While cryptos can often be held as an investment rather than as a currency, in my experience as an analyst, there are a few ways for investors to add crypto-related exposure to their portfolios.
Before we begin, let’s be clear. I am not offering investment advice. The performance of crypto-currencies is very erratic. Their values have gone up and down significantly over the last year. No asset has a long-term track record that tells investors when or even if they will return a positive return. That being said, since this is only my second article on the subject, I want to explain how I believe crypto-currencies can be helpful to investors at a basic level.
Cryptocurrency = Digital Asset
Cryptocurrencies are comprised of a series of code and hash functions or digital files that are permanently distributed to users and their computers. This is different from stock or other assets that are either owned or owed by one party. For example, when an investor buys a bitcoin (BTC), they are essentially buying a number representing the number of BTC in the world, currently valued at around $40,000 per coin. These coins are digital assets, and the only real difference between them and a physical coin is the dollar value and the verification process.
If you own any kind of asset, it is generally going to be either a physical asset (like shares in a company or currency) or an asset with a limited number of suppliers. Bitcoin, for example, has an artificially limited supply, somewhere between 21 million and 30 million coins. Another popular cryptocurrency, Ethereum, has a growing supply.
Proof of Work
Anyone can become an owner of digital assets via mining. A miner buys the entire network of digital assets and has to use computing power to secure them.
Bitcoin mining, a process that requires specialized hardware, consumes energy. It is currently the primary energy provider for the bitcoin network, consuming 20% of the world’s electricity for cryptocurrency mining. So miners will only agree to work on a coin’s network if the value of the coin is going up, because an increasing share of their electricity bill goes to producing more of the currency.
Ethereum miners work on the software that allows the protocol to operate, so they do not burn so much power, although they are still far from competitive with Bitcoin.
Proof of Stake
Proof of Stake is an alternative method for using your computing power in the network. A miner can now own a stake in the network and work on the network to increase that stake. This is different from Proof of Work, which all participants must use to secure the network and mine coins, and the cryptocurrency network using more and more computing power to improve security.
As a side note, one of the largest mining pools, AntPool, used to own all of the Ethereum blockchain, before it was bought out by another miner.
Ethereum’s PoS algorithm rewards small contributors with a steady rate of more ether, the token used to pay for electricity and compute power in the