Cryptocurrencies are so new to the world of investment that debate still rages – as it does around foreign exchange – about whether we call them an asset class. But one thing was made perfectly clear at the end of 2017: they belong at the riskier end of the investment spectrum.
Institutional investors barely touch the digital currencies – yet. But some are predicting a flood of institutional funds in the coming months, that will drive fervent retail demand and further cryptocurrency issuance.
Investors pick a portfolio of assets that reflect a wide spectrum of risk: the riskier the asset, the higher the returns when it wins. But on the other side of the trade, the bigger the losses when it fails.
Long-term investors currently consider the risks of cryptocurrencies too high. The volatility at the turn of 2018 saw bitcoin – the crypto figurehead – times its value twentyfold to nearly $20,000 between April and December. Four months later, it has more than halved this peak to stand at around $8,100.
But what is going to tempt the institutional investors into cryptocurrency assets?
Andrew Pritchard, managing director of Blockspace and talking to Capital.com on behalf of The Easy Access Crypto Company's 10x Growth Account, believes a bubble is forming that could be all over in 18 months as institutional and retail investors pile into cryptos.
"Only a small percentage of the population have any exposure to the crypto market. There's not much money in there yet," he says.
The institutional players are on the sidelines, he believes, possibly even manipulating the market as they prepare to enter. At this point, he expects the market to take off again and – as the name of the account suggests – could drive asset growth by tenfold.
Crypto-bubble: phase one
As the market takes off, retail investors enter in droves. "We need to see bitcoin trading through $9,100 to see the bulls coming back into the market, which will coincide with an influx of retail investors," says Pritchard.
"But once the public come in, they'll drive growth in the market to the point where it blows up again. This will happen within the next 18 months, and then it'll go pop."
Timing the escape will be paramount to those investors who have bought and held, and the big risk is that they get this wrong. The price action seen in December bears out this concern.
Crypto-bubble: phase two
The second phase – after the bubble bursts – will see the clever traders make money by shorting the market, Pritchard suggests.
Shorting is where those who are trading on the physical markets sell stock borrowed from a broker or exchange at a high price, expecting the asset to fall in value, then buying the stock on the physical market at the lower price to give back to the lender.
Otherwise, on electronic CFD trading platforms, shorting is simply speculating on the price moving lower.
This is a big risk for long-term investors who haven't timed their exits correctly, or for those day traders chasing profits.
Crypto-bubble: phase three
Phase three will see the better crypto companies emerge as they were always intended – as payment companies and blockchain developers. Of the current crop, Pritchard believes Litecoin and Ripple will be among the major players. He adds a caveat that we've not yet seen the best cryptocurrencies. But bitcoin is not among them.
DeVere's Nigel Green similarly believes bitcoin will go the way of the also-rans.
Responding to recent comments by Twitter chief executive Jack Dorsey that bitcoin will become the global single currency, Green says: "I am confident that there will be many successful cryptocurrencies alongside Bitcoin.
"This is primarily because they all have different inherent characteristics, strengths and values and, therefore, they are useful in different ways for people and organisations."
Market domination and bubble theories aside. The events surrounding this highly controversial asset class this year have highlighted several major risks to trading cryptocurrencies, which we at Capital.com feel is our duty to share with our members.
And remember, that while greater risk can bring higher rewards, greater risk can also result in abject losses.
Cryptocurrencies risks: High volatility
While many traders consider some market volatility a reward, any asset that fluctuates up and down on a daily basis to the extent that the digital currencies have been since December is almost impossible to time perfectly.
And given the high level of volatility in the crypto market, technical analysis becomes impossible as trends fail to manifest in such a turbulent price environment.
"You can have wins, but you can't win all the time," says Pritchard.
Ben Sapper, chief executive of Australian crypto exchange Blockbid, says: “The key to successful investment is to stay put for the long run and not panic sell when the price rises.
“Once you’ve done extensive research, getting on board with an ICO early can reap rewards once the secondary market sees its benefit and the value of the token rises.”
Alexey Burdyko, chief executive at Play2Live, which recently completed a $30m token sale also advocates diligent research.
“There have been around 150 new launches already this year, so be completely aware and clued up on not only the success and price of the token to date, but also the company behind it.”
Don’t forget – if you’d bought just one bitcoin for $800 at the beginning of 2017, you’d still be sitting on a $7000 profit.
Cryptocurrencies risks: Low visibility
It's a difficult market for longer-term investors though, as those who would buy and hold assets are ever in thrall to the lack of transparency in the governance of exchanges and the execution of transactions.
"Financial regulatory bodies around the world are increasingly looking to regulate cryptocurrencies," says deVere's Green.
Again, it comes back to the market being too new and too turbulent to spot trends that could give longer-term investors a clue as to the direction of the market.
But this will change if, as both Pritchard and Green suspect, the market gets much bigger in the coming months.
Green says: "Regulation – which I now firmly believe is inevitable – will drive the market even higher. It will give investors more protection and more confidence. It adds a layer of certainty and legal assurance. We have seen how the market has grown in Japan since exchanges were regulated there."
Cryptocurrencies risks: Regulatory crackdown
When, in December, the price of cryptocurrencies began to plummet, it appeared that the response by several countries to the huge growth in unregulated exchanges was to blame.
Some investors feared that tough regulation would suck the juice out of a fresh, new market that they considered ripe for profits.