Investing in cryptocurrencies is risky. Nevertheless, bitcoin, ether and other cryptocurrencies are now regarded as recognized investment instruments. This is evident on the stock exchange, where in October 2021, the first bitcoin ETF was launched on the market in the USA. Brazil and Canada had previously given the green light for trading with a bitcoin index fund.

Demand for crypto investments – on a par with their potential returns – is high worldwide. However, investors who previously regarded cryptocurrencies as a safe haven in times of crisis, as claimed by some experts, have been disappointed: for the time being, blockchain money has not proven this to be the case.

Not digital gold

The price of bitcoin has been behaving cyclically for months. In other words, it loses value in parallel with the global economy. In order for bitcoins to deserve the designation of safe haven, they would have to increase in value in times of high inflation and restrictive monetary policy – like gold does, for instance. In the case of precious metals, long-term studies show a negative correlation with the stock market. Since this has also been the case with bitcoin and other cryptocurrencies until now, some experts have referred to them as digital gold.

But the reality is that in mid-June 2022, bitcoin fell to 17,590 dollars – its lowest value since the end of 2020. Ether didn’t do any better: the number two on the crypto market sank below the 1,000 dollar mark. It’s been quite striking: in their nosedive, the coins have shown clear parallels, especially with the US tech index, the Nasdaq.

Why is it in tandem with the Nasdaq?

The question is: why is bitcoin suddenly running in tandem with tech shares? There are two main reasons for this:

• The new ETFs give an important indication: there are more and more conventional financial products based on bitcoins. They are traded within the same cycle as traditional securities. This means that crypto investments have become mainstream, as it were. Bitcoin’s all-time high of almost 70,000 dollars in November 2021 attracted many new investors.
• Crypto investments and tech shares are both very risky financial instruments. In times of rapidly rising interest rates, they are now often excluded from portfolios, whether by institutional or small-scale investors. This is because tech shares are securities with high valuations and these fall when interest rates rise.

Energy problem and politics

While the interest rate policy of central banks is partly responsible for the cyclical behaviour of bitcoin and other cryptocurrencies, the new, conventional crypto products also have their share of the blame. Yet there are other factors that contribute to bitcoin’s weakness:

The energy problem

To secure the network, the bitcoin network has to consume a lot of power. This is not the case with most other cryptocurrencies, however, as they don’t rely on energy-intensive mining via proof-of-work algorithms.

Political measures

Central banks and regulators are trying to contain the spread of this alternative currency. They fear for the future effectiveness of monetary policy. Other issues are the lack of investor protection and the risk of money laundering.

Is potential for returns inherent to cryptocurrencies?

In view of their weakness and conformity with stock market trends, are investments in cryptocurrencies still worthwhile? The answer is that there is still potential for returns. Although bitcoin and other cryptocurrencies are currently not suitable for protecting against inflation due to their cyclical behaviour, they do have an innovative dimension: blockchain technology still has great potential for a wide variety of applications.

The key when investing in bitcoin and other cryptocurrencies

Anyone who wishes to invest should diversify their portfolio and consider traditional asset classes in addition to cryptocurrencies. Ultimately, the broader a portfolio, the less susceptible it is to fluctuations. Furthermore, investors should have a) a sufficiently high risk capacity (e.g. a long investment horizon) and b) a suitable risk appetite. Investors should be able to sleep peacefully even if their investment suddenly loses a lot of value.