How and why to invest in digital assets?
Digital currencies are a phenomenon that has been gaining more traction since day one. In the short history of this market, we have already witnessed several bull and bear markets, different bubbles, manias or trends. Yet, digital currencies did not always have the best image. Many argued that they are only used for financing illicit activities or money laundering purposes or that investing in digital currencies is nothing else than pure gambling.
These arguments might have had an impact on investors, who decided not to invest in digital currencies. However, these arguments are not true, which can lead to shifting of their perspective and thus the questions of how or why to invest into digital assets might be back on the table.
Why should anyone buy digital currencies?
It might look appealing to invest into digital assets mostly for the possible gains. It is nothing unusual to see double digit returns on daily candles or triple digit returns annually. Bitcoin for instance has an average of around 200 % growth annually since its inception. However, Bitcoin and all the other digital currencies offer much more than that. Here are only a few reasons why investing in digital currencies is ever more popular.
Hedge against the inflation
Probably the most mentioned reason for being invested in the digital asset world, aside from the speculative nature of the investment, is the “hedge against the inflation” narrative. Since the total supply of Bitcoin is known and unchangeable, everyone can see what the total number of coins mined is, how many will be mined in the next few days or weeks or when the next halving will occur, hammering the miner rewards by half.
Moreover, the total supply of bitcoins does not change. On the contrary, it stays the same, no matter what the price is. Thus, many people treat investing in digital currencies, especially Bitcoin, the same as investing in gold. They use this investment as a tool against the unprecedented and unpredictable monetary policies, which, as we see now, can lead to rising inflation.
Long term investment
Hand in hand with the narrative of buying digital assets as a hedge against inflation goes another, very popular narrative. Since digital currencies have been around only for a bit more than a decade, analysts consider them mainly a long-term bet that needs time.
Many compare especially the adoption of Bitcoin, the first successful digital currency, to the adoption of the Internet. According to that comparison, currently the digital market is at the same stage, as the Internet was in the year 1998. Thus, those who bet that digital currencies will follow the path of the Internet are mostly aiming to hold for the long run. They call this buy-and-hold-strategy “hodl,” which originated from the misclick, but got popular really fast.
Adoption curve of Bitcoin (orange) vs Adoption curve of Internet (white), Source: twitter.com
It might sound surprising to some, but there are people who are buying digital currencies not only to hold on to them, but to actually use them. For some of them, digital currencies offer cheaper options for money transfers, which is mostly seen in Salvador, where remittances from the United States contribute about 25 % of the country’s GDP, yet there are not any providers that would offer cheap services of this kind. In El Salvador, where Bitcoin was accepted as a legal tender only few months ago, more people already have the government-created Bitcoin wallet Chivo, that have bank accounts.
And that is only one country. Solely in South America, there are several other states that are already looking at legalizing Bitcoin as a payment option or legal tender, just like El Salvador did. These include Argentina, Panama, Paraguay, Brazil or Cuba. Therefore, if this happens and some of these countries will follow El Salvador, digital currencies will not only gain more trust and credibility, but also payment options, which some consider another reason why to invest in them.
Answering crucial question before entering the digital world
Digital currencies are creating a whole new asset class, which also means that investing in them is different. That is one of the reasons why investors have to ask the right questions before they join this fast-paced environment, so that they can choose the best investment strategies. Generally speaking, investing in digital currencies can be divided into three easy-to-comprehend categories, which, however, differ greatly. The answer to the following simple question can help anyone decide which route the digital asset investor should take.
Do you want to buy digital currencies easily and comfortably, do you want to buy them for the cheapest price, or do you want to buy them anonymously?
Buying digital currencies comfortably
If the biggest priority is comfort, the best ways to buy digital currencies might be through traditional finance apps. It is highly possible that the investor, who is looking at digital currencies, is already using some traditional finance app anyways, which makes the purchase of Bitcoin, Ethereum or Litecoin very simple. These apps are for instance CashApp, PayPal, Robinhood, SoFi or Revolut. All of these platforms offer different digital currency services that support buying and selling of different currencies.
Yet, the comfort of these purchases comes with a price. While the actual price of the digital currencies is usually similar to the prices on the digital currency exchanges, most of the platforms do not offer a “withdrawal” function. That simply means that the digital currencies that are bought via such means are not actually digital currencies. In most cases, these are only derivatives, because the investor is not the owner of the private keys, which essentially represent the coin or token that was bought. The digital currency world uses a phrase to describe this phenomenon and it goes as follows:
“Not your keys, not your coins.”
While we will introduce the concept of public and private keys in different articles, it is important to note that buying digital currencies via these services in most cases only represents buying a derivative that tracks the price of the given digital currency. Unless the investor can actually withdraw the digital currency to his/her own wallet wallet, he/she does not own any coins or tokens.
Buying digital currencies cheaply
In case the investor actually wants to buy digital currencies, the attention should mostly be focused on centralised digital currency exchanges. Coinbase, Gemini, Kraken, Binance or Bitfinex are just a few of them that offer digital currency related services such as buying, selling, withdrawing or depositing digital currencies. Most of them do much more than that, but that will be covered in the following articles.
The advantage of these digital currency exchanges is that most of them offer the best possible prices in the markets. And while high fees are commonly connected to Coinbase or other exchanges, it is important to note that, unlike with buying through the traditional financial apps, buying digital currencies through centralised exchange actually means owning the coins or tokens of the given digital currency.
This means that if anyone buys digital currencies through these centralised exchanges, in the vast majority of cases they can withdraw the digital currencies to their own wallets and keep them safe and secure. This not only improves the security of theinvestment, but also means that the investor is the owner of the given coins and tokens.
Yet, centralised digital currency exchanges might have some limitations when it comes to investment volumes. While in theory, most of them provide unlimited services when it comes to buying and selling digital currencies, these come at the cost of numerous verifications that the investors have to undergo before they can invest or withdraw their investments to their hardware wallets. For instance, for an unverified account at Kraken, the daily withdrawal limit is 5 000 dollars
While verifying usually means only sending copies of a few documents such as ID, passport, home address, photo or bank statements, it can sometimes take several days or in more severe cases even weeks for the accounts to get verified. This mostly happens when the bull market is on and everyone wants to buy more and more digital currencies. The services of centralised exchanges can get clogged easily and while there has been a huge improvement in processing the verification application, the process is still far from perfect.
Buying digital currencies anonymously
Decentralised exchanges (DEXes)
As one can imagine, there are also a variety of other options how one can buy digital currencies. Several of them are designed in such a way, as to promote mostly anonymity of the buyers or sellers. That means that these means of purchases offer not only safer options of buying digital currencies, but also greater anonymity and privacy. As was portrayed in the previous examples, both the traditional financial apps as well as the vast majority of the centralised digital currency exchanges need a KYC (Know-Your-Customer) verifications. This is however not the case with decentralised exchanges.
So-called DEXes, decentralised exchanges, offer different solutions that are mostly oriented around privacy of the buyers and sellers. Uniswap, SushiSwap, 1inch or Pancakeswap are amongst the most popular DEXes as of now. The technicalities around DEXes are much more complicated than it looks, which is a reason why we will introduce them in different articles. What one needs to know now is that they offer the buyers complete privacy, since none of them need any KYC verifications or proofs of identities of any sort.
Interface of Pancakeswap exchange, Source: pancakeswap.finance
While these DEXes can offer interesting services for anyone, who values his/her privacy, they are fairly new and have several drawbacks. These are for example complicated interfaces, rather common hacks or exploits or problems with liquidity. We will look more closely on the benefits and drawbacks of decentralised exchanges later, but for now, everyone needs to be aware of them, since they are getting more attention every day.
There is also another interesting alternative of buying digital assets anonymously. That is represented by Bitcoin ATMs, which work similarly to the traditional ATMs. The only difference is that the investor usually receives the digital currencies straight to the wallet, not any bank account or platform. Some of these ATMs even offer cash withdrawal options.
But why is this in the “anonymous” section? Because it is very common to be able to buy digital currencies without any proof of identification or verification through Bitcoin ATMs. That is also why prices in Bitcoin ATMs are usually a bit higher than the market prices. There is usually a fixed fee per purchase, but also a floating fee. The floating fees can be as low as 2 % above the market price, to as high as 20 %.
However, even if one decides to buy digital currencies anonymously, Bitcoin ATMs might not solve all the problems. Even if they offer an anonymous purchase, there is usually a limit of 1 000 dollars/euros/pounds per purchase without the KYC verification. This means that buying larger amounts than this can take a long time and some Bitcoin ATMs might not even allow it if the buyer uses the 1 000 dollar incremental buy-ins. Unlike with other options, with Bitcoin ATMs, one would need to physically go and find one, but if you want to do so, here is an extensive map of most of the Bitcoin ATMs in the world.
If all of this information is confusing or new, there is nothing to worry. Since we understand the complexity of investing in the digital currency world and we are aware of how overwhelming it can be, we are here to help.