What you must know if you are investing in Cryptocurrency markets for 2021 and beyond

02 Feb 2021

Bitcoin’s meteoric rise in 2020 was eclipsed only by its dramatic correction in early 2021. The cryptocurrency rose by 300% in 2020, and proceeded to breach the US$40,000 mark on January 3, briefly touching US$41,000. Within the next week, it proceeded to plunge below US$30,000, before recovering to US$34,000.

Here’s what you need to know about cryptocurrencies like Bitcoin and investing in them.

What are Cryptocurrencies?

Cryptocurrencies are virtual or digital currencies that are based on a decentralised network of computers, called blockchain. That means, cryptocurrencies are neither issued by nor regulated by a central bank or government, and can exist independently from them.

The most well known of these cryptocurrencies is Bitcoin, which was launched in 2009 by a person (or a group of persons) under the pseudonym “Satoshi Nakamoto”. The success of Bitcoin sparked the creation of other cryptocurrencies, or altcoins, including Ethereum, Litecoin and Ripple.

Ethereum is a blockchain based software platform launched in 2015, that is used in value exchange. Its token is called Ether, and it is the second largest cryptocurrency by market capitalisation, after Bitcoin.

Why are cryptocurrency markets so volatile?

To be sure, cryptocurrencies like Bitcoin is no stranger to extreme volatility. Back in late 2017, Bitcoin first hit a record US$20,000, then plunged quickly to US$7,500. A year later, bitcoin prices were at a low of US$3,500 before rallying again in 2019 and 2020.

Some market watchers noted that the recent rally could have been accelerated by the entry of new mainstream institutional investors, as well as the perception of Bitcoin as a hedge against inflation, much like gold.

The changing perception has also benefited other cryptocurrencies like Ether. The digital token on the Ethereum blockchain rose to an all time high of US$1,476 on January 25, even as Bitcoin was in the midst of a major correction.

That being said, there continues to be concerns about the use of cryptocurrencies in illegal activities and technological glitches, the latter which has been disputed by Bitcoin advocates. Its extreme short- term volatility also remains a concern for the investment community.

On the other hand, its long-term outlook offers a silver lining for the digital currency market.

Long term outlook of cryptocurrencies

Mooris Tjioe, investment analyst at Phillip Futures, is bullish on the long-term outlook for cryptocurrencies, largely due to macro-economic factors.

Easy monetary conditions have made investors worried about how to protect their wealth from inflation and many people now recognise that specific features of cryptocurrencies can help make it an effective hedge against inflation.

For example, Tjioe has observed a renewed interest among Argentinean citizens in Bitcoin, as confidence in the peso was shaken by high inflation year after year and Argentineans fled from the peso to stronger currencies, in order to preserve their wealth.

The buying of Bitcoin by institutional investors in response to the trillions of dollars in quantitative easing by the Federal Reserve, the Bank of Japan (BOJ), and the European Central Bank (ECB), is yet another signal of their expectation that inflation will rise in the near future.

Risks of investing in cryptocurrencies

There are a number of ways in which investors can participate in the cryptocurrency market. That includes buying the cryptocurrency, or participating in it through cryptocurrency index funds, cryptocurrency ETFs, and cryptocurrency trusts.

Investors might also opt to trade cryptocurrencies through Contracts for Difference (or CFDs) to hedge their existing cryptocurrency holdings against short term price volatility. CFDs are leveraged products that are available to trade through proprietary CFD providers or on multi-asset platforms like the MetaTrader 5, or MT5.

Here’s how CFDs can be used as a hedge. A Bitcoin owner might believe that Bitcoin prices are likely to fall soon but decides not to sell his holdings as he remains bullish in the long term. In this scenario, he might choose to enter a short position though CFDs to ride out the near-term volatility. When the market resumes its uptrend, he could then choose to close his short position.

That said, it is clear that investment in cryptocurrency is not for the faint hearted. Tjioe notes that cryptocurrencies tend to have a very long outlook, with very discouraging volatility in between market peaks that could span many years.

At the same time, he explains that the intrinsic value of cryptocurrencies is still poorly understood. It is unclear what the fair value of one Bitcoin really is. Furthermore, as cryptocurrencies have publicly accessible ledgers, there are many technical indicators unique to them – also known as on-chain metrics. Investors need to take time to understand them, or they would be investing blindly.

As a final reminder, Tjioe tells investors to keep their investment objectives and risk profiles in mind, and stay away from the asset class – even in light of its potential returns – if it is unsuitable for their needs.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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