A Beginner's Guide To Crypto Investing With Fidelity

Investing in crypto on Fidelity is a complex process with many options and considerations. Crypto is a highly volatile asset class that is susceptible to market manipulation and lacks regulatory protections. Before investing, it is crucial to understand the risks and fundamentals of crypto. Fidelity offers various crypto investment options, including buying crypto directly, purchasing crypto-related ETFs, and investing in crypto stocks. Additionally, Fidelity Digital Assets provides crypto solutions for institutional investors, but retail investors' options are limited. It is important to note that crypto investments are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, so investing should only be done with funds one is willing to lose.

Buying crypto outright

The most straightforward way to gain exposure to cryptocurrency is by investing directly in the coins you're interested in. This is most commonly done via a traditional investment platform or crypto exchange.

However, there are also risks to be aware of. Before buying crypto outright, consider learning the basics of crypto cybersecurity first. Like any digital asset, crypto is vulnerable to online theft. Transferring coins is also a multi-step process where even small errors could mean losing access to your investments forever. And remember, crypto is highly volatile, and there's a possibility that the value of any cryptocurrency can drop to zero.

Important Considerations

• Crypto is highly volatile and may be more susceptible to market manipulation than securities.
• Direct investments in crypto do not have the same regulatory protections as registered securities.
• The future regulatory environment for crypto is uncertain.
• Crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, so only invest amounts you're willing to lose.

Crypto ETPs or ETFs

Crypto ETPs (exchange-traded products) and ETFs (exchange-traded funds) are two of the main ways to gain exposure to the crypto market without buying crypto directly.

ETPs give you direct exposure to a cryptocurrency's value without needing to buy the coin yourself. They can be purchased through traditional routes like brokerage accounts, IRAs, and trusts, which may make tax and estate planning simpler. However, ETPs do not offer direct ownership of the cryptocurrency and have unique trading limitations, such as only being traded during traditional market hours. They can also be quite expensive, charging up to 250bps TER per year.

Crypto ETFs are traded on major stock exchanges and are available to all investors. They are typically passive investments that do not offer direct exposure to crypto assets. Instead, they invest in stocks of publicly traded companies involved in the blockchain and crypto industry, such as Coinbase, Meta, or Nvidia. Crypto ETFs tend to be less risky but also have lower profit potential. They also offer the potential for lower fees than other investment options.

When deciding between ETPs and ETFs, it is important to consider your investment goals and risk tolerance. If you are looking for active management and higher returns, a crypto fund may be a better option. However, if you prefer a passive investment with lower fees, a crypto ETF or ETP may be more suitable.

Crypto stocks

How to Buy Crypto Stocks

Most major brokerages allow investors to trade crypto stocks without fees, although they may charge a spread. Crypto stocks can be purchased through traditional investment platforms or brokerage platforms.

Risks of Crypto Stocks

Direct investments in crypto give investors complete custody over their coins, allowing them to transfer coins between wallets. Crypto stocks, on the other hand, do not offer this level of control. Additionally, direct investments in crypto can be made 7 days a week, whereas crypto stocks can only be traded during traditional market hours.

Other Ways to Invest in Crypto

There are three main ways to invest in crypto:

• Buying Crypto Directly: This gives investors complete custody over their coins and allows them to transfer coins between wallets. However, direct investments in crypto are vulnerable to online theft and other cybersecurity risks.
• Buying Crypto ETPs or Crypto-Related ETFs: Crypto ETPs and ETFs give investors exposure to the crypto industry without needing to buy the underlying coins. These investment vehicles can be purchased through traditional routes like brokerage accounts, IRAs, and trusts, which may make tax and estate planning simpler.
• Buying Crypto Stocks: This allows investors to bet on specific companies within the crypto industry.

Understanding Crypto

Before investing in crypto, it is important to understand the fundamentals and risks of this asset class. Cryptocurrencies are digital assets that can be bought and sold. Unlike stocks, owning crypto does not give legal ownership of a company. Crypto is highly volatile and may be more susceptible to market manipulation than securities. The future regulatory environment for crypto is uncertain, and crypto investments are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.

Crypto wallets

There are several types of crypto wallets, each with its own advantages and trade-offs:

• Paper Wallets: Keys are written on a physical medium like paper and stored in a safe place. While this method offers strong security, it is less convenient as it requires manual entry of keys for digital transactions.
• Hardware Wallets: Keys are stored on a thumb drive or a USB-like device, which is kept in a secure location. Hardware wallets aim to balance security and convenience by allowing you to connect the device to a computer when you need to access your crypto.
• Online Wallets: Keys are stored in an app or software, often protected by two-factor authentication. While online wallets are more susceptible to hacking and phishing attempts, they are more convenient for frequent transactions.

When choosing a crypto wallet, it is essential to consider factors such as security, ease of use, compatibility with different cryptocurrencies, and your own trading needs and frequency.

It is worth noting that, as of August 2024, Fidelity does not offer a wide range of crypto investment options for regular investors. Therefore, you may need to explore other platforms or exchanges to set up a crypto wallet and start investing in cryptocurrencies.

Crypto volatility

Volatility is a measure of how much the price of an asset has moved up or down over time. In financial terms, volatility refers to the rate of change in the price of an asset for a set of returns. Volatility is one of the primary factors in assessing investment risk. Generally, the more volatile an asset is, the riskier it is considered to be as an investment. Crypto is widely considered to be a volatile asset class, with the potential for significant upward and downward movements over shorter time periods.

As a relatively new asset class, crypto continues to be highly volatile and therefore riskier than traditional asset classes. Crypto market volatility is in a league of its own. Historical price charts of cryptocurrencies like Bitcoin (BTC) show extreme volatility, with skyrocketing rises and aggressive drops occurring at a rapid pace compared to prices of assets in more mainstream markets.

Factors affecting crypto volatility

• Market maturity: Crypto markets are still relatively new and immature, and the asset class, market, and investors are still finding their feet.
• Price discovery: Crypto assets, especially Bitcoin, are still in the price discovery phase, with new participants constantly entering the market and trying to establish a consensus on the fair value of digital assets.
• Supply and demand dynamics: The limited supply of certain crypto assets, such as Bitcoin, can lead to increased upward pressure on prices during periods of high demand.
• Investor sentiment: The crypto market is heavily influenced by investor sentiment, and positive or negative views can spread quickly due to the psychology of individual/retail investors who are less informed and more impressionable than traditional investors.
• Regulation: The lack of comprehensive and clear regulation of the crypto market by government bodies globally also contributes to volatility.
• Trading hours: Unlike traditional markets that trade within set hours, the crypto market operates 24/7, and the lack of circuit breakers to dampen volatility caused by panic selling or destructive events further increases crypto volatility.

Strategies to manage crypto volatility

For investors who are uncomfortable with high volatility, there are strategies to limit the downside impact, such as dollar-cost averaging. Additionally, there are now cryptocurrencies specifically designed to have low volatility, called stablecoins, which are pegged to a reserve asset like the US dollar.

Frequently asked questions