The money of the future They come with enticing names such as Bitcoin and Ethereum. However, do cryptocurrencies deliver what they promise? Cryptocurrencies are not currencies in the everyday sense of the word, like the Swiss franc or the euro. Instead, an increasing number of market participants believe they constitute a separate asset category. This asset category has attracted an ever-increasing number of followers in recent years. The term cryptocurrencies now encompasses several thousand digital means of payment, although only a couple of dozen of these are actually used actively. Among other things, cryptocurrencies were created as a reaction to the financial crisis that shook the banking system to its very foundations back in 2008. They function as decentralized networks that exist independently of established financial institutions, and are therefore – unlike national or so-called “fiat” currencies – “protected” against state meddling. Up until now, cryptocurrencies have been bought and sold via one of the numerous crypto exchanges that exist on the internet. What makes this possible is the use of Blockchain technology. Blockchain is essentially a cryptographic tool that creates blocks of transactions through complex computing processes, with these blocks being virtually unfalsifiable as things stand today. Market prices subject to significant fluctuation Those who want to invest in cryptocurrencies load a virtual “wallet” onto their mobile phone and buy their first units with a traditional currency such as the franc or euro. The wallet is kept secure using a private key that takes the form of numeric codes. Instead of having their own wallet, buyers can also have their digital assets administered directly by a crypto exchange. However, security standards differ from platform to platform, as there is not yet any regulation in place for crypto exchanges. “I am expecting five or six major cryptocurrencies to become firmly established over the coming years.” Milko Hensel, Head of Digital Partnerships, Member of Senior Management It should be pointed out that cryptocurrencies have so far proved unsuitable investments for investors with weak nerves: their prices are subject to high levels of volatility. This is also true of Bitcoin, whose long-term trend has nonetheless been upward despite very strong fluctuations. There are a number of reasons for cryptocurrency volatility: Sometimes even a rumour on social media is sufficient to send the price of a cryptocurrency soaring into the stratosphere or plunging by an alarming amount. Another reason for this volatility is that crypto-related financial products often involve a high degree of leverage. The pricing of cryptocurrencies is dictated by supply and demand, and is very transparent. Users can submit bid or sell offers and conclude transactions at whatever price they like. There is no single institution (e.g. like the Swiss National Bank) that controls cryptocurrency issuance. In the case of Bitcoin, the maximum number of units has been set at 21 million, which prevents any inflation through an uncontrolled expansion of the money supply, as is possible with fiat currencies or other cryptocurrencies. One aspect that has limited development of the crypto market to some extent is the absence of any truly informative fundamental valuation models. “We are convinced by the great potential of Blockchain technology.” Dr. Stephan A. Zwahlen, Chief Executive Officer A handful of cryptocurrencies to become firmly established While cryptocurrencies may have become increasingly popular among investors in an era of negative interest rates, they are still only a peripheral phenomenon as an everyday means of payment. In Switzerland, for example, online market leader Digitec Galaxus accepts Bitcoin as a means of payment, although volumes are still small. A few shops, restaurants and online retailers also accept Bitcoin. Moreover, this cryptocurrency can also be bought and sold at any Swiss railway station (SBB) ticket machine. According to Milko Hensel, Head of Digital Partnerships at Maerki Baumann, it is likely to be another four years or so until cryptocurrencies are recognized as a legal means of payment. “I am expecting five or six major cryptocurrencies to become firmly established over the coming years”, he says. People often mention cryptocurrencies such as Bitcoin or Ethereum in the same breath, even though comparisons are only valid to a certain extent. Bitcoin, which has been traded since 2009, was the first cryptocurrency and remains the best known. Right from the start, it was conceived as a pure means of payment and value preservation, and currently accounts for some two thirds of the trading volume of all cryptocurrencies. By contrast, Ethereum is backed by a platform on which not only payments but also all kinds of so-called “smart contracts” can be processed. This involves the contract components being programmed and the corresponding agreements being automatically concluded when certain previously agreed conditions come about. Furthermore, in addition to monitoring product payment, the Ethereum Blockchain also monitors delivery, thereby contributing to a more efficient processing of the commodity transaction. The potential of Blockchain technology “We are convinced by the great potential of Blockchain technology”, emphasized Dr. Stephan A. Zwahlen, CEO of Maerki Baumann, back in 2018. This traditional Zurich-based institution duly became one of the first Swiss private banks to recognize the potential of cryptocurrencies and develop its own crypto-strategy. In 2019, it began offering business accounts for Blockchain companies along with supervision of initial coin offerings (ICOs) and security token offerings (STOs). In future too, Maerki Baumann will be putting its faith in this new business area: We will be offering the trading and custody of cryptocurrencies from mid-2020, and submitting crypto-related investment recommendations to interested clients from the autumn of 2020 onwards. In addition, it goes without saying that we meet the high regulatory and technological standards that have made the Swiss banks synonymous with security and stability.