Cryptocurrencies have been treading water for a few weeks now, with bitcoin only managing to hold above $30,000 for a short while. However, crypto ETNs remain in demand, at a low level. Physical collateralization attracts in any case.
12 May 2023. FRANKFURT (Börse Frankfurt). The price rally of cryptocurrencies from the first months of the year has stalled. Bitcoin, Ethereum & Co. are treading water or have lost value. Most recently, it did not go down well that the world's largest crypto exchange Binance had to suspend withdrawals of Bitcoin twice within twelve hours due to overloading of the blockchain. It has been known for some time that Binance also has problems with regulators. "This is not exactly confidence-building," commented Jan Duisberg, who trades ETFs, active funds and also crypto ETNs for ICF Bank.
Bitcoin had risen from $16,500 at the beginning of the year to over $30,000 in mid-April. As of Thursday morning, it is back to just $27,500. Since the beginning of the year, however, this still results in a plus of 66 percent. One of the drivers of the price rally this year was the U.S. regional banking crisis. Doubts about the traditional banking system based on central bank money boiled over. The crisis is not yet over. However, most analysts assume that it will remain regionally limited.
As a reminder, in November 2021, bitcoin had climbed to an all-time high of nearly $69,000. Then it went down to below 16,000 US dollars in November 2022.
Bitcoin ETNs: Better with collateralization
"There was no trading disruption in ETNs," notes Jan Altmann of ETC Group. The company issues crypto ETNs, including the bitcoin tracker ETC Group Physical Bitcoin (DE000A27Z304). The is the largest and highest-turnover crypto ETN on the Frankfurt Stock Exchange, with $562 million in funds raised. Altmann reports inflows into physically-backed bitcoin products, including the ETC Group Physical Bitcoin, for the past 30 days. According to issuer WisdomTree, flows into physically backed bitcoin ETNs specifically have increased, with $175 million now flowing into the products since the beginning of the year and $63 million since the beginning of April, as Benjamin Dean details. For synthetic bitcoin ETNs, however, Dean registers outflows for this year.
Altmann
At Lang & Schwarz, the Bitcoin rise in April had caused significantly more turnover in trading crypto ETNs. "These were mainly purchases," explains Torben Bendt. The VanEck Bitcoin (DE000A28M8D0) in particular was popular. Now it has become quieter, he says. "We haven't seen much recently." This is also confirmed by Duisberg from ICF: "There is very little going on. The air is out."
A small addition of bitcoin to a broadly diversified portfolio would not only have been extremely profitable in the past, but would not even have entailed excessive fluctuations or risk of loss - this is the conclusion of a study by the ETC Group. The study examined how a classic institutional portfolio with 45 percent equities, 40 percent euro government bonds and 7.5 percent each of gold and commodities would have performed over the period 2013 to 2022. This was compared with an almost identical portfolio containing 3 percent and 5 percent bitcoin, respectively, at the expense of equities. An investment of 100,000 euros was simulated, with implementation via ETFs and ETNs, and annual rebalancing was also assumed.
The result: The value of the portfolio with a Bitcoin share of 5 percent would have increased to 978,902 euros, with 3 percent to 482,495 euros - compared to 184,236 euros without Bitcoin. Of particular interest: the volatility of the portfolio would have increased as a result of the bitcoin admixture, but not rapidly, specifically from 20.5 percent a year for the standard portfolio to around 26 percent for the admixtures. Maximum drawdowns, or the maximum losses of the portfolios, also increased, but not significantly. Also of interest: the correlation of bitcoin to other asset classes, even to the Nasdaq, turned out to be lower than suspected. However, this is a back calculation - a forecast for the future cannot be derived from it. The enormous Bitcoin increase until 2021 certainly contributed significantly to the result, but also the regular closing of profits.
Ethereum update well over the top
Ethereum, the second most important cryptocurrency, currently costs 1,832 euros, an increase of 53 percent this year, but also less than a month ago. Major turbulence caused by the important Ethereum update on April 12 was absent. Following the September 2022 "merge," the upgrade was another milestone, as Adrian Fritz of 21Shares explains. Since September 2022, Ethereum has operated entirely as a proof of stake system. "This means that Ethereum owners provide for the ongoing operation of the network by voluntarily depositing ("staking") their Ethereum tokens." The staked tokens were used to validate transactions and were locked for that purpose until April. "With the Shanghai upgrade, stakers will regain access to their tokens."
WisdomTree's Dean said inflows into Ethereum ETNs have picked up slightly after a slow start to the year. Altmann at ETC Group reports smaller overall inflows into Ethereum trackers, though slight outflows for its own ETC Group Physical Ethereum (DE000A3GMKD7) over the past 30 days. ICF and Lang & Schwarz saw a lot of turnover specifically in 21Shares Ethereum Staking (CH0454664027).
"Not all small currencies will survive"
ETNs on smaller currencies did not see any flashy flows. "There is little going on in the smaller crypto ETNs," Duisberg notes, citing 21Shares Polygon (CH1129538448) and 21Shares Cardano (CH1102728750) as examples. "The crypto market is in a consolidation phase. While the major cryptocurrencies are likely to survive, not all of the smaller ones necessarily will."
According to ETC Group's figures, the past four weeks saw slightly larger inflows into 21Shares Binance BNB (CH0496454155), 21Shares Solana Staking (CH1114873776) and VanEck Tron (DE000A3GSUE1), and slightly larger outflows in 21Shares Ripple (CH0454664043) and 21Shares Polygon ((CH1129538448).
There has been great progress on the regulatory side - welcomed by crypto fans and critics. On April 20, the EU Parliament passed the Markets in Crypto Assets (MiCA) regulation, widely considered a milestone. It contains rules for oversight, consumer protection and environmental protection for crypto assets, including cryptocurrencies. For instance, crypto service providers will require a mandatory license in the future. In addition, crypto companies with more than 15 million users will in future be supervised by European supervisory authorities, while smaller ones will be supervised by national ones, in Germany by BaFin. Issuers of crypto assets will also have to publish a white paper with a lot of information in the future.
by Anna-Maria Borse, 12 May 2023, © Deutsche Börse AG
Anna-Maria Borse is a finance and economics editor specializing in financial markets/stock markets and economic topics.
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