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Created on 26.06.2023

What you should know before investing in cryptocurrencies

There are many different cryptocurrencies, and new ones are added every day, while others sometimes disappear. Cryptocurrencies are receiving a lot of interest from investors, but are still the subject of controversial debate. If you want to buy Bitcoins and other cryptocurrencies independently, it is advisable to gain at least a basic understanding of them beforehand. We’ll give you the broad outline.

The key points at a glance: six facts about trading with cryptocurrencies

  1. Cryptocurrencies are purely digital and are fundamentally based on blockchain technology. Unlike conventional payment methods, they are not controlled and circulated by governments or central banks. Blockchain acts as a decentralized database and encrypts, verifies and stores all transactions and account balances.
  2. You have several options if you want to buy cryptocurrencies: you can trade directly on a crypto exchange, place an order through a crypto broker or trade your cryptos through your bank.
  3. Thanks to digital trading venues, cryptocurrencies can be bought and traded worldwide. Crypto regulations differ in individual countries, however. Switzerland is one of the leading locations and has created legal guidelines to promote the security and integrity of the financial market.
  4. Buying cryptocurrencies is not the only way to participate in the crypto market. Derivative products such as CFDs or even ETPs and certificates are common alternatives.
  5. To buy cryptocurrencies directly, you need a digital wallet. As with a physical wallet, these need to be protected against loss and theft with security measures.
  6. Heavy fluctuations are the norm. Extreme price fluctuations make crypto trading a high-risk investment. Therefore, as always with investments, the following rule applies: you should determine your risk tolerance in advance and always invest only as much as you could theoretically afford to lose.

What are cryptocurrencies and how do they work?

In essence, cryptocurrencies are nothing more than digital payment methods. What makes them special is that they function independently of financial institutions and are not circulated and controlled by governments and central banks. Cryptocurrencies are based on blockchain technology, a decentralized network. They work in a similar way to a logbook. All transactions are stored as encrypted information in data blocks and cannot be changed at a later point. These blocks are not located on a central server, but on the servers of all participants. Everyone can participate in this decentralized network and provide their computer’s processing power. In return, you are rewarded with digital currency units that increase the value of the relevant cryptocurrency. This process is also called “mining”.

Which are the best cryptocurrencies?

There is no single answer to this question, as it depends on the specific needs of the buyer. It’s a bit like asking “Which is the best technology startup?” There are now many different cryptocurrencies, and new ones are being introduced to the market all the time. The oldest and best-known digital currency is Bitcoin. It is one of the most established cryptocurrencies and is accepted as a payment method in certain situations (e.g. in stores or for tax payments, as in the Canton of Zug). After Bitcoin, Ether has the second largest market capitalization, followed by a large margin by Tether, a so-called stablecoin . Other well-known cryptocurrencies include Litecoin, Binance Coin, USD Coin, Ripple and many others. Cryptocurrencies are some of the assets with the highest yields in recent years, offering investors growth opportunities and a valid opportunity for diversification. But if you want to buy cryptocurrencies, you must always be aware that they can all be volatile and high risk. Especially in the beginning, it is generally recommended to opt for larger cryptocurrencies. Do your research well in advance, and make sure you understand how the currency works before you invest.

How can I invest in cryptocurrencies?

If you want to buy Bitcoin, Ether, etc., you have several options ranging from decentralized exchanges to crypto brokers and crypto exchanges. More and more banks are also offering their customers services in this field. Whichever option you choose, anyone investing for the long term should consider the following important points.

Peer-to-peer buying via a decentralized exchange

Decentralized exchanges (also known as DEX) enable peer-to-peer trading of cryptocurrencies. Peer-to-peer refers to a marketplace where transactions take place directly between traders. These transactions are facilitated through the use of self-executing agreements written in code, known as smart contracts. Decentralized exchanges perform one of the most important functions of cryptocurrencies: they facilitate financial transactions that are not conducted or overseen by banks, brokers, payment processors or other intermediaries. Decentralized exchanges are not obliged to hold funds in custody, which means that investors must hold their funds independently in their crypto wallet. However, in practice, this option is rare when investing in cryptocurrencies.

Buying cryptocurrencies through a crypto broker

A crypto broker is an intermediary between customers and the cryptocurrency market. They provide a user-friendly platform, which means that buying and trading cryptocurrencies is usually easy and user friendly, especially for beginners.

When choosing a crypto broker, it is important to carefully and intensively research a reputable provider that allows trading in the preferred cryptocurrencies. Factors such as security, ease of use, fee structure, and support for the particular region should be considered. Opening an account usually requires providing your personal information and possibly verifying your identity according to KYC (Know Your Customer) guidelines. After opening the account, fiat currencies must be deposited into the account before cryptocurrencies can be purchased. The preferred cryptocurrency can then be selected, and a purchase order can be placed. Crypto brokers also usually offer a wide range of tradeable cryptocurrencies, giving investors more choice and allowing them to invest in different projects. Once the purchase is complete, the cryptocurrencies can be transferred from the broker’s account to the wallet, where they are stored. To this end, it is advisable to obtain detailed information about the various custody options.

The risks of crypto brokers

While there are many advantages to buying and selling cryptocurrencies through a crypto broker, you should also consider some potential disadvantages:

  • Custody and loss of the private key: in many cases, a crypto broker will require you to store your cryptocurrencies in a wallet provided by them. You will therefore not have complete control over your private key, which is required to access your cryptocurrencies. In the event of a hack or insolvency of your broker, you risk losing access to your cryptocurrencies.
  • Fees: crypto brokers often charge fees for their services. These can affect the buying and selling price of cryptocurrencies and reduce the profitability of your investments. This is why it’s important to understand and assess the broker’s fee structure.
  • Data protection: when you register with a crypto broker, you will usually be asked to disclose your personal information, including your identity. This may raise data protection and privacy concerns, especially if the broker has not implemented adequate safeguards to protect your data.

Buying and trading cryptocurrencies on a crypto exchange

Another way to invest in cryptocurrencies is through crypto exchanges. These follow the same principle as other exchanges: they allow the buying and selling of cryptocurrencies. The price is set by supply and demand. Crypto exchanges provide a trading platform where users can place orders to buy or sell cryptocurrencies.

There are numerous crypto exchanges, and choosing one is not always easy. Recent events surrounding the collapse of crypto exchanges showed that even the biggest players are not 100 percent secure (think “regulation”). This is why it’s important to carefully consider which exchange you want to use, because the lack of regulation can be problematic in various ways. European and especially Swiss crypto service providers have higher security standards than others.

The prerequisite for trading on a crypto exchange is that you have your own account. The wallet is often compared to a digital purse. Research online platforms that specialize in cryptocurrencies to find out which crypto exchange is best for you. Security and ease of use are particularly important criteria. After installing your wallet, you will receive a globally unique address (known as a public key), which is similar to an account number and works like an e-mail address. You purchase the required amount of digital currency from an online provider.

Similar to crypto brokers, crypto exchanges also offer a wide range of tradeable cryptocurrencies. However, crypto exchanges often have larger trading volumes than crypto brokers. This means that you can usually buy and sell at current market prices without having to wait for buyers or sellers, enabling faster execution of trade orders.

The risks of crypto exchanges

Trading cryptocurrencies via crypto exchanges may also pose certain risks:

  • Technical complexity: trading cryptocurrencies through a crypto exchange often requires technical understanding and knowledge of the market. Especially for beginners, it can be challenging to become familiar with the trading platforms, charts, order types and other aspects of trading.
  • Safekeeping: when it comes to secure custody of cryptocurrencies with crypto exchanges, there are two options. First, there is independent custody. With this option, you are solely responsible for the safekeeping of your cryptocurrency. You must keep your access codes – the “private keys” to your money – and your passwords safe. If they get lost or are stolen, your money can quickly disappear. Alternatively, there is the possibility of custody at the crypto exchange. However, this does come with some risks, as exchanges can be the target of hacks or cyberattacks that endanger your funds.
  • Regulatory risk: crypto exchanges are often subject to different regulatory frameworks in different countries. There is a risk that the exchange may be restricted or closed due to regulatory action.

Using banking services

The trade in cryptocurrencies works independently of financial institutions. Because customers’ needs are changing and the demand for digital assets is increasing, more and more banks are entering the crypto business and offering their customers services for trading and custody of cryptocurrencies. This offers various advantages for customers: they can manage all their financial activities in one place and benefit from support services. In particular in the area of custody, which independent investors have to handle for themselves, some risks can be avoided. Swiss banks offer the following:

  • Reputation and trust: Swiss banks enjoy a good reputation for financial services and protecting their customers’ assets. They have strict regulations and high security standards that inspire confidence in investors.
  • Stringent regulatory environment: Switzerland has a mature regulatory environment for financial services, including cryptocurrencies. Banks must adhere to strict regulations to prevent money laundering, terrorist financing and other illegal activities. This can lead to additional protection for your cryptocurrencies.
  • Security measures: Swiss banks generally have high security standards, both physical and digital. They use modern technologies to protect their customers’ assets. This can reduce the likelihood of a hack or theft.

What options do banks offer aside from cryptocurrency trading?

More and more banks offer “tracker certificates” for a variety of cryptocurrencies as an additional investment instrument. The bank trades the cryptocurrency, and you participate in price gains and losses via the certificate. This can be attractive for you if you are less interested in the currency itself, but still want to profit from the developments of the relevant cryptocurrency. One disadvantage of these certificates is that the fees are significantly higher compared to direct investments. Crypto ETPs are another option. ETP stands for exchange traded product, an investment product that aims to track a specific index or underlying as closely as possible. In the case of crypto ETPs, these are price developments for cryptocurrencies such as Bitcoin, etc. This allows you to participate in the growth of digital currencies without having to buy any yourself. ETPs are traded on the stock exchange, just like shares and ETFs. There are now also various leverage products with which investors can speculate on the price development of cryptocurrencies. These are very high risk, however, and more suitable for experienced traders. Essentially, the crypto range differs from bank to bank, but it is clearly tending to become more diverse.

Whatever else you do, find out how crypto works and the attendant risks

As mentioned at the beginning, your individual needs determine whether, where and how you invest in crypto(currencies). In any case, we recommend that you carefully assess the advantages and disadvantages, services available, possible costs and security measures. You should definitely have a basic understanding of how digital currencies and crypto technology work in order to be aware of what is happening to your money and what risks you are taking. As always, only invest money that you can afford to lose. Cryptos can be subject to particularly high volatility, and the technology behind them is extremely complex and largely unregulated.

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