The cryptocurrency world is full of potential landmines for prospective buyers. Nicolas Roth explains how investors can avoid pitfalls, in an exclusive essay for finews.first.
The first hurdle for anyone who decides to gain exposure to cryptocurrency comes with the choice of instrument. As with gold, investors can access synthetic or physical exposure. Synthetic exposure is achieved by buying an exchange-traded fund or a one that affords exposure to cryptocurrency prices. Given that some of the key underlying principles of cryptocurrencies are privacy, protection and decentralization, there is something contradictory in buying an ETF and leaving it in the hands of a custodian.
It is the same reasoning that has always pushed perma-bears into buying gold bullions and storing it in specific facilities rather than buying into the gold and silver index XAU. However, in early 2018, finding the right financial instrument to gain exposure to the space is not as straightforward as with other more mainstream asset classes – only a handful of products are available.
Most funds are managed by first time teams with little experience in money management, while being registered in offshore places such as the British Virgin Islands or Caymans. In the era of UCIT funds and alternative investment funds, or AIFs, investing in a BVI to gain exposure to cryptocurrency seems like a serious U-turn on risk and good governance principles!