Cryptos have benefited from legal clarity, lockdown, diversification strategies, and risk appetite. The crypto rush is full of superlatives, legends, overnight billionnaires, and Twitter jargon.
Are cryptocurrencies the big winners of the pandemic? «The pandemic has undoubtedly accelerated the adoption of cryptocurrencies», says Anthony Lesoismier, co-founder of Swissborg, the Lausanne-based startup turned into a unicorn, after creating an algo cryptotrading app and becoming a reference media on YouTube with its Cryptonites channel. «Cryptocurrencies have benefited from the lockdowns combined with helicopter money in the United States or Asia», he goes on. «Fundamental shifts in the population mindset have also shaped the boom. Cryptocurrencies are a symbol of a growing distrust in the current political system».
Since the famous March 20, 2020 rebound, bitcoin, the number one cryptocurrency, gained 870%, versus 80% for the S&P 500. Ethereum, the network used by most decentralized finance (DeFi) protocols, triumphed with 1630%. And why not mention the Dogecoin, a parodic cryptocurrency which went up 18’727%, based on an Elon Musk running joke on Twitter. Hardly a laughing matter though, since it has now a $50 bn market cap and has become a «top 5» crypto currency commanding respect.
Part of this rush has to do with a healthy awareness about the transformational power of blockchains, decentralized finance, and digital currencies, a paradigm shift that helped Coinbase exceed all expectations with an 80-billion listing on the Nasdaq.
«The fact that respected hedge fund managers like Paul Tudor Jones have been using bitcoin as a hedge against inflation arising from central-bank money-printing has clearly pushed the institutionalization of cryptos», says Lamine Brahimi, cofounder of Taurus Group, the Geneva-based digital assets firm that aims to become the Nasdaq of crypto assets.
«There was a fear effect», says Nicholas Hochstädter, who founded Performance Watcher ten years ago to compare client portfolio results among different banks. «People see social and economic issues ahead, among which inflation, and seek to protect their assets. This has boosted bitcoin, especially among institutionals, even more so after it gained regulatory clarity.»
For the most part though, greed was stronger than fear. After all, we witnessed fairy tales of young geniuses becoming billionaires in less than three years. Like California-born Sam Bankman-Fried, founder of the FTX exchange in Hong Kong, «who often sleeps on beanbag chairs in the office». As FTX now processes $11 bn in trades per day, he has amassed a wealth of $8,7 bn since 2019.
The crypto boom mostly had to do with cheap borrowing, extreme risk appetite, very little regulation, high or extreme leverage, and the fact that cryptocurrencies offered the best potential for high flying speculators. «There was a snowball effect from social media to mainstream media, taking interest in cryptos, analyzes Nicholas Hochstadter. There was clearly a ‹FOMO› effect on investors, or the fear of missing out».
The crypto market that literally exploded since the March 20, 2020 rebound was decentralized finance (DeFi). It grew tenfold within eight months. Decentralized finance is the crypto credit market. It is cryptos borrowed against collateral, or farmed against a yield (i.e. staked for a reward). Yet Anthony Lesoismier downplays this growth: «The total value of DeFi remains a drop in the ocean. Indeed, almost 21% of all dollars in circulation (or $4500 bn) were printed in 2020».
Still, DeFi can be deceptive to unexperienced investors. As fxstreet.com warns, «newbies are often led to believe that yield farming is free money and a lucrative way of passive income. However, high returns are accompanied by high risks. Smart contract risk, liquidation risk, permanent loss, composability risk and scam risks are just a few examples of the risks of yield farming».
A 20 year-old Swiss crypto entrepreneur, Benoit Dubosson recounts the laymen crypto frenzy: «People often think about altcoins in terms of who will multiply my investment by 100, which billionaire or YouTube star will talk it up, and those who entered at 10 cents hope to exit at 4 dollars, in a ‹pump and dump› mode. You need to do some research before going into coins». Benoit Dubosson is about to launch Galvani Capital (based in Wallis) in September. He cofounded it with Madrid-based Jacob Secanell Holstad, 27. They will offer a tokenized ETF replicating a basket of high potential small-cap cryptocurrencies (Elrond, Polkadot, Solana…). All selected market caps are under 50 mio. Fr. They hope to raise 20 mio. Fr. in client funds by the end of 2022.
To Anthony Lesoismier, from Swissborg, DeFi is not just another Repo market, but a major disruption: «Defi showed us that with the right token incentive, you can encourage different participants to collaborate - as with Uber consumers/service providers - in order to create any type of financial platform: Lending/borrowing, Spot Trading, Derivatives Trading, CDO, Lombard loan, etc. Technology paired with a strong community has shown us that we can, hand in hand, do a better job than intermediaries, namely banks or traditional financial institutions. By aligning incentives and making rules transparent, we are moving from the simple and superficial clients/suppliers interaction to the creation of fair and robust financial ecosystems. It's a slap in the face of current monetary policies».
Cryptos are still interdependent with classic markets. Under the massive entry of institutional investors, the derivatives market has greatly affected crypto prices during recent months. Excess leverage was one of the reasons behind the flash crash seen on April 19, 2020 when 10 bn $ were liquidated in a single day. Heavy concentration in derivatives «brings us back to a centralized use of decentralized finance», says Benoit Dubosson. But he still believes, like Anthony Lesoismier, «that the trend is towards a finance that is a 100% decentralized and able to do exactly what banks do, but quicker, cheaper, and with better scalability».
To cautious investors, what are the merits of bitcoin? Does it offer a good diversification? «Bitcoin has been proven to be uncorrelated with the main asset classes by several research papers», says Lamine Brahimi. «Yet these also point to a ‹recorrelation› in times of stress for all asset classes, including bitcoin».
Tokenized assets, says the cofounder of Taurus group, are the real diversifiers. «Tokenizing non listed assets or private assets brings a real diversification to any portfolio strategy. Of course, if the token represents a real asset, this underlying asset must be properly analyzed, since a bad underlying can’t back a good token».
«Betting on rational investments in cryptos is the right path, concludes Benoit Dubosson. It’s not about playing roulette, but playing a strategy that is smarter than ‹Musk spoke about it, so I’ll buy it›».