Extreme movements

Meteorologists have just confirmed that the summer of 2022 was the hottest in Europe since records began. Regardless of the heat, though, in the last few months what has been called a “crypto winter” has set in. The term was first coined in 2018 when Bitcoin lost half of its value, dragging the rest of the digital coins down with it. The current bear market in cryptocurrencies is proving to be even more pronounced, however. The bedrock Bitcoin, for instance, which hit a record high of USD 68,789 just in November 2021, has since fallen below the USD 20,000 mark and is now trading lower than it has even been these last two years. Its little brother Ethereum has also had to absorb huge losses, the number two crypto having lost three quarters of the market capitalisation it had at its peak.

A new era

Nevertheless, Ethereum has since staged something of a recovery on the crypto market. In the middle of September, after years in the making, came the eagerly anticipated update called “The Merge”. This changed the mechanism from the electricity-hungry “Proof of Work” to the “Proof-of-Stake” method. “Happy merge all”, tweeted Ethereum founder Vitalik Buterin following the successful reform. According to the developers, the revamp slashes energy demand by more than 99%. That is a huge benefit, because it makes the digital currency attractive to those investors who look at sustainability criteria as well. Another positive influence on the value of Ethereum, say the experts, is the fact that the rate at which new cyber coins are issued could be sharply reduced as a result of the changeover. This anti-inflationary effect can, conversely, lead to rising share prices. There are even suggestions on the market that Ethereum’s increasing attractiveness could see it displace current industry behemoth Bitcoin from its leading position in terms of stock market value.

From crisis ...

The positive changes of direction for crypto prices in summer and then again in autumn were short-lived, however. In fact, most recently the downward trend has accelerated significantly once again, as Bitcoin, for instance, dropped by a fifth within just one week. The latest crash was triggered by the cash flow problems of cryptocurrency exchange FTX.com. The company came under pressure when customers withdraw huge quantities of capital within a very short space of time. According to media reports, the company suddenly had a shortfall of up to 8 billion US dollars. The prospects of a rescue initially seemed good, with rival Binance announcing shortly after the disaster had become public that it wanted to acquire the majority of FTX’s business. Following a comprehensive tax audit, allegations of the possible misuse of customer money and the probability of investigations by the US authorities, though, Binance pulled out.

… into insolvency

FTX ultimately had to file for insolvency, and boss Sam Bankman-Fried, who founded the company in 2019, packed his bags. That may not be the end of the story for him, though: insiders suggest that at least a billion dollars of customer money has disappeared from the company. According to Bankman-Fried, a former Wall Street banker, however, there had simply been misunderstandings in postings. While investigations for possible embezzlement are under way in the Bahamas, the world's largest payment processor, Visa, has terminated its collaboration with the insolvent crypto exchange. It could take some time until the whole truth about FTX emerges, and this will in turn further heighten the uncertainty among crypto investors in the near term. What is more, experts do not rule out the possibility that other industry giants are facing similar problems.

Chart: Bitcoin vs. Ethereum (1 year)

Source: Refinitv

Contrarian trading:

Broad crypto product range allows focused investment

For and against

“Buy when the cannons roar”, goes an often quoted stock market rule first expressed by the banker Carl Mayer von Rothschild back at the start of the 19th century. In other words, investors should go against the tide, investing when the bulk of stock market players are fleeing the trading floor in panic and prices are falling. It is precisely such panicked sell-offs that are the order of the day on the crypto market at the moment. Dogecoin, for instance, recently lost around a third of its value within the space of a single week, while Solana, regarded as the pioneer in the verification of transactions using the Proof-of-Stake method, even fell by almost a half. Although such price ups and downs highlight the fragility of the crypto market, they do not diminish the significance of digital assets. Blockchain is a mature technology on which the next stage of the internet – think web3 – is being built, among others. Indeed, central banks have already leapt onto the crypto bandwagon. According to the latest statements from ECB president Christine Lagarde, the ECB is already at a relatively advanced stage in its search for a central bank-supported digital currency.

Regulatory efforts

That cryptos remain in demand is demonstrated by a new study entitled “Crypto and Established Financial Institutions” produced by Crealogix, a Swiss fintech 100 company. This comes to the conclusion that demand for crypto services will continue to grow. Another factor in favour of the digital currencies is that – unlike the situation a couple of years ago – they have shaken off their “Wild West” status thanks to much tighter regulation. At the beginning of July, for instance, the European Union was the first major economic region to agree on regulations for cyber currencies. In light of the recent upheavals, the global Financial Stability Board (FSB) has proposed worldwide rules for cryptocurrencies. The FSB has put forward nine recommendations in total. These require cryptocurrency firms to hold capital, just like banks, when they conduct similar business to financial institutions. The new proposed regulations are to be finalised by the middle of next year before being rapidly implemented by the FSB member states. Similar noises can even be heard from the industry, too. “We do need some regulations, we do need to do this properly, we do need to do this in a stable way,” said Changpeng Zhao, the boss of cryptocurrency exchange Binance, at the G20 meeting in Bali. The industry collectively had a role to protect investors, he added.

Broad product range

Despite the progress in regulation, investors must always be aware of the risks associated with crypto assets. The opportunities are also enormous, though. Since the launch of Bitcoin in 2009, the cryptocurrency market has already survived several “crypto winters” and come through plenty of bull markets. Leonteq gives prospective buyers a broad array of options for investing in the still young sector. The universe comprises a total of 30 crypto assets in which tracker certificates enable one-to-one participation. Half of them are listed on the SIX Swiss Exchange and five on the BX Swiss, with the rest available over the counter. The market-leading product range extends from 0x through Chainlink and Polkadot to Solana and Yearn.Finance. The management fee for each certificate is 1.50% p.a.

Diversified investment

The Leonteq Crypto Index gives investors an opportunity to “kill 11 birds with one stone” or, to put it better, “buy 11 cryptos in one go”. The actively managed barometer is designed to allow in as many as 25 crypto assets. Their inclusion, though, is tied to certain selection criteria, such as sufficient fungibility, along with minimum requirements on liquidity and market capitalisation. The index is reviewed every quarter and adjusted where necessary. As already mentioned, the barometer currently consists of 11 members. These are dominated by Bitcoin and Ethereum, which together account for almost two thirds of the index's weight. The professional approach means that the management fee of 1.95% p.a. is slightly higher than that for trackers on individual cyber currencies, but these costs are actually relative modest given that this is an actively managed index. The trackers are offered in CHF, EUR and USD denominations. The comprehensive Leonteq crypto platform ultimately makes it hard to choose from the many different alternatives. In light of the considerable fluctuation on the market, however, the chosen capital commitment should always be consistent with the investor’s own risk profile and their overall portfolio.

Composition of the Leonteq Crypto Index

As at: 14.11.2022

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