The management of Colonial Pipeline reportedly paid a ransom of $5 million of cryptocurrency to the hackers of its computer systems. An artist named Beeple sold a piece of art that was embedded with a string of code called a Non Fungible Token (NFT) for $69 million. The value of one Bitcoin has risen from about $8,700 one year ago to over $37,000 now, with a stop at over $60,000 a month ago. Clearly the worlds of Bitcoin and other cryptocurrencies as well as the related world of NFTs is growing up and going more mainstream. Anecdotally, I have had a number of people ask me about cryptocurrency within the past couple of months, more than ever before. Interest is high, but involvement is still relatively low. Are you reading these stories and thinking about getting involved by investing in Bitcoin or other forms of crypto? If so, what is the best way to do so? I have my thoughts about that.
A Long Time
What strikes me about crypto and NFTs is that we are in the very early innings of this game and that it is going to take a long time for the real applications of these technologies to play out. Take this Wall Street Journal article by columnist (and former venture capitalist) Andy Kessler about an email conversation he had with entrepreneur Mark Cuban. Kessler and Cuban discuss the possible future of crypto and especially NFTs. Central to their discussion is the concept of “smart contracts”, which are transactions between two parties that are authenticated by virtue of blockchain code. The more business transactions become “smart”, the more useful and valuable blockchain becomes, and therefore the more valuable Bitcoin becomes, or so the thinking goes. This could all occur more or less as Kessler and Cuban surmise, but its adoption will take a long time.
If you see a trend that you think is going to take a long time to play out and you want to invest in that trend so that you will profit if your reading turns out to be correct, then you play that long-term hunch by buying something that you are going to hold for a long time. In the case of crypto, the way to play the crypto game is to buy and hold crypto. Set up a separate account for it (you kind of have to anyhow), buy it, and don’t look at it very often. Go to Coinbase or another reputable crypto house (and I am assuming Coinbase is reputable because it is public – no assurances that it is), buy some Bitcoin and/or Ethereum – most of the other cryptocurrencies out there including Dogecoin are “a hustle”, as Elon Musk stated – and sit back.
Another way to play crypto is to buy or sell Bitcoin futures. The Chicago Merc has offered futures trading in Bitcoin for over 3 years. As with other Futures instruments, each Bitcoin futures contract expires every 3 months. This means that you cannot own a futures contract for the long term. Futures are for short-term traders. If you want to try to time the market and profit from short-term fluctuations in the price of Bitcoin, then have at it with Bitcoin futures. However, if you believe as I do that Bitcoin is a long-term thing, then don’t play in the futures sandbox.
There are some Bitcoin ETFs out there offered by smaller, less-well capitalized shops. Stay away from these. However, some of the bigger ETF shops – such as potentially Fidelity and Blackrock – have filed to introduce Bitcoin or crypto ETFs. This will probably happen, if not this year then next. Some current crypto investors believe that ETFs will be game-changers for this market. They could be correct, and ETFs are a good alternative to holding actual crypto. Problem is, we don’t know what these reported ETFs look like yet, let alone what their asset mix will be. Also, the SEC is not on board yet. Until all of these details become evident, and even still with that development, I still like owning “hard” crypto over an ETF.
I think that the true value of cryptocurrencies will be realized only in the very long term. Years, if not decades, but not weeks or months. A long term time horizon means you should own a long term asset. Don’t try to trade it in the short term. I like investing in Futures for most other trends, but not this one. Be a buy and hold investor if you want to play the crypto phenomenon.