Investing in Bitcoin & Co is more than speculation and "playing the lottery", but you have to understand the market to be able to trust it.
Bitcoin, the oldest of the digital currencies, has undergone a remarkable development in recent years and today represents the coin with the largest crypto market capitalisation. Since its launch in 2009, a lot has happened in terms of price: in 2010, the price value of a Bitcoin was at 0.08 cents, in February 2011, it rose to a value of USD 1.00 due to coverage in the mainstream media, and reached a peak of almost USD 69,000 on 10 November 2021. Naturally, Bitcoin attracted both individuals and institutional investors during this period. Over the past year, the value of Bitcoin has declined significantly and many people wondered if this meant an end to Bitcoin and cryptocurrencies in general.
The crash of Terra Luna and the collapse of the crypto exchange FTX resulted in a massive loss of investor trust. Similar events can continue to occur on the crypto market - as well as on the classic capital markets, by the way - as long as individual players do not adhere to ethical principles and abuse the trust of investors. The downfall of Credit Suisse tragically demonstrated this to us in March 2023. This is part of the market risk and does not mean that the crypto industry is corrupt per se. Cryptocurrencies, such as Bitcoin or Ethereum, continue to be justified and popular despite recent setbacks.
The crypto market is growing and has become an integral part of the international financial system
As with any capital market investment, there are risks and price fluctuations. But the most important currencies in the crypto universe have proven that blockchain technology is an integral part of the international financial system. It is possible that bitcoin will temporarily lose its value, but as can be seen from Figure 1, the value of bitcoin has developed positively over the last 10 years and has always recovered after each setback and reached a new high. For example, in the first quarter of 2023, Bitcoin gained 44%, while the major stock indices comparatively gained about 10%. This shows the potential of the market.
Figure 1: Bitcoin price development from 2013 - 2023
Overall, it can be said that the acceptance of Bitcoin, Ethereum & Co has increased over the last few years and ultimately the further development will mainly depend on the trust of the market participants. The increase in regulation levels, innovation and technological progress, but also economic macro factors (e.g. inflation, government debt, etc.) and, last but not least, increasing demand can have a positive impact on market stability, trust and thus market capitalisation.
Figure 2: Acceptance and development path of the crypto market
In this context, it is worth mentioning that a large number of countries worldwide now allow cryptocurrencies as an alternative currency and more and more companies are also accepting it as a means of payment. In Switzerland, 85,000 retailers[1] already accept payments via Bitcoin or other currencies.
Protection against the political devaluation of purchasing power
correlating more and more with the classic capital markets. Although the diversification effect to the classic capital market is therefore becoming less pronounced, the limited supply, as is the case with Bitcoin, for example, offers protection against the politically induced dilution of the classic currencies. Currently, 19.3 million of 21 million Bitcoin are in circulation. This means that the amount of bitcoin is limited. Once all coins are in circulation, the price is determined only by supply and demand.
Let us take an illustrative example from Switzerland: If we look at the development of the USD/CHF exchange rate over the last three decades, we see that the USD has continuously lost value against the CHF. This means that the purchasing power of the USD has declined against the CHF over the years.
Figure 3: Development of the USD/CHF exchange rate 1983 - 2023
This is not the case with the value of bitcoin, which has increased against the USD over the last decade, despite temporary setbacks. Figure 4 shows that although growth has slowed down in the last 5 years, the number of active addresses is constantly increasing, which is conducive to value stability and continuous growth.
Figure 4: Logarithmised price development BTC/USD
Another indicator for the positive market development is the development of the number of "non zero addresses" on the Bitcoin Blockchain. After an initially hesitant growth in the initial years and a slump in 2018, the market has seen exponential growth in the number of active addresses (market participants), as shown in Figure 5.
Figure 5: Logarithmised number of non zero addresses in USD
Besides the fact that the number of non zero addresses is increasing rapidly, investor behaviour has also changed. If we look at the price setbacks in 2019, 2020 and 2022 and the reaction of investors with Bitcoin assets of more than 0.1 Bitcoin, i.e. around CHF 2,500, we see an increasingly strategic approach: price setbacks are used to buy Bitcoins. This shows that market participants want to profit from the current valuations and have confidence in the future of bitcoin and especially in blockchain technology.
Figure 6: Number of addresses with assets in USD > 0.1 BTC
In summary, after a phase of capital withdrawal in 2021-2022, investors are gradually returning to crypto trading in order to benefit from the overall market development on the one hand and from new, innovative features, such as the recently introduced withdrawal on staked Etherum Coins (ETH), on the other. The possibility of withdrawal on staked Etherum offers investors the opportunity to remain liquid, to profit from the positive price development of ETH and at the same time earn an attractive interest rate via staking.
How do I invest wisely in the crypto market?
Overall, it might be worthwhile to invest a small part of your portfolio in the crypto market. One possible investment strategy is to assume that the market knows the best distribution of assets among the different digital assets. Therefore, market capitalisation serves as a good guide. As of 26 April 2023, the crypto market capitalisation was EUR 1,080 billion, with the 6 largest currencies representing 80% of the value, as shown in Figure 7. It should be noted here that although the BNB coin has a higher market capitalisation than Ripple at EUR 47 billion, it has a lower trading volume than the XRP coin, with a trading volume of EUR 560 million, and thus results in less liquidity. This makes the XRP more appealing than the NBB coin[2].
Figure 7: Example of a coin strategy (growth)
Please note that this is NOT an investment recommendation, but merely a mathematical example. Choose a strategy that suits you and how you want to invest.
Among the stablecoins, the USDT currently offers the largest market capitalisation and is therefore often preferred by investors over the USDC as a liquidity holding. Pax Gold, which still has a small market capitalisation today, offers the advantage over the two USD stablecoins that it is linked to the value of gold on a 1:1 basis. Since the Dollar has not been backed by Gold since 1971 and has continuously lost value over the last three decades, Pax Gold potentially offers a good way to preserve and protect one's assets over the long term in an inflationary environment.
Example calculation
According to Figure 7, a crypto strategy could look as follows - based on market capitalisation:
45% in BTC
25% in ETH
10 in XRP
5% in USDT (liquidity)
15% in PAXG
With an investment of CHF 100, the purchases would then be made on a proportional basis along the coin strategy. Set the percentages at your own discretion to define your own investment strategy.
Furthermore, investors who have time and are convinced that they have strong forecasting skills can consider investing 20% of their assets in trading smaller currencies and benefit from their price fluctuations. In this way, it may be possible to achieve short-term capital gains. Depending on one's interests, tokens could also be taken into account here, of which there is now a wide range[3]. However, these should be selected carefully because the small market capitalisation means that they cannot be easily sold again and the prices are prone to market manipulation.
Before buying, check the characteristics of the coins and assess the risk and opportunity based on the available market data, taking into account your risk tolerance and risk capacity.
The key findings in brief
Diversification: Even with crypto investments, it is important not to put all eggs in the same basket. It therefore makes sense to evaluate the market capitalisation and trading volume of the coins in order to increase diversification and thereby reduce market risk.
Regular investments: Due to the fact that Bitcoin & co are subject to price fluctuations, even though the most important currencies show a positive trend, it is worthwhile to invest at regular intervals along the chosen crypto strategy (e.g. defined percentages) and reduce the average acquisition cost in the coin portfolio. This allows the long-term increase in value to be optimised. In the words of Charlie Munger, long-time partner of investment legend Warren Buffet: "The money is not in buying or selling, but in waiting." Or in crypto slang: HODL: Hold on for dear life!
Reliable partners: When choosing an exchange or trading platform, make sure that it is a regulated and trustworthy provider. Check whether the company is recognised by an official body such as an SRO (self-regulatory organisation on behalf of FINMA) or by a financial market supervisory authority such as FINMA.
Do you believe in the future of Bitcoin and other cryptocurrencies and want to get into crypto trading? Then follow a few basic rules and observe market indicators. Set up an investment strategy and always stay up to date. Wishing you a lot of success.
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[1] Vgl. Six Payment Services: https://www.six-payment-services.com/de/shared/news/2021/crypto.html
[2] Vgl hierzu https://coinmarketcap.com/de/