Exploring Crypto Investments: Options, Stocks, And More

Crypto investments are a relatively new asset class that has gained popularity in recent years. They are not considered stocks or options but rather a separate type of investment with its own unique characteristics. Crypto investments refer to the buying and selling of cryptocurrencies, such as Bitcoin and Ethereum, which are decentralised digital currencies that can be used for payments or speculative investments. Cryptocurrencies are powered by blockchain technology, which allows for secure transactions without the need for a central authority.

While crypto investments offer the potential for high returns, they also come with significant risks and volatility. The value of cryptocurrencies is highly speculative and subject to rapid changes based on market sentiment. Unlike stocks, which represent ownership in a company, crypto investments are not backed by any physical assets or cash flow, making their value purely based on demand and sentiment.

Therefore, when considering crypto investments, it is important to understand the unique risks and characteristics associated with this asset class. Crypto investments should be treated as a speculative portion of an investment portfolio, with a small allocation of typically less than 5%.

Crypto options trading strategies

Crypto options trading is a form of trading where you make an investment based on the future price of a cryptocurrency. This differs from buying the actual cryptocurrency, as you are not buying the "crypto asset" itself. Crypto options trading is a method of speculation, meaning you can profit even if the underlying asset does not move in your expected direction.

There are two types of crypto options: call options and put options. If you buy a call option, you will make a profit if the price of the underlying asset increases and it rises above your purchase price. On the other hand, if you buy a put option, you will make a profit if the cost of the underlying asset drops, even if the asset's price rises.

• Bullish Iron Condor Strategy: This strategy is used by pro traders to maximize gains and limit losses. It involves selling the call and put options at the same expiry price and date. The target profit area is achieved when the price of the asset is within a certain range.
• Covered Call: An investor who owns shares of a stock sells a call option on those shares, earning a premium from the sale. However, they agree to sell the shares at the strike price if the call option is exercised.
• Protective Put: This strategy is used by investors to protect against downside risk when holding an asset. It involves simultaneously purchasing an asset and put options for the same number of associated units of the asset.
• Protective Collar: This strategy involves owning shares of a stock and simultaneously purchasing a put option and selling a call option. This caps the potential upside and downside of the stock.
• Long Call Spread (Bull Call Spread): The investor buys a call option and sells another call option with a higher strike price but the same expiration date, reducing the upfront cost while capping the potential profit.
• Long Put Spread (Bull Put Spread): The investor buys a put option and sells another put option with a lower strike price but the same expiration, profiting from a moderate decline in the stock price.
• Long Straddle: The investor buys a call and a put option with the same strike price and expiration date. This strategy is used when the investor believes the price of the underlying asset will make a large move in either direction.
• Long Strangle: Similar to the long straddle, but the investor buys out-of-the-money call and put options, which requires a larger move in the stock price to be profitable but is cheaper to establish.
• Long Call Butterfly Spread: The investor combines bull and bear spreads with three different strike prices, resulting in a net debit position. The strategy profits if the stock stays near the middle strike price.
• Iron Condor: A combination of a bull put spread and a bear call spread, where the investor sells and buys out-of-the-money put and call options. The maximum profit is achieved when the stock finishes between the middle strike prices.

It is important to note that crypto options trading is a risky investment with a high potential for loss. The price of an option can change quickly, and it may be challenging to predict how much profit you will make. As with any investment, it is crucial to understand the risks and have a solid trading strategy before diving into crypto options trading.

Pros of investing in cryptocurrency

Crypto investments are a type of derivative contract. They give investors the option to buy or sell a given cryptocurrency at a predetermined price and date.

Possible hedge against fiat currency

For some investors, one of the biggest appeals of cryptocurrency is its decentralized nature. It’s not controlled by central banks or governments who print money and generate inflation in fiat currencies such as the US dollar or the euro. Cryptocurrency has been called “digital gold” by some investors who hold it because they think it will protect them from inflation.

Potential for outsized gains

Several cryptocurrencies have seen their prices skyrocket since they were first introduced. These gains are the main reason people are attracted to cryptocurrencies, but the potential for price appreciation comes with significant risk.

Growing number of coins

In the early days of cryptocurrencies, there were just a few coins that could be invested in, but the speculative interest has changed that. New coins are introduced regularly and there are now thousands to choose from.

Wide interest in digital currencies

There seems to be a growing interest in cryptocurrencies from investors, companies and governments. Tesla holds Bitcoin on its balance sheet and briefly accepted the digital currency as payment. El Salvador adopted Bitcoin as legal tender in 2021, though the International Monetary Fund has urged the country to reverse its decision. Increasing acceptance of digital currencies could be positive for investors.

Minimal transaction cost

Sending money online through a bank gateway is time-consuming and expensive. On the other hand, cryptocurrencies come with little to no transaction cost as the commission levied is negligible.

24/7 access to money

Money invested in share markets or credited in bank accounts has a specific timeline for transactions. With cryptocurrencies, a person has 24/7 access to their money without any specific timeline to transact or utilise the money invested.

Unlimited transactions

With cryptocurrencies, you can pay or send money to anyone, anywhere and anytime, irrespective of the location of the other user. However, they should be willing to accept the payment in the said cryptocurrency. As there is no central authority to control or resist the transactions, you can make unlimited transactions.

Faster international transactions

With cryptocurrencies, the time taken to process a transaction is relatively low. If you are sending money online to another country, blockchain technology processes the transaction within seconds and in the most secure way.

Cons of investing in cryptocurrency

• Extreme volatility: Cryptocurrencies are extremely volatile due to their lack of backing by any assets or cash flow, making their prices subject to the whims of traders. This high volatility can lead to quick fortunes or losses, and there is no way to predict where a coin's value will go next.
• Cybersecurity risks: Despite claims of improved security, there have been notable hacks involving cryptocurrencies, and recovering stolen funds can be challenging.
• No intrinsic value: Cryptocurrencies have no intrinsic value as they are not backed by underlying assets or earnings. In contrast, stocks derive their value from future earnings power and what they will return to their owners.
• Regulatory risks: Cryptocurrencies face regulatory uncertainty and scepticism from governments worldwide. China has banned them, and other countries may follow suit. The regulatory landscape is constantly evolving, making it challenging for investors and businesses to navigate compliance requirements and potential legal risks.
• Lack of long-term track record: Cryptocurrencies have only been around for just over a decade, in contrast to the centuries-long history of stock markets. This lack of historical data makes it challenging to predict their long-term performance.
• Scalability issues: Cryptocurrencies face significant scalability issues, leading to slow transaction processing times and a frustrating user experience.
• Security risks for newcomers: New investors in cryptocurrencies are more vulnerable to security risks, such as losing their private keys or falling prey to hacking, phishing, or other malicious attempts to gain control of their holdings.
• Tax and regulatory complexities: The regulatory landscape around cryptocurrencies is complex and evolving, and it is challenging to keep up with changing compliance requirements and potential legal risks. Additionally, cryptocurrencies are taxed differently than traditional investments, and investors must carefully track their gains and losses for tax purposes.

Pros of investing in stocks

Crypto investments are a type of derivative contract that gives investors the opportunity to speculate on market movements to make a profit. On the other hand, stocks have a long history of producing solid investment returns. Here are some pros of investing in stocks:

Long history of solid returns

Stocks have a long track record of producing solid investment returns, with the S&P 500 stock index returning about 10% over the long term. Though stocks can be volatile in the short term, they have generally been safe to hold over long periods of time.

Intrinsic value

A stock represents an ownership interest in a company and its value over time depends on the success of the underlying company. Companies own assets that produce earnings and cash flow for investors, creating what’s known as intrinsic value.

Accessibility

It is easier than ever to invest in stocks these days, with many online brokers cutting trading fees to zero. You can invest in individual stocks or choose to purchase a diversified basket of stocks through an index fund. Index funds help keep costs low, and you can build a diversified portfolio even if you don’t have much money to start with.

Stronger regulation

Stock exchanges, brokers, and companies are all heavily regulated through various government agencies. Companies are required to provide certain information to investors through the Securities and Exchange Commission. No regulatory body is perfect, but stocks have been around for a long time, and there are certain important investor protections in place.

Build massive wealth

You can amass great wealth with stocks because, over long periods, the stock market has averaged annual gains of close to 10%. For example, $5,000 invested annually over 30 years at a conservative 8% annual gain would grow to about $700,000.

You don't need to be a genius

Another plus for investing in stocks is that you don't need a degree in finance to do it successfully. You can opt for easy, low-fee, broad-market index funds, such as those that track the S&P 500. Doing so will get you roughly the same returns as the overall stock market.

Cons of investing in stocks

• Risk of Volatility: Investing in stocks comes with the risk of market volatility, where share prices can fluctuate drastically within a single day. These unpredictable changes pose risks to investments, and it may take years for the market to recover from a significant crash.
• Brokerage Fees: Each time an investor buys or sells shares, they incur brokerage fees, which can eat into profit margins.
• No Guaranteed Returns: Unlike certain other investments, stocks offer no guaranteed returns. The profitability of stock investments depends on fluctuations in stock prices, which are tied to the company's growth and profitability.
• Higher Risk: Stocks are generally riskier than other investments, such as bonds, due to the lack of guaranteed returns. In the event of a corporate bankruptcy, common stockholders are last in line and may end up with nothing.
• Lower Potential for Extreme Gains: Broad stock indexes, like the S&P 500, have a lower potential for extreme gains compared to certain other investments, such as cryptocurrencies. While stocks have historically returned about 10% per year, cryptocurrencies can experience gains of 10% in a single day.
• Time Horizon: Stocks are better suited for long-term investment plans. The longer the investment horizon, the more time there is to recover from short-term losses and ride out market volatility.

Frequently asked questions