Crypto has been around for over a decade now, but only recently has it become mainstream, with over 1 in 8 Americans investing in crypto in the last year. Cryptocurrency is a digital financial asset that uses cryptography to secure the network, control the creation of additional units, and verify the transfer of assets.
Cryptocurrency exists entirely in blockchain cyberspace and is not controlled by any single entity or organization. The decentralized nature of crypto makes it appealing to many people who believe in its potential for future growth and adoption, as an alternative to traditional assets.
The first cryptocurrency was Bitcoin, which was introduced in 2009 by an anonymous person (or group of people) under the name Satoshi Nakamoto. Since then, there have been over 11,000 cryptocurrencies created, with hundreds more being introduced every year.
Why is Crypto Viable As An Investment?
Crypto offers unique opportunities to investors that traditional assets do not.
First off, crypto has low correlation with traditional assets, and can act as a hedge against inflation. This makes it a good way to preserve capital during periods of high inflation or when interest rates are expected to rise. Since cryptos are less correlated to traditional assets, they can help reduce overall portfolio risk by providing downside protection.
Crypto is also a source of high alpha. Historically speaking, Bitcoin has returned around 230% per year on average since its inception. That’s more than ten times the return of the Nasdaq 100 over the same time period.
These benefits stem from crypto’s inherent, unique characteristics, that have motivated millions of new investors to get involved.
First, crypto is permissionless. This means that anyone can invest in it without needing to get approval from a third party. There are no barriers to entry and no restrictions on who can participate in the market.
Second, crypto is decentralized. This means that there is no single point of failure or control point for hackers to target and exploit. The code is open source and transparent, which makes it difficult for bad actors to operate undetected within the system.
Third, crypto is immutable. This means that once an asset has been created, it cannot be changed without consensus from all holders of that asset (i.e., everyone who holds your cryptocurrency must agree with any changes you want made).
Finally, crypto offers financial independence from governments and banks by offering users complete control over their money supply and assets through blockchain technology.
Types of Crypto Investments
Now, let’s look at a number of specific crypto investments:
- Security Tokens
- Staking Tokens
- Decentralized Finance (DeFi)
- Non-Fungible Tokens (NFTs)
A stablecoin is a cryptocurrency that maintains price stability against other currencies. It does this by pegging its value to another asset, such as the US dollar or the Japanese yen.
Stablecoins are particularly useful as downside protection. For example, if Bitcoin is crashing, it could take days to sell your crypto to fiat, and then days again to get back into crypto, given how slow the traditional financial system is. With stablecoins, you can instead convert your crypto to a stablecoin in minutes.
Stablecoins have been around for quite some time now, but they’ve only recently seen increased adoption due to their potential use cases in financial services and beyond. For example, stablecoins could be used as collateral for loans on DeFi platforms. They could also be used as an alternative payment method on e-commerce platforms like OpenBazaar.
The most well-known stablecoin is Tether (USDT), which has been criticized for its lack of transparency and whether it actually holds enough dollars in reserve. Others include USD Coin, Binance USD, and MakerDAO’s Dai.
Security Tokens are a new form of financial asset. They’re a digital representation of a real-world asset that can be traded on a blockchain, such as equity, debt, real estate, or even hard assets like gold or art.
Security Tokens have the potential to disrupt the financial services industry and usher in a new era of democratized access to capital. This is because they can be freely traded on open exchanges and allow investors to participate in assets that may not be as easily tradable (or at all) otherwise.
For example, most real estate investors aren’t able to easily sell their holdings because real estate is illiquid. However, with a Security Token Offering (STO), investors can purchase fractional ownership in real estate.
Staking is a method used to secure blockchain networks. It involves locking up a portion of the cryptocurrency, usually a set amount for an indefinite period of time, in exchange for future rewards.
There are multiple benefits to staking. For example, by securing the blockchain network you are aligning your interests with that of the network's stakeholders—the users who maintain and operate it—and allowing them to transact without fees. By doing this, you help prevent spam attacks on the chain while also securing its long-term viability.
Another benefit is that by setting aside a portion of your cryptocurrency holdings to work for you instead of the network, you greatly reduce your exposure to price volatility.
Ethereum is a Proof-of-Work blockchain, which means that it’s not yet possible to withdraw staked Ethereum funds and accrued rewards, but that will soon change, as Ethereum is moving to Proof-of-Stake.
Ethereum staking is the process of locking up ETH for a specified time in order to get rewarded. As of writing, nearly 7 million ETH are staked, at an APR of 6%.
Polkadot is creating a new decentralized web by enabling blockchain interoperability.
As Polkadot uses Nominated Proof-of-Stake, you can begin staking right away (well, within a 24-hour “election” period). Polkadot stakers that stop staking will need to wait 28 days to unlock their assets, but staking DOT comes with a red-hot APR of around 10%. As of writing, staking DOT on Kraken comes with annual rewards of 12%.
Staking Polygon (MATIC)
Polygon is another popular staking opportunity, which provides a simple rewards calculator to see how much you can earn by staking.
Polygon is considered Ethereum’s “Internet of Blockchains,” addressing concerns like low throughput, delayed transactions, and lack of community governance by using sidechains.
Decentralized Finance Tokens (DeFi)
DeFi is an alternative to traditional finance that lets users keep custody over their funds at all times, and without any third parties involved.
Aave, governed by the AAVE token, is an open-source liquidity protocol that lets users earn interest by depositing crypto, and allows depositors to borrow additional funds.
Yearn.Finance, governed by the YFI token, offers depositors interest on their assets. It could be considered an open-source
MakerDAO, governed by the MKR token, is an open-source credit facility that allows the minting of the decentralized stablecoin Dai.
Uniswap, governed by the UNI token, is a decentralized exchange that allows anyone in the world to trade assets completely permission free.
Non-Fungible Tokens (NFTs)
NFTs are another crypto investment opportunity that has recently gained traction. An NFT is a non-fungible token, or a unique, provably scarce digital asset.
Crypto art collectibles are one example of an NFT. NFTs are also used to represent ownership in physical assets like sports cards, fine art, and collectibles.
Because each NFT is unique, its value is derived from scarcity and demand for the underlying asset it represents.
Beeple, the name of digital artist Mike Winkelmann, recently sold an NFT for a whopping $69 million, positioning him among the three most valuable living artists.
For reference, that single NFT sale in 2021 was 5x bigger than the entire NFT market of 2020.
CryptoPunks is one of the most prolific and “og” NFT projects in the industry. A collection of 10,000 pixelized characters built on the Ethereum blockchain.
These algorithmically generated collector’s items have only grown in value over time.
Bored Ape Yacht Club
As with CryptoPunks, there are a total of 10,000 Bored Ape NFTs. These ape images maintain the spirit of an Ethereum sub-culture that operates at the cutting edge of smart contracts, decentralized finance and crypto culture.
Alongside the emerging asset class, there are also new investment platforms that are combining the power of tax-advantaged retirement accounts with crypto. Companies like iTrustCapital offer the ability to make tax-free trades inside of their Crypto IRA – with options to transfer an existing IRA, rollover an employer plan, or contribute new funds. They offer a wide range of crypto assets, institutional cold storage and incredibly low fees.
Those looking to invest in crypto for the long-term and looking to take advantage of crypto retirement accounts, then an iTrustCapital Crypto IRA could be a great option.
Investing in crypto used to mean buying Bitcoin, or later on, buying Ether. Nowadays, entire new industries within crypto are emerging, like the $100 billion DeFi space or the $2.5 billion NFT space, while the Security Token space is expected to reach $3 billion by 2025. And those are only niche segments within the $2 trillion cryptocurrency market.
In short, crypto investments have emerged as a large, viable segment of the alternatives market, as a way to hedge against inflation, generate outsized returns, and diversify one’s portfolio.