Physical crypto asset management options from a long-term perspective Has the crypto asset winter come to an end?

Although it may be difficult to visualise because it is digital, crypto assets also have the concept of physical holdings.

Holding crypto assets in physical form allows you to trade as usual, and there are also services that allow you to increase the amount of the crypto asset itself simply by depositing it, or receive a loan fee by lending it to a third party.

As such, there are a variety of physical operations of crypto assets that can expand the scope of one's own operations. This section introduces the types of crypto asset management methods available.

Current crypto asset market conditions

The crypto asset market has been buoyant since mid-October over the approval or non-approval of a physical bitcoin ETF in the US. Initially, the market was dominated by bitcoin, with dominance (market share) surpassing 50% for the first time since April 2021.

This means that bitcoin accounted for half of the crypto asset market capitalisation. However, as of November, the crypto-asset market is also seeing inflows into major altcoins, including Ethereum, and signs are emerging that the crypto-asset market is poised for a significant rise.

In line with the overall market price rise, investor sentiment has also turned sharply bullish. According to the Fear & Greed Index, which represents the Bitcoin fear index, the current score is 73, indicating a bull market.

A score of 73 is the level at which bitcoin reached its all-time high in November 2021, which means that more and more investors are expecting a significant price rise to occur. This is a worrying situation.

The main concern in this situation is how to manage crypto-assets. In the ever-changing crypto asset market, the way in which crypto assets are managed is a major point in generating profits.

In this article, we will pick up on the trading and management methods that can be used to profit from crypto assets.

Leveraged trading is a massive risk in the current market

Margin trading, which is also offered on some domestic crypto asset exchanges, is a trading method that can easily generate large profits, but it is not recommended in the current market climate.

To begin with, margin trading is a trading method with the potential to earn a lot of profit with a small amount of capital. The amount of money deposited as collateral can be several times the amount of the deposit.

Among these, FX (foreign exchange margin trading) is one of the best-known. For example, if you take ¥10,000 and multiply it by a factor of 2, you can trade the equivalent of ¥20,000.

If a profit is made, the profit originally earned on ¥10,000 is also doubled. Another advantage of trading on margin is that, unlike cash trading, you can start trading not only from ‘buy’ but also from ‘sell’.

On the other hand, there are disadvantages. The fact that a profit of several times can be obtained when a multiple is increased can, on the other hand, also result in a loss of several times.

Furthermore, while the maximum multiplier for FX in Japan is limited to 25 times, some overseas entities offer services with multipliers of up to several hundred times.

Only a handful of people can profit from using such services, and there is no end to the number of cases of large debts. One of the advantages and disadvantages of trading on margin is the high risk of price fluctuations.

Although margin trading is more likely to generate profits due to higher price volatility, it is also more likely to generate losses. Therefore, margin trading of crypto assets with large price fluctuations is relatively suitable for intermediate and advanced traders, and is a bit of a hurdle for beginners.

Margin trading of crypto assets in Japan is currently limited to 2x, so depending on the source of margin, the damage incurred in the event of a loss can be relatively light.

Nevertheless, the current market is becoming a difficult trading environment for both beginners and advanced traders, as the price volatility is intensifying due to the approval or non-approval of a physical bitcoin ETF.

Again, these market conditions can lead to large profits, but also to significant losses. When trading, it is recommended that you carefully monitor market conditions and invest only to the extent that your daily life will not be affected even if you incur losses.

Physical investment with an eye on the future

In the case of crypto assets, we believe that the best way to invest in crypto assets is to invest in ‘physical assets’. The price fluctuations of crypto assets are very large, and trading on margin, especially in the current market conditions, entails significant risks.

Therefore, for beginners and users who are considering investing in crypto assets from a medium- to long-term perspective, we recommend the management of physical crypto assets. There are several ways to invest in physical crypto assets, but before that, we will introduce some points on how to choose a crypto asset exchange.

The following characteristics are particularly important when choosing a crypto asset exchange.

・High liquidity on exchange services

・The number of stocks handled.

・The type of management services.

Let us explain in this order.

High liquidity in exchange services

First of all, there is nothing better than high liquidity. This is because where there is no liquidity, transactions cannot be concluded in the first place. If buy orders dry up when prices have fallen sharply, there is no way for assets to escape, and you may just watch in dismay as the value of your asset falls.

Conversely, if the market heats up and there are no sell orders when they want to trade, they may be forced to acquire the asset at a price higher than the market price.

Continuing to trade on such exchanges can lead to losses in the long run. Therefore, when looking at the chart, you should avoid exchanges where there is no change in the candlesticks at all, or where there are frequent ‘windows’ with empty spaces between candlesticks.

It is also important to use ‘exchange services’ as much as possible to avoid losing money, especially in terms of fees. The majority of domestic crypto asset exchanges offer two types of trading services: ‘sales offices’ and ‘exchanges’.

To explain the difference simply, a sales exchange is ‘trading with a crypto asset exchange that provides the service’, while an exchange is ‘user-to-user trading’.

The advantage of a sales exchange is that crypto-assets can be bought and sold as long as there are no serious problems. Therefore, if you want to trade immediately but do not have a trading partner or do not know at what price you should trade, you should use a sales exchange.

However, some exchanges charge a 5% commission for buying and a 5% commission for selling. It is very wasteful to have 10% deducted as a commission just for buying and selling.

Exchanges, on the other hand, have overwhelmingly lower commissions than sales outlets. In some cases, transaction fees are waived through campaigns. Another advantage is that it is relatively easy to trade at the price you want.

The disadvantage is that, as mentioned above, if liquidity is low, transactions may not be concluded in the first place. In order to avoid cases such as not being able to evacuate assets, you must choose an exchange service with high liquidity.

Number of stocks handled

Next, the number of stocks handled. This is also important to broaden your investment options. No matter how low the fees are on an exchange, if there are no stocks you are interested in, you will not even be able to start trading.

Until recently, a major disadvantage of domestic crypto asset exchanges was that they handled far fewer stocks than their overseas counterparts.

However, in recent years, the number of stocks is rapidly increasing as the requirements for handling stocks have been eased. On the other hand, it is important to check carefully how many stocks are handled by the exchange services.

Even if a large number of stocks are handled, if most of them can only be traded on exchange services, the fees may be a significant burden in the long run.

The large number of stocks handled can also be a headache for beginners. This is because if there are many issues where they do not know what kind of crypto asset it is, they are likely to find themselves in a situation where they do not know what to trade.

Therefore, when choosing a crypto asset exchange for beginners, first check whether the top-ranked crypto assets in terms of market capitalisation are handled.

After that, it is advisable to choose one by looking at how many stocks it handles and how liquid the trading is in terms of the future.

Types of management services

Lastly, in terms of the type of management services, crypto asset exchanges offer the following main types of management services

・Savings

・Staking

・Lending

The three main types of investment services offered by crypto asset exchanges are

Accumulation investment

As the term suggests, savings is a service that allows users to purchase and accumulate a certain amount of crypto assets on a regular basis.

For users who want to increase their assets even slightly while holding crypto assets on an exchange, this is probably the first service they should try.

Staking and lending are often confused with each other, as both involve depositing on an exchange, but the mechanisms are different.

Staking

Staking is similar to mining in Bitcoin, where you hold crypto-assets and contribute to the operation of the blockchain and receive crypto-assets in return.

In the case of services provided by crypto asset exchanges, this is recommended for users who are a little more familiar with crypto asset trading, as the process is easy to follow.

Lending

Lending, on the other hand, is a service whereby users deposit their own crypto-assets to be managed by an exchange to increase their assets.

Basically, any type of crypto asset can be deposited, but the stocks supported vary from exchange to exchange.

Differences between staking and lending

The main differences between the two services are the deposit period, whether or not the deposit can be cancelled mid-term, the annual rate of change and the stocks supported.

Firstly, in terms of deposit periods, staking is basically indefinite as it rewards network contributions, while lending often only allows deposits to be made for a set period of time.

Related to this, staking can be stopped at any time, while immediate withdrawal is not possible with lending.

Furthermore, while staking allows you to receive remuneration for the period you have deposited even if you cancel the deposit midway through, in most cases, lending basically does not generate remuneration if you cancel midway through, so this is also a point to bear in mind.

The annual percentage rate is basically fixed at the time of application for lending, but in the case of staking, the amount of remuneration is likely to fluctuate as it is subject to change in relation to other operators in other countries, not just in Japan.

In terms of supported issues, staking is basically only compatible with crypto assets that have introduced a proof-of-stake (PoS) mechanism. On the other hand, lending is conceptually compatible with all crypto assets, which is a major difference.

Therefore, if the crypto-assets you own do not support staking and you still want to invest in them, you may want to use lending.

As described above, lending and staking have different investment mechanisms, which results in changes in the stocks that are supported and interest rates.

Both have their advantages and disadvantages, so it is important to have a good understanding of the characteristics of both before using them.

What are the rewards that tend to be higher?

So far, we have focused on crypto asset exchanges, but when it comes to the management of physical crypto assets, there is a strong tendency for operators specialising in that service to generate higher rates of interest.

For example, in the case of lending, crypto asset exchanges offer services with an annual interest rate of 1-2%, whereas specialised operators may offer 5-10% per annum.

With crypto asset exchanges, various restrictions are placed on operations, which tends to keep interest rates low. On the other hand, specialist lending operators do not currently require a licence and can operate with a higher degree of freedom.

This makes it possible for specialist lending operators to offer higher rates of interest than crypto asset exchanges.

However, the lack of a licence means that irresponsible and unscrupulous operators may appear, and there is a risk that assets may not be returned in the event of a failure by the depositing operator.

While it is possible to increase assets at a high rate of interest, it should be used with the understanding that there is the potential for a great deal of risk.

It is also recommended that, when choosing a specialised operator, the reputation and track record of the service should always be carefully investigated before use.

Yield farming

Another asset management method that is not available on crypto asset exchanges is called ‘yield farming’. This involves depositing certain crypto assets with a DeFi service, such as DEX, a decentralised exchange without administrators, and being rewarded for providing liquidity.

The lending user deposits the crypto asset in a place called a liquidity pool, and the user wishing to acquire the crypto asset conducts transactions with the liquidity pool as the counterparty.

The image is similar to the sales exchange service of a crypto asset exchange. However, it differs from a sales exchange service in that the fees are relatively low and the crypto-asset pairs need to be prepared in advance in order to trade.

For example, if there is a trading pair of Ethereum and Tether and you want to acquire Tether, you need to prepare Ethereum.

The rewards for providing liquidity are known to be relatively high, with some exceeding tens of per cent per annum, depending on the crypto assets deposited.

However, it should be noted that being an administrator-less service, all actions are at the user's own risk. In fact, there have been a number of hacking attempts targeting DeFi services in recent years, resulting in a large amount of damage.

In addition, the service is basically designed in English, and some operations are difficult to understand, so it can be said that the service is relatively suitable for intermediate and advanced users when managing crypto assets.

We have described various methods of managing crypto assets, but in all cases, it is best to start with funds that you have researched well and are not afraid of losing.

It is also a good idea to diversify your investment methods in the process, as this will help reduce risk.

The most important thing when getting involved with crypto assets is to first hold crypto assets in a way that you are comfortable with, and then look at managing them.

Short Column

Key points when managing crypto assets as the ‘crypto asset winter period’ is coming to an end.

What you should always be aware of if you are thinking of managing crypto assets in the future is to diversify the timing of your purchases. If you have never touched crypto assets before, you can start with something like investing in points.

The price movements of crypto assets are considerably larger than those of other asset classes (investment products), so risk management methods are very important when managing them.

If crypto assets are included as part of an asset management portfolio, it is a good idea to use the dollar cost averaging method to accumulate crypto assets on a monthly basis. Also, when considering the price movements of crypto assets, it may be a good idea to make detailed daily accumulations.

If you want to take risks and still aim for a large return on your investment, you can adjust projects in altcoins instead of bitcoin and focus on tokens in projects with a small market capitalisation that are likely to grow in the future.

You need to invest with an understanding of the higher risk involved and think about how you will use crypto assets.

Profile.

◉ Sho Nakashima

Representative Director and FX and virtual currency trader, Mmenu Japan Inc.

Director of the Japan Carbon Neutral Organisation

Sho Nakashima has a background in FX, futures and options trading as a student, and immersed himself in investing for four years, mainly in FX. After that, he aimed to work in the market sector of the financial industry and obtained a qualification as a securities analyst.

Twitter: @sweetstrader3

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