The same core tenets of investing that govern prudent stock market trading also apply to the crypto market. Even expert stock pickers struggle to outperform the market, which is why index funds have become so popular. The crypto market could experience a similar transition toward…
Though crypto fundamentally transformed the way value is exchanged, the core tenets of investing remain the same. The crypto market is a very young version of the stock market in the sense that participation, trading volume, and market capitalization all have a lot of room to grow.
That said, cryptocurrencies are already worth more than $200 billion, exceeding Jeff Bezos’ net worth of $112 billion. With the stock market’s total value worth a towering $67.5 trillion, cryptocurrencies lag behind, but stocks also had a few hundred years’ headstart.
I predict that the crypto market cap will double or even triple in size within the decade and be as robust as the traditional stock market in terms of the quality of investment opportunities.
Given bitcoin jump-started cryptocurrency development a little more than a decade ago, the speed of maturation of the crypto sphere is incredible. There are currently more than 3,000 cryptocurrencies in circulation and involvement from such heavy-hitters as JPMorgan Chase, Fidelity, and Facebook, to name a few. Investment in cryptocurrency has become much easier for institutional players.
When cryptocurrencies first launched onto the digital sphere, individuals had to take the time to research projects and manage their own investments. For those unfamiliar with crypto, this meant learning the importance of retaining control over their private keys, and either signing up for an exchange or purchasing tokens during a project’s ICO. It wasn’t economical for endowments and hedge fund managers to engage in crypto without custodial options, and the regulatory uncertainty surrounding ICOs was too risky regardless.
The days of ICOs are mostly over, with the United States and other regions outlining frameworks for investments in digital assets precluding projects from raising money without abiding by securities laws.
Nonetheless, since crypto’s early days, we’ve seen the launch of over 700 cryptocurrency funds that invest in various tokens on behalf of clients. Bakkt, operated by the Intercontinental Exchange (ICE), recently launched its first bitcoin futures contracts, and is eyeing bitcoin options next. Gemini’s NY-based exchange launched a custody service in September 2019 that allows for “customers to check balances, download account statements, initiate withdrawals, and grant auditors view-only access to confirm balances, transactions and activity.”
Such developments showcase an ongoing explosion of cryptocurrency investment-related products and services, particularly geared to meet the needs of institutional players.
Whether we are discussing investment in cryptocurrencies or stocks, the methodology is the same: do the research necessary to know when to buy low and sell high. The strategy for executing this mantra varies based on each investor’s situation. When it comes to most retail investors of modest means, index funds tend to be the best option. Why not apply this common knowledge to crypto markets?
The reasons for the success of index funds among retail investors vary, but it comes down to time and expertise. For professional investors with ample time to research assets and manage their portfolios, investing directly in individual stocks may be more lucrative, but the reality is most regular people lack both time and expertise to achieve such a level of self-management successfully.
As Princeton economist Burton G. Malkiel points out in his book A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, even the most seasoned professionals cannot consistently predict which stocks will perform the best over many years. By investing in highly-reputed index funds, retail investors can benefit from ownership of top-performing stocks without executing the arduous research themselves or paying high fees for a firm to manage the assets for them.
The most well-known indices in the traditional financial sphere are the Dow Jones Industrial Average (DJIA), which tracks 30 influential, blue-chip stocks chosen by S&P Dow Jones Indices, and the S&P 500, which includes 500 of the top US stocks by market cap. These serve as interesting models for cryptocurrency indices (disclosure: my company, Crypto Price Index (CPI), will be issuing a CPI200 coin to track the top 200 cryptocurrencies by market capitalization). Furthermore, the crypto industry as a whole would greatly benefit from the adoption of a universal crypto index that could serve as a reference for exchanges, traders, and businesses alike.
For cryptocurrency to achieve mass adoption, investment opportunities need to appeal to everyday people as well as institutional players. Adoption will remain slow as long as retail investors are required to do their own due diligence.
Looking to the fiat-driven financial markets, industry-accepted market indices like the DJIA and S&P 500 are considered essential for making smart investment decisions; why should crypto markets be any different?
About the Author: Herbert Law is the founder and CEO of Crypto Price Index (CPI).
Disclaimer: The above should not be considered trading or investment advice from CCN.
This article was edited by Josiah Wilmoth.
Last modified: January 11, 2020 2:31 PM UTC