Introduction: Cryptocurrency has become a controversial and widely discussed topic within the realm of investing. While it has gained more acceptance among the millennial and younger generations, it has often been shunned by Generation X and older investors. However, as I have previously discussed in my post on investment strategies, I believe that allocating a small portion, around 5-10%, of one’s portfolio to risky assets can be a viable approach. In this article, we will delve into the potential of blockchain technology, the underlying innovation behind cryptocurrencies, and explore how it can be an indirect investment opportunity with reduced speculative risks.
Understanding Blockchain: The Foundation of Cryptocurrencies At its core, blockchain serves as a digital and decentralized ledger that records transactions. It provides a transparent and secure platform for exchanging value between businesses, partners, customers, and other parties involved in transactions. The decentralized nature of blockchain ensures that it is not stored in a central location but rather distributed across various hard drives and servers worldwide. This distribution prevents any single individual, business, or cybercriminal from gaining control over the network. Consequently, blockchain technology is considered to be even safer than traditional banking systems.
Investing in Blockchain: Exploring the Options Investors have several avenues to invest in blockchain technology. One option is to purchase Exchange-Traded Funds (ETFs) or individual stocks that have a vested interest in developing blockchain solutions. Microinvesting is particularly suitable for investors who contribute small sums of money at a time, as it enables the practice of dollar-cost averaging. This approach becomes especially advantageous during bear markets when market fluctuations offer attractive entry points. Investors can choose to invest through tax-advantaged accounts such as IRAs or taxable accounts, depending on their preferences and financial goals.
ETFs for Conservative Investors: Mitigating Risk For conservative investors who seek exposure to blockchain technology, ETFs can be an appealing choice. Notable blockchain ETFs in the market include BLCN (Reality Shares Nasdaq NexGen Economy ETF), BLOCK (Amplify Transformational Data Sharing ETF), and KOIN (Innovation Shares NexGen Protocol ETF). ETFs comprise multiple stocks, providing investors with diversified exposure to the blockchain sector. To make informed investment decisions, investors can research ETFs using platforms like seekingalpha.com or morningstar.com. It’s important to pay attention to the expense ratio associated with an ETF, as it represents the fees charged by the fund manager. Opting for low-cost, passively managed index funds can help keep expense ratios minimal.
Investing in Individual Stocks: Capitalizing on Opportunities Another approach to investing in blockchain is to select individual stocks that are directly involved in the development and implementation of blockchain technology. Some prominent examples of such stocks include IBM, MasterCard, NVIDIA, AMD, SQ, and Intel. IBM stands out due to its commitment to the cloud computing industry and its pending acquisition of Red Hat, a move that significantly bolsters its presence in the blockchain arena. As the demand for data storage and computational analysis continues to grow, these companies hold potential for investors seeking exposure to blockchain technology.
Creating a Personalized Approach: Combining Strategies Investors have the flexibility to combine ETF strategies with personalized portfolios by leveraging platforms like M1 Finance. This allows for the creation of customized portfolios, often referred to as “pies,” which can replicate existing blockchain ETFs or consist of hand-picked stocks. By setting desired asset allocations and utilizing rebalancing techniques, investors can manage their portfolios according to their preferences and risk tolerance. Dollar-cost averaging can be employed to take advantage of market fluctuations and systematically invest new funds over time.
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