relative to bitcoin. It does, however, indicate that the blockchain industry is developing naturally and that in the future we should not expect bitcoin to occupy an overwhelming share of the market. And it certainly won’t be the only cryptocurrency.
Looking at the process in more detail (Figure 2), we see that each significant loss of bitcoin market share is accompanied by the growth of one or more new projects. Thus, technological development takes a variety of alternative directions on the market.
Understanding the natural processes of development within the blockchain industry means professional investors do not restrict their assets to Bitcoins alone. Striving for the best financial result, they are always on the lookout for the most promising and relevant projects.
The blockchain is not only a new type of asset, it is first and foremost a new technology, and as such, it is natural for it to develop not within one, but within a variety of projects and directions. Therefore, investing solely in bitcoin may not be the most effective option.
Cryptocurrency indices
The index represents the state of a particular sector or the industry as a whole. Each index has a specification — a formalized algorithm for calculating what proportions of the assets should be placed in the investment portfolio. Although the world of traditional finance has plenty of portfolio theories, they don’t always work for cryptocurrencies. In such a volatile young market, finely tuned mathematical models and expert evaluation of assets are absolutely essential.
Many companies offer to place funds in a cryptocurrency portfolio, which they maintain (rebalance, revise), and which provides reliable storage of assets. The ICU.ME platform is one of these projects. We focus on automation of processes, which allows us to reduce overhead costs, and thus reduce commissions too. In fact, our expertise and our infrastructure saves our customers valuable time and money and makes investing in cryptocurrencies simple and accessible to everyone.
In the near future, we plan to add new investment products and expand the functionality, join our community, and we’ll build a quality service together :)
