Crypto quarterly review and outlook for Bitcoin, Ether & Co.

Many investors were asking themselves the same question as they looked ahead to the new year: should I be investing in crypto and, if so, which cryptocurrencies should I buy? Our experienced crypto team has been convinced for more than half a decade that crypto assets should be part of a diversified portfolio. We have been offering our clients at Maerki Baumann crypto investments since as far back as 2020.

And in 2023, we once again invested in cryptocurrencies for our clients. At the start of this year, our Investment Management made the first strategic portfolio adjustments within the “Crypto” focus module, which is part of Maerki Baumann’s modular investment solution and provides clients with access to the young asset class of digital assets. The “Crypto” focus module’s investment universe currently comprises a total of 22 different crypto assets and the aim is to add to this number on an ongoing basis. Financial investments with Bitcoin and Ethereum take centre stage and are supplemented with other crypto assets depending on the prevailing market situation and any opportunities that may arise.

Selection of crypto assets

At the end of 2022, the focus module held Bitcoin (BTC), Ether (ETH) and Litecoin (LTC). The latter was integrated into the portfolios due to its halving event in August 2023. At the same time, the cryptocurrency has proven itself to be more “stable” in falling markets or sideways phases relative to other digital assets. Between the end of July 2022 and the end of July 2023, for example, Litecoin outperformed the other two crypto assets, a result that could primarily be attributed to Litecoin’s own halving.

Source: Maerki Baumann Investment Management & Bloomberg

Nevertheless, Bitcoin is considered the real “blue chip” investment in the crypto world. We therefore reduced our holding of Ether and Litecoin during the course of 2023. With a view to the crypto asset recovery phase, we primarily placed our focus on Bitcoin and thus assigned it the strongest weighting. Viewed historically, Bitcoin has always led the recovery in crypto assets.

A further reason why we overweighted Bitcoin was the upcoming approval of Bitcoin spot ETFs in the US. On 9 January 2024, the focus module thus contained 64.1% Bitcoin, 28.4% Ether and 2.7% Litecoin, with the remainder held in cash.

With the approval of Bitcoin spot ETFs in the US on 10 January 2024, our team made a strategic shift. On 10 January 2024, we held 54% in Bitcoin and 36% in Ether for our clients. The entire Litecoin holding was also sold off and replaced with a 3% crypto investment in Chainlink (LINK)

Analysis of selected crypto assets

With the approval of Bitcoin ETFs, our Investment Management placed a greater focus on Ethereum and Ether was weighted more heavily at the expense of Bitcoin (although the portfolio remained overweight Bitcoin in absolute terms). Until approval was granted, interest was firmly focussed on Bitcoin. Following BlackRock’s registration of the Bitcoin ETF on 15 June, Bitcoin outperformed Ether by approximately 30% in US dollar terms in the time up to its actual approval.

A change of narrative thus seemed inevitable. According to the bank’s internal opinion, this change in focus would chiefly be driven by three potential catalysts:

• BlackRock also registered an Ethereum spot ETF on 15 November. Other investment firms such as Fidelity, VanEck and ARK 21 Shares have followed in the footsteps of the world's largest asset manager. The initial deadline for a decision by the US Securities and Exchange Commission (SEC) has been set for 23 May.
• The Dencun update to increase scaling (EIP 4844) was planned for 13 March.
• EigenLayer represents a promising new addition to the Ethereum ecosystem. The protocol offers security as a service and enables Ethereum stakers to offer other projects security on the blockchain. The protocol has already collected in excess of USD 13 billion and it is expected that it could soon drop free tokens (airdrop).

The shift from Litecoin to Chainlink, however, is down to the progress made in tokenisation. This includes the development of mapping rights to real goods as digital tokens on blockchain technology. This can include real assets such as real estate, equities, bonds or commodities.

We still find ourselves in the early stages of this wave of tokenisation. In addition to BlackRock CEO Larry Fink, a further 97% of institutional investors believe that tokenisation will fundamentally change the financial world. Thanks to its infrastructure, Chainlink is predestined to make tokenised assets available on numerous blockchains. Against this backdrop, we are convinced that Chainlink currently offers the best opportunity to benefit from the advancing process of tokenisation.

Outlook and possible candidate

Due to the highly dynamic nature of the crypto markets, we in the Investment Management team are constantly on the lookout for further promising investment opportunities. Exposure to so-called Ethereum rollups appears obvious. These are technological scaling solutions (so-called Layer 2s) that in the short to medium term represent the only practicable scaling solution for the Ethereum blockchain to date.

Source: Dune Analytics

As can be seen in the chart above, the rollups, which are also referred to as Layer 2s, benefited from the previously mentioned Dencun update, as their transaction fees were markedly reduced. Protocols such as Optimism (OP) and others are therefore included in our watch list.

Maerki Baumann sees similar opportunities in the expanded Bitcoin ecosystem. For a long time, Bitcoin was considered to be technologically conservative and thus hardly scalable. Protocol improvements such as the 2018 SegWit update and, most recently, the 2021 Taproot upgrade have reshuffled the cards in this respect. This change has made it possible for various Bitcoin Layer 2s to position themselves over the course of the past year.

Performance to date in the focus module

Since the implementation of the aforementioned changes, the overall portfolio has posted a performance of 59.5% in US dollar terms (as at 31 March). The price change in the held digital assets is as follows:

Price performance of crypto assets in the “Crypto” focus module from 10 January to 31 March

Quelle: Messari

As these hard facts reveal: our bet on Ether delivering an outperformance is no longer paying off. The expectation that Ether would outstrip Bitcoin in terms of its price performance has only temporarily come to pass. Up until 11 March, i.e. two days before the implementation of the Dencun update, Ether still had its nose just in front by 3 percentage points. The Ether-US dollar exchange rate subsequently fell more sharply than Bitcoin against the backdrop of a general market correction, making the launch of Dencun look like a “sell the news” event to a certain extent.

Optimism did not turn out to be effective as an Ether alternative and beta play. Up until 11 March, Optimism was still up 16% (albeit underperforming against Ether) before a strong price correction set in. In contrast, the Bitcoin alternative Stacks would, at first glance, have been suitable for “playing” the Bitcoin ecosystem due to its outperformance of Bitcoin.

Outlook for the second quarter

For the quarter ahead, it will be advisable to reflect on the current positions and weightings and adjust them where necessary. The potential Ethereum ETF and the ongoing developments in connection with EigenLayer will also be taken into consideration. The protocol went live on the Ethereum mainnet on 9 April.

The Bitcoin halving is set to take place on 20 April. At around the same time, an interesting change is also to be introduced with respect to the programmability of Bitcoin in the form of an Ordinals upgrade called Runes. And Bitcoin Layer 2 Stacks will perform its long-awaited Nakamoto upgrade. These factors could ensure that the general level of interest in Bitcoin remains high relative to Ethereum and other altcoins.

Important legal information:
 

This publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request, an offer, or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. ­Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA).

This publication is expressly not intended for persons resident in Germany.

Editorial deadline: April 2024

Maerki Baumann & Co. AG
Dreikönigstrasse 6, CH-8002 Zurich
T +41 44 286 25 25, info@maerki-baumann.ch
www.maerki-baumann.ch