Over the course of their condensed history, the world of finance has viewed cryptocurrencies through a lense of either intense scrutiny or euphoric optimism. Personal opinions regarding blockchain technology and its potential applications vary wildly from one individual to the next. Nonetheless, there has been an increasing enthusiasm toward the future of the sector, prompting the creation of a brand-new asset class.
This rise in popularity has attracted venture capital and the interest of investors from around the globe. Depending on current valuations, there are typically more than 1,000 unique cryptocurrencies available for trade with a market capitalisation of £648,000 or greater.
With such an extensive array of options, selecting the most suitable product can be a monumental challenge. However, in the same spirit as blue-chip stocks, there are several cryptocurrencies that serve as the "gold standard" of the industry.
They are as follows:
Dating to Bitcoin's inception in 2009, the concept of an exclusively digital form of money backed solely by sophisticated technology has been an area of contention. Questions surrounding security, regulation and long-term viability have plagued the acceptance of virtual money. However, advantages afforded to the user such as anonymity, increased transaction speed and a low fee structure have brought cryptocurrencies into the financial mainstream.
The Cryptocurrency Marketplace
From an active trading perspective, cryptocurrency products offer many attractive attributes. Consistent volatility, availability of leverage and 24/7 market access can make them a viable avenue for short-term traders and long-term investors. There are numerous online financial venues that support a variety of unique methods of engaging cryptocurrencies:
Cash Markets: Cryptocurrency exchanges offer the public an opportunity to buy or sell digital currencies at the prevailing market price. Traders may take physical ownership of the product, storing purchases locally or in an e-wallet. The cash markets are the most traditional method of trading cryptocurrencies, featuring participation from individuals around the globe.
Contract For Difference (CFD): Cryptocurrency CFDs are over-the-counter (OTC) derivative products that give individuals the ability to speculate, hedge or take a position in a specific market. CFDs are available through various online brokerages, offering leverage and an array of trading options to aspiring virtual currency market participants.
Futures Exchanges: Although relatively new, standardised futures contracts based upon the value of Bitcoin are available to the public. Both the Chicago Mercantile Exchange (CME) and Chicago Futures Exchange (CFE) offer Bitcoin futures, with the eventual launch of contracts linked to assorted altcoins expected.
Equities Markets: Publicly traded corporations tied to blockchain technology—or the cryptocurrency atmosphere in general—are available for trade on many international equities markets. Companies that integrate the blockchain into day-to-day operations, such as Overstock.com, may exhibit a sensitivity to the pricing of digital currencies. Accordingly, traders and investors may engage the cryptocurrency markets indirectly through the buying or selling of related corporate stocks.
Initial Coin Offerings (ICO): A fledgling mode of raising capital, an ICO implements a crowdfunding approach to launching a cryptocurrency startup. The regulatory environment of ICOs is fluid, with the potential of achieving extraordinary returns being coupled with a significant risk of falling victim to fraud.
For active traders, the cash and CFD markets are the most opportune venues for conducting operations. High degrees of liquidity, volatility and the availability of leverage make these outlets preferable. Conversely, long-term investors may elect to purchase sector-specific stocks, promising ICOs or hedge cryptocurrency market exposure through strategies involving futures products.
The cryptocurrency marketplace is a fluid environment that faces many challenges, the largest of which are regulatory. Led by economic superpowers China and Russia, virtual currencies are banned or closely monitored in a majority of sovereign nations. Because of the evolving nature of the regulatory environment, many existing products and modes of trade are subject to change.
- Bitcoin (BTC)
Bitcoin (BTC) is widely viewed as the first incarnation of cryptocurrency. It's a decentralised, peer-to-peer method of sending and receiving payments supported by a vast technological infrastructure known as the blockchain. As a result, BTC offers a fast, reliable means of transferring digital currency worldwide.
Developed in 2009 by an anonymous computer programmer under the alias Satoshi Nakamoto, BTC has grown from being a fringe concept to a mainstream mode of exchange. Overstock.com, Expedia.com and Dish Network are a few prominent corporate entities that process payments denominated in BTC. In addition, banking monoliths Citibank, United Bank of Switzerland (UBS) and Barclays have expressed interest in integrating BTC and blockchain technology into their operations.
2017 was a monumental year for BTC, as valuations and consumer acceptance skyrocketed. From 1 January 2017 to 1 January 2018, the price of BTC rose from £708 to £13,733—a 19-fold gain in value. An established market capitalisation of £0.12 trillion with a circulating supply of greater than 16 million units illustrated the enormity of the BTC market as a whole during this period.
BTC exhibits consistent volatility, which makes it a prime target for active trade on both the cash and CFD markets. Short-term trading opportunities come frequently, with daily volatility regularly eclipsing 6.5%. With such large trading ranges and sudden swings in pricing, BTC is a premier destination for traders that practice scalp, position or swing methodologies.
- Ethereum (ETH)
Ethereum is a publicly accessible software platform based on blockchain technology. It supports user-built applications and facilitates the trade of Ether (ETH). In contrast to BTC, the purpose behind ETH is not to revolutionise the transfer of capital between parties, but to truly decentralise the internet. Through using the blockchain to replace third-party data storage vendors, ETH aims to revolutionise the current client-server model and create a "world computer."
As of this writing (February 2018), ETH is the second largest cryptocurrency in terms of market capitalisation. Worth more than £63 billion with a circulating supply of 97 million units, ETH is behind only BTC in terms of aggregate market value. For the period of 1 January 2017 to 1 January 2018, the price of one ETH appreciated from £7 to £550, a gain of more than 6,000%.
The growth potential of ETH in the online atmosphere has brought many participants to the market. Because ETH is offered to the public in much the same way as BTC, it is easy to aquire or actively trade. In addition, ETH is not as expensive as BTC, as prices are some ten times less.
- Litecoin (LTC)
Litecoin (LTC) is a peer-to-peer cryptocurrency that functions in a similar capacity to BTC. Founded by former Google employee Charlie Lee in 2011, LTC is designed to complement BTC while eliminating some of its drawbacks. The following are several areas in which LTC is considered an improvement on existing BTC functionality:
Speed: LTC adds to the blockchain, or completes a "block confirmation," every 2.5 minutes. As a result, LTC transactions are conducted four times faster than those conducted using traditional BTC processes.
Fees: The transaction cost associated with using LTC is roughly 1/50th that of BTC.
Mining: Cryptocurrency mining occurs when complex mathematics are performed to complete transactions and add to the blockchain. "Miners" are awarded units of the mined virtual currency as compensation for services rendered. LTC mining occurs faster than in BTC, with the increased transaction speed encouraging individuals to mine and process greater volumes of data.
The affordability of LTC as a mode of trade or investment vehicle has attracted a vast number of market participants. Rallying from valuations similar to those of pink sheet stocks, LTC began 2017 with a price in the neighborhood of £3.50. One year later, LTC prices eclipsed £220. Subsequently, the market capitalisation of LTC rose from £155 million to more than £14 billion.
The staggering gains experienced from January 2017 to January 2018 alluded to a growing confidence in the technology behind LTC. In many cryptocurrency trading circles, LTC is viewed to be the main rival to BTC as the future of decentralised peer-to-peer payment networks.
- Bitcoin Cash (BCH)
Bitcoin Cash (BCH) is a variation of classic BTC. Created in August 2017 by a "hard fork" from BTC itself, Bitcoin Cash aspired to make BTC transactions more efficient. Through increasing the amount of data included in each block (permanent transaction data files that make up the blockchain), Bitcoin Cash is able to increase transaction speed dramatically.
The launch of Bitcoin Cash has been a hotly debated topic among participants in the cryptocurrency industry. Supporters claim that larger block sizes increase the efficiency of mining practices and make BTC more accessible to the public. Detractors cite the chances of increasing centralisation, lowering mining fees and undermining the harmony of the BTC community as being potential detriments.
In the marketplace, the launch of Bitcoin Cash was a success. In the six months following the hard fork, values rose from £213 per BCH to a high of more than £2,700. The steep appreciation in value made Bitcoin Cash a top five global cryptocurrency with a market capitalisation of more than £42 billion.
- Ripple (XRP)
In much the same vein as BTC, BCH and LTC, Ripple (XRP) is a cryptocurrency platform that facilitates exchange between participants via the online space. However, instead of the primary objective being the creation of a decentralised and anonymous peer-to-peer mode of transfer, the target audiences for XRP are traditional banking institutions.
The appeal of XRP to the banking industry is its speed as a payment protocol. XRP moves very quickly, with transactions being settled in as little as 3.6 seconds. With such robust capabilities, more than 100 banks have adopted the XRP version of the blockchain. The list includes some of the biggest names in the commercial banking industry such as UBS, American Express and Westpac.
In contrast to the other leading cryptocurrencies, XRP has a huge circulating supply. Due to the large float of slightly more than 39 billion, the per unit pricing is modest. From January 2017 to January 2018, values rose from under £0.01 per XRP to a high of £2.59. The run up in price fostered a maximum gain in market capitalisation of more than 7,700% for the year.
The applications to the mainstream banking industry have attracted the attention of traders and investors worldwide. Coupled with moderate pricing, XRP is an ideal avenue for many to engage the cryptocurrency environment.
The cryptocurrency asset class is still very much in its infancy. Uncertainty is present in the market on a near-daily basis, producing wild volatility and stimulating even greater levels of liquidity. While these attributes are attractive to active traders, an additional degree of risk is associated with the rapid moves.
Unlike the conventional markets of currency, commodity and equity products, cryptocurrencies are not subject to traditional financial influences. Economic growth, official monetary policies or even the weather have no bearing on their premium. Values are determined by the process of price discovery on the open market, which in itself is highly speculative. The current news cycle or the evolving regulatory environment often surprise market participants and shock pricing.
Despite the periodic turbulence present in the markets of virtual currencies, they represent a formidable presence in global finance. As of February 2018, the market capitalisation of all cryptocurrencies stood at £330 billion. While this value is certain to fluctuate over time, its magnitude illustrates the degree of interest from traders and investors alike.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…