Raconteur

Cryptocurrencies 2018 special report

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RACONTEUR.NET 23 market is under stress and prices are plummeting. Simon Tobler, head of trading at Swiss startup Crypto Finance AG, likens it to trading currencies such as the Argentine peso or Thai baht in which there is far less turnover and lower liquidity than in major currencies. Before joining Crypto Finance, which provides asset man- agement, brokerage and storage for crypto assets, he traded foreign exchange options at Credit Suisse. Mr Tobler says: "Bitcoin trades more like emerging market curren- cies than the majors, because it is highly illiquid with few big mar- ket makers and no corporate fl ow. The illiquidity leads to sharp intra- day moves, and makes it diffi cult to manage your risks and adjust your positions in real time." If the market continues to attract new participants, liquidity should improve, but this will take time, par- ticularly for institutions that must secure multiple approvals to trade new products. Even then, their partic- ipation is likely to be modest at fi rst. "Liquidity is increasing," says Gabriel Wang, analyst at research and advisory fi rm Aite Group. "As the market cap of cryptos is ris- ing fairly quickly, market makers, exchanges and over-the-counter desks continue to pop up in the market, and the current market size has attracted more and more insti- tutional interest and order fl ow. This is driving up liquidity and trading volume." Beyond liquidity, more idiosyn- cratic risks should be considered. In a market that is still developing, there are legitimate concerns over the potential for fraud and market manipulation, so investors must take necessary precautions. More established assets such as bitcoin or ethereum may be a safer bet than the newer coins, for example. Regulatory risk is also important, as central banks and regulators around the world have taken very different stances on this evolving asset class. In China, for example, exchanges and financial institu- tions have been banned from han- dling crypto assets. While officials in other countries may have been less heav y handed, with most cen- tral banks keeping a close watch on the sector, further intervention is always possible. "Political and regulatory risk has declined as this space has become more accepted, but inves- tors should certainly be careful when investing in the newer coins because there is a risk of sudden discontinuation or regulatory intervention," warns Mr Tobler. Managing this unique combina- tion of risks is not straightforward. Whereas standard practice in fi nan- cial markets would be to model key risks and set aside capital for a worst-case scenario, these idiosyn- cratic risks are much more diffi cult to measure and manage. When investing in a high-risk asset class, investors would typi- cally diversify across multiple prod- ucts, but this approach is diffi cult in the crypto world as most coins are very highly correlated as they tend to move in the same direction. Diversifi cation, therefore, off ers lit- tle protection in the event of a sud- den price move. "Due diligence is always advised, but in the world of cryptocurrencies, the level required, given the land- scape, is exponentially higher and more diffi cult. A mindset change is required not only from the require- ments of a considerably more vola- tile and illiquid market, but given its extraordinary speed of evolution," says Mr Longmore. Given the unpredictability of risk and the potential for high returns, the most prudent approach for new investors might be to hold just a very small proportion of their portfolio in cryptocurrencies. This would give some exposure without excessive risk as the market con- tinues to mature. "By the end of 2017, a lot of portfo- lio managers had to explain to their clients why they had only achieved single-digit returns in traditional asset classes, while some crypto funds had earned up to 2,000 per cent from recent volatility. There is ultimately little downside from investing 1 per cent of the portfolio in cryptocurrencies, but the poten- tial upside is almost unlimited," Mr Tobler concludes. Importance of the following datapoints when buying cryptocurrencies Cryptocurrency investors were asked to rate the importance on a scale of zero to ten CoinDesk 2018 Investor bullishness How investors used gains from cryptocurrencies in 2017; percentage of those who realised gains only CoinDesk 2018 Market capitalisation Exchange volume Number of exchanges listing the coin On-chain transaction volume Total future supply of coins Transaction fees Total current supply of coins Hash power Google trends Kept investing in cryptocurrencies Diversifed into other assets Paid debt Spent it 84 31 123 10 0 1 2 3 4 5 6 7 8 9 10

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