Ever since the Bitcoin phenomenon gripped the world in 2017, it is hard to avoid hearing friends, relatives and co-workers discussing the relative benefits and drawbacks of various cryptocurrencies.

As cryptocurrencies, or “cryptos”, are now more accepted as a form of payment, they also become available to retail investors as tradable securities. Investment platforms like CMC Markets allow trading CFDs linked to Bitcoin, the original cryptocurrency, or Ethereum, its peer competitor.

Trading cryptos is not suitable for everyone. Many investors are unfamiliar with trading cryptos or they simply do not fit their risk appetite. But they are still curious about the phenomenon and are attracted by potential returns. Because of this, they are looking for a safer way to gain exposure to the boom without directly investing in a volatile asset.

Bitcoin is down 70% from December’s record highs of $19,461 but found support above the $5,900 handle and bounced 11% from 2018 lows. Is now an opportune moment to invest in cryptocurrencies?

This report analyses some of the options available for retail investors who are interested in gaining exposure to the cryptocurrency boom. Either directly though Bitcoin CFDs or through blue-chip equities, sensitive to the financial world’s hottest asset.

Why are cryptos receiving attention?

Since mid-2017, a growing number of media outlets, financial institutions and market commentators have been reporting on the cryptocurrency boom, initially championed by industry flag bearer Bitcoin. Stories of investors without any trading experience gaining returns of 100% or more attracted immense interest to this new and volatile market.

Many traditional investors remain cautious, questioning the fundamental nature of Bitcoin as a currency and suggesting that price surges are speculative rather than generated by fundamental factors. Despite persistent doubt, demand for cryptos has boomed globally and shows no sign of letting up, encouraging investors to examine their portfolios to potentially include crypto-tied assets.

The risks of trading cryptocurrencies

There are multiple reasons why direct investment in cryptocurrencies can be risky. Volatility is a major concern for investors; swings of 20-30% per day can be sudden and commonplace. This can lead to considerable profits, but also significant losses.

Falling on the wrong side of a crypto price swing can be very costly. Increased volatility means that even trading CFDs, a 50% deposit is required to open a position, while spreads can vary between 9 and 100 points, depending on the type of cryptocurrency.

Mitigate your crypto risk with equities

These risks should not to be taken lightly. For investors who do not want to be directly exposed to them, there are alternative opportunities to trade less volatile equities that have some form of exposure to cryptocurrencies.

This still allows investors to tap into the potential of the cryptocurrency boom, however it removes a significant portion of trading risk. Furthermore, the process of trading equities is simpler than cryptos, thanks to the access to a unified investment platform to execute trades and manage your portfolio.

Overleaf, we examine stocks that can provide opportunities to gain exposure to the crypto boom. If you see an exciting opportunity in Bitcoin, get in touch with one of our brokers to discuss your options.

The Trader

It will come as no surprise to many that Goldman Sachs has been one of the first major global financial institutions to plan a cryptocurrency trading desk. The US investment bank is famed for its progressive attitude toward the fintech sector (which includes cryptocurrencies) and has been clearing Bitcoin-linked futures contracts offered by CME and CBOE exchanges since May, as well as providing clients liquidity for those futures.

Goldman Sachs is now looking for an opportunity to seize upon the cryptocurrency boom to offset weaker trading in traditional markets. The bank’s plans to create a cryptocurrency trading desk is a sign of growing institutional acceptance of the fledgling market and could be mirrored by its peers.

As a first step, the bank is focusing on developing a safe, institutional-grade custody solution for cryptocurrencies. Additionally, according to Goldman CFO Martin Chavez, the bank is trying to develop over-the counter derivative contracts for Bitcoin, called “non-deliverable forwards”, further adding to the investment options for retail investors interested in the crypto space. (Source: CNBC, 7 September 2018)

Other investment banking institutions, including Barclays, JP Morgan and BlackRock have also created teams to investigate cryptocurrency trading. (Source: DowJones Newswires, 6 August 2018)

The Technology

While Goldman Sachs may be trading cryptocurrencies, other banks are taking a different approach. A consortium of major institutions, including the UK’s bank Barclays, has begun trialling how the technology that underpins cryptocurrencies, called the blockchain, can be used to guide institutions through the vast MiFID II financial regulations that have come into force in early 2018. (Source: Finextra, 15 December 2017)

Alongside UBS, Credit Suisse and Thomson Reuters, Barclays is investigating how blockchain-based smart contracts can improve data quality and simplify processes. A blockchain is a type of shared digital “ledger” that can be used to record financial transactions, legal information or customer data. Blockchain is incorruptible and easily verifiable, making is attractive to banking institutions for settling transactions and verifying financial data against multiple sources to protect against fraud.

The cryptocurrency boom pioneered by Bitcoin is merely one aspect of the digital banking revolution that is taking shape on financial markets at this very moment. As the value and acceptance of cryptocurrencies grows, more traditional financial institutions will become entangled with the underlying technology and benefit from adopting crypto-based technological standards.

And what of Bitcoin itself? On the next page, we delve deeper into the technical indicators behind Bitcoin, Goldman Sachs and Barclays.

Accendo Markets’ research team puts together similar daily publications daily on blue-chip equities, indices and commodities. For more personalised  assistance in trading cryptocurrencies or crypto-linked equities, you can sign up to have our research sent directly to your inbox.

Bitcoin

Source: CMC Markets, 13 September 2018

Will Bitcoin return to July highs of $8,482 (+32%) or fall to 2018 lows of $5,790 (-11%)?

• Prolonged downtrend, with the cryptocurrency -65% from 2018 highs.
• Several bounces this year from $5,900 support level, now trading +11% from 2018 lows.
• Technical indicators (RSI, Stochastics) are in oversold territory, but turning up higher.
• Falling highs resistance and horizontal support generating a narrowing sideways pattern.
• Trend strength (ADX) has been low since July, suggesting continuation of sideways movement.
• 100-day Moving Average and falling highs since March are creating a level of resistance around $7,250.

Pricing data sourced from Bloomberg on 13 September 2018. Please contact us for a full, up to date rundown.

Goldman Sachs (GS)

Source: CMC Markets, 13 September 2018

Will Goldman Sachs return to 2018 highs of 274p (+20%) or fall to 2018 lows of 218p (-5%)?

• Goldman Sachs shares in September downtrend (-4% in the last week), notching 11 straight days of declines to record the longest losing streak since the company started public trading in May 1999.
• Recent sell-off in the US financials (Morgan Stanley, Citibank and JP Morgan in similar downtrends) and concerns over investment banking deal flow is adding to the negative momentum. (Source: FT)
• Shares are down 17% from 2018 highs but have bounced over 4% from June-July lows.
• Shares are below 50-day, 100-day and 200-day Moving Averages, supporting current bearish sentiment. Rising lows support around $222 could provide a cushion for the shares.
• Analysts are positively biased toward Goldman Sachs shares, with only 1 broker (Berenberg) saying “Sell”. Medium-term target prices are rather bullish, with a significant 95% of brokers seeing an upside for the share price from current levels toward the $274 target.

Broker Consensus: 50% Buy, 46% Hold, 3% Sell
Bullish: Oppenheimer & Co, Outperform, Target $336, +45% (30 July 2018)
Average Target: $274.83, +20% (13 September 2018)
Bearish: Berenberg, Sell, Target $200, -14% (20 July 2018)

Pricing data sourced from Bloomberg on 13 September 2018. Please contact us for a full, up to date rundown.

Barclays (BARC)

Source: CMC Markets, 13 September 2018

Will Barclays return to 2018 high of 220p (+25%) or fall to October 2016 lows of 164p (-6%)?

• Barclays have been in a prolonged downtrend since May this year, down close to 22% from 2018 highs.
• Shares are trading at 2018 lows, with the current share price level last seen in October 2016.
• Analysts are bullish on Barclays shares, with over 88% of brokers saying either “Buy” or “Hold”.
• This is further supported by bullish outlook toward the bank’s share price, as 95% of brokers are projecting upward movement over the next several months toward an average target of 222p.
• Recent Q2 results have been broadly positive, with pre-tax profit beating market expectations and the bank remaining on track to meet medium-term financial targets.
• Barclays recently created a team of senior staff to explore trading cryptocurrencies, looking for ways to integrate “digital assets project” into its markets business, with those involved in the project believing cryptocurrencies could be a “viable asset”. (Source: DowJones Newswires, 6 August 2018)
  

Broker Consensus: 50% Buy, 38.5% Hold, 11.5% Sell
Bullish: HSBC, Buy, Target 270p, +54% (18 August 2018)
Average Target: 222.1p, +26% (13 September 2018)
Bearish: Day by Day, Sell, Target 139.28p, -21% (3 September 2018)

Pricing data sourced from Bloomberg on 13 September 2018. Please contact us for a full, up to date rundown.

Want to take advantage of the above opportunities right now?

Whether you see UK Stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

While buying 9,561 shares in IQE @ 104.58p requires an outlay of around £10,000 plus commission, the same exposure via a CFD requires about £2000 plus commission (see right-hand box; margin + costs). If a trader invests in IQE, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to IQE shares - some of that capital could be put to good use elsewhere in the markets. (Source: CMC, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up as little as 20%/£2000 (note that overnight financing costs will still apply). The remaining £8,000 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

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