Cryptocurrencies , after years of false starts, seem to have finally arrived in the financial mainstream. More and more major banks and brokers offer them to clients, and though they remain volatile and controversial products for many investors, they seem to be here to stay. Early investors in Bitcoin and similar crypto assets made immense fortunes, and even relatively late comers have seen significant gains – though probably no other asset has an equivalent downside risk, and 30 – 50% declines in a matter of months seem shockingly common.
This is not a place to put your pension then, but it is still an interesting opportunity for risk-loving investors looking for the potential of vast returns. Not all cryptocurrencies have the same characteristics and risk profile, but they are highly correlated: when Bitcoin performs poorly, so do all the other crypto assets; they are classic ‘risk-on’ trades and the peak of various crypto price surges (most notably in 2017/18) often marks the peak of the general market.
What currencies are available?
Crypto is an almost limitlessly vast space, with different currencies, some well-known and heavily traded and others laughably fringe, all competing for attention. Some of the best known coins include Bitcoin, Ethereum and Tether, and each serves a different function within the broader ecosystem of crypto assets.
Tether: stablecoins
Tether is an example of a ‘stablecoin’ – a cryptocurrency that is intended to maintain a 1:1 exchange rate with another currency, in this case the US Dollar. These coins are hugely controversial, with critics claiming they cannot possible hold enough assets to offset sudden selling pressures, though Tether has been able to maintain its price within a range of +/-10% since inception, and +/- 3% since 2021.
The problem with Tether is its consistent claim – essential to price stability, not just of Tether itself but of the broader crypto market, which uses Tether as a hedge or benchmark – that it keeps $1 USD for every 1 dollar of Tether minted. Given that more than $68 billions worth of Tether has been minted, this would make Hong Kong based owners iFinex some of the largest holders of cash in the world – indeed only household names such as Apple, Microsoft and Berkshire Hathaway hold more. To most analysts, it is simply not credible that a relatively tiny company could be sitting on one of the worlds largest fortunes in cash, but speculative attacks on the price of Tether have consistently failed to dent the peg, and it appears to be getting more rather than less stable overt time.
For most crypto investors, Tether is of secondary interest; the average crypto investor is seeking high risk, high return products rather than a 1:1 equivalence with the dollar, which for holders of most bank accounts, would be simpler to achieve by just buying dollars. That said, Tether is an important part of the crypto ecosystem as many businesses which accept crypto need it to stabilise prices. It is also worth noting the failure of a stablecoin like Tether would have severe knock-on effects for other crypto assets.
Ripple
Ripple is both the name of a payments company and its own cryptocurrency, sometimes known by its ticker XRP. XRP trades within a narrow range by the standards of crypto assets, though it is known to make volatile spikes within that range, and since it is a highly traded asset Ripple does not see the absurd price spikes of some smaller coins. Ripple the company is fond of pointing out they are a payments system and not a ‘cryptocurrency’ by to investors the difference seems academic: not so the SEC, who accused Ripple of illegally selling unlicensed securities (because XRP was ‘not crypto’ it was classified as a security) to fund their business operations. This charge is vehemently denied by Ripple who have fought back, so far successfully, against the US authorities.
Ethereum
Ether, often called Ethereum after the name of the company which founded it, is the second most traded cryptocurrency after Bitcoin, and has been operating since 2013. From 2020 to the end of 2021 Ethereum saw an unprecedented price rally from $120 to over $4000, with the price plunging back down to $1500 before recovering to trade in the vicinity of $1500 for 2022. This is a volatile asset then, but one with serious backing and huge daily trade volumes. Ethereum was designed to deal with perceived flaws in the original Bitcoin white paper, and Ethereum hopes to bring a large number of non-currency activities onto the blockchain, using decentralised ‘smart contracts’ – information held across every computer on a network. Many subsidiary projects use this technology, including blockchain-based marketplaces that allow users to lend cryptocurrencies to other users for interest. That this are all things which already exist in regular finance is a valid criticism; decentralisation an end in itself for crypto advocates, but Ether is a popular crypto asset with the most tech-savvy wing of the market.
Bitcoin
The story goes like this: Satoshi Nakamoto, a (still somehow unidentified) pseudonymous author published a white paper detailing his (or her) idea for a decentralised cashless electronic currency in 2008, with the first transactions taking place in 2009. Hilariously, the first commercial transaction using bitcoin – 10,000 of them – was the purchase of a single pizza, using assets which at the peak of their value in 2021 would have been worth half a billion dollars. The first few years of Bitcoin’s trading history are a litany of very expensive trivial purchases, but investors who held on to bitcoin minted in those earliest days went on to become very rich indeed.
Initially Bitcoin received fairly negative press coverage, being used frequently for the illegal purchase of drugs or other dubious activities (Bitcoin transactions are anonymous and untraceable unless you can identify the owner of a particular ‘wallet’, though converting crypto assets to cash is a traceable event), and accordingly reserved to a fairly marginal group of software enthusiasts and petty criminals. That all changed though, as more and more businesses and even national governments began to express an interest in both Bitcoin itself and the blockchain technology underlying it. In the later 2010s Bitcoin broke into the mainstream, becoming a popular asset with major investors, banks and investment managers, and the commercial uses of the technology have multiplied exponentially.
Conclusion
Saxo Bank offers a range of popular crypto assets to account holders, alongside other standard products such as FX and stock trading. Investors must understand all crypto assets are either very volatile, or in the case of stablecoins have the potential to be. This is not a place to put your life savings, but for investors willing to take risks, can be a highly profitable area.