Investing, speculating and trading with cryptocurrencies

Prices driven by supply and demand

The market is driven by supply and demand and exhibits high volatility due to the relatively new asset class. On the demand side, the increasing acceptance of cryptocurrencies by users and the growing interest of passive investors in financial products are driving demand.Public blockchains and their dApps can only be used if the corresponding tokens are used for transactions. For example, using the bitcoin network requires bitcoin for transactions, while Ethereum tokens (ETH) are required to access the Ethereum blockchain and its dApps. On the supply side, factors such as tokenomics, including maximum token supply and vesting schedules, affect the availability and supply of cryptocurrencies.When investing, it’s important to assess whether the network or blockchain application represented by the cryptocurrency is actually used and in demand, and whether the supply is not excessively high. The crypto space is a dynamic environment where new trends and technologies frequently emerge, often initially hyped but just as quickly disappearing if they fail to prove their long-term viability and acceptance. While the largest blockchains and applications have established a degree of legitimacy, the same cannot be said for the majority of the approximately 15,000 listed cryptocurrencies, which may not prove to be successful investments. As always, DYOR (Do Your Own Research) applies.

Crypto investment strategies

As the cryptocurrency space is still in its early stages, many experts consider it to be an asset class with a favorable risk/reward ratio. Given the high volatility of the sector, most investment strategists recommend a relatively small portfolio allocation of 2-5% of total assets with a medium-term time horizon of 3-5 years. Long-term investments aim to benefit from the next evolution of the Internet, known as Web3, and its strong adoption, thereby capturing the potential value growth of cryptocurrencies.Another strategy is dollar cost averaging (DCA), where fixed amounts are invested regularly to minimize the impact of price fluctuations. The investment universe in the cryptocurrency space is vast. However, the majority of the market is dominated by a relatively small number of cryptocurrencies. The top 20 cryptocurrencies by market capitalization already account for approximately 90% of the total market capitalization. This means that most of the value is concentrated in just a few leading cryptocurrencies.

Types of cryptocurrency investments

There are several ways to invest in cryptocurrencies, each with its own advantages and disadvantages. Here are the most common options:

1. Direct purchase through crypto exchanges

Crypto exchanges are platforms where users can directly buy, sell and trade cryptocurrencies.

• Procedure: To buy cryptocurrencies, register on a crypto trading platform, verify your identity, and then transfer money from your bank account. You can then purchase cryptocurrencies such as bitcoin, ethereum, and many others.
• Advantages: Direct ownership of cryptocurrencies, access to a variety of cryptocurrencies, low fees.
• Disadvantages: Security risks (exchanges can be hacked), need to ensure secure storage of cryptocurrencies (e.g. via hardware wallets).

2. Financial products such as ETPs, ETFs and ETNs

For investors who don’t want to hold cryptocurrencies directly through wallets, there are various financial products that provide exposure to cryptocurrencies. These include exchange-traded products (ETPs), which track the price of cryptocurrencies, as well as mutual funds and certificates that invest in crypto assets and provide indirect exposure. The most important include:

• Exchange-traded funds: ETFs offer the opportunity to invest in bitcoin without buying the cryptocurrency directly. These ETFs are listed on regulated exchanges and can be purchased through traditional brokerage accounts.
• Exchange-traded products: ETPs include various investment products, such as ETFs and ETCs, that are traded on exchanges and replicate the performance of an underlying index or asset. They are typically backed by physical assets or derivative positions.
• Exchange-traded notes: ETNs are similar to ETFs, but are unsecured debt securities that track the performance of a cryptocurrency and are dependent on the financial stability of the issuer.

3. Dedicated financial apps

There are dedicated financial apps that simplify the purchase and management of cryptocurrencies. These apps allow users to buy and sell cryptocurrencies directly from their smartphones. Some also offer additional features such as copy trading and integrated wallets.

Trading with derivatives

Derivatives are financial instruments whose value is derived from one or more underlying assets, such as stocks, bonds, commodities or currencies. Derivatives are mainly used to hedge against price fluctuations or to speculate on future price movements. In recent years, crypto derivatives have emerged as a new category based on cryptocurrencies such as bitcoin and ethereum.

• Bitcoin futures and others: Bitcoin futures and other crypto futures are now available on regulated traditional exchanges such as the Chicago Mercantile Exchange (CME). These exchanges provide a safe and supervised trading environment that is particularly attractive to institutional investors. In addition, several crypto exchanges such as Binance, BitMEX and OKEx also offer futures contracts, which are often more accessible to retail investors and offer a wide range of trading instruments, including perpetual swaps and other derivative products.
• Decentralized Exchanges (DEXs) with Futures: Decentralized exchanges, also known as DEXs, now offer futures contracts. These platforms enable trading without a central intermediary by using smart contracts to securely and automatically process transactions. DEXs offer several advantages, including increased transparency, lower fees, and improved security, as users retain control of their private keys.
• Crypto options on traditional and crypto exchanges: Digital asset options are available on both traditional trading venues and specialized crypto exchanges. On traditional platforms such as CME and Bakkt, investors can trade bitcoin options, allowing them to speculate on bitcoin price movements or hedge against price fluctuations.

Leveraged trading involves significant risks. While it allows traders to take larger positions than would be possible with their own capital, thereby increasing potential profits, it also greatly increases the risk of loss. In the highly volatile crypto market, small price movements can lead to large losses, often exceeding the initial capital. There is the risk of margin calls, where traders are forced to provide additional capital or liquidate their positions, often at unfavorable prices. Therefore, careful risk management and a thorough understanding of how leverage works are critical to avoiding catastrophic financial losses.

Beware of scams

Be extremely cautious if someone contacts you unexpectedly asking for access to your wallet or exchange accounts. These requests are almost always a scam. Legitimate financial services providers and exchanges will never ask for personal information or passwords without a reason. Scammers often use social engineering techniques to build trust and trick unsuspecting victims into revealing sensitive information. Protect your accounts by enabling two-factor authentication (2FA) and keeping your security software up-to-date to guard against these scams.

Social scams, fake giveaways and airdrops

Another common scam in the crypto space is social scams, where fake giveaways or airdrops are announced by supposed celebrities or well-known companies. The scammers promise large rewards or cryptocurrencies as gifts in exchange for a small “processing fee” or a small amount for “verification”.In reality, there is no such giveaway or airdrop. Once you send the requested amount, you receive nothing in return and lose your money. To protect yourself, always verify the source of such offers, follow only official channels and announcements, and be skeptical of unusual requests or promises.

There are no gurus: Beware of trader groups and recommendations

In the world of cryptocurrency trading, you should be aware that there are no all-knowing gurus. In particular, be wary of trader groups and individuals on social media platforms who present themselves as experts and actively offer trading recommendations. Even if these individuals have many followers, there is a high probability that they are trying to deceive you. A common problem is that these “experts” open their own positions first and then encourage their followers to make similar trades in order to influence the token price in their favor.

Summary