Swissquote Bank has joined the Bitcoin bandwagon with another first after the release of an actively-managed bitcoin certificate offering ‘a simple way to diversify traditional portfolios into cryptocurrency, but also integrating an algorithm designed to reduce volatility’, according to the bank. In the first of a two-part article, SRP talks to the Swiss banking community about the creation and distribution of product based on cryptocurrency.

“We built our strategy to focus on reducing volatility by increasing the amount of traditional currency on periods of uncertainties and downturns,” said Peter Rosenstreich (pictured), head of market strategy at Swissquote. “This strategy is designed to create more consistent return potential in the long run.”

There are plenty of passive trackers on bitcoin, but the downside risk is keeping investors sidelined, according to Arnaud Masset, market analyst at the Swiss bank. “We focused our algorithm on smoothing the downside,” said Masset. “In short, the strategy generates excess returns over bitcoin performance during such periods. The cost of downside protection is that, during uptrend periods, the strategy has the tendency to slightly underperform the Bitcoin’s performance.”

This is a pure algorithmic trading strategy developed by the bank’s quantitative asset management department and is available for trading on the Six Swiss Structured Products Exchange. The Swissquote Bitcoin Active Index comprises data collected from various sources to create propriety indicators, such as technical patterns, realised volatility measures, buy and sell pressure measures, and social media sentiment; and a machine learning algorithm trained to predict the short-term direction of future returns based on those indicators.

The certificate will allocate between 60% and 100% of the portfolio to the cryptocurrency, depending on confidence in the predicted future direction, with the remaining cash invested in US dollars in an effort to reduce volatility. The product follows the launch by Vontobel and Leonteq Securities, last week, of two short mini futures tracking bitcoin on the Swiss stock exchange aimed at enabling investors to profit if the price of bitcoin goes down. “There is plenty of room for further bitcoin appreciation”, despite the crypto currency trading at a record high on the back of a 700% appreciation this year, according to Masset.

The new bearish tracker certificate will allow investors to benefit for the first time from downward movements of the currency, according to Manuel Duerr, head of public solutions at Leonteq. “The short strategy responds to numerous requests from clients following “substantial interest in our bullish tracker certificates on bitcoin which we launched seven weeks ago”.

Leonteq’s new short tracker will increase its value by US$10 if the bitcoin price decreases by US$100 as the certificate follows the inverse bitcoin price movement (adjusted by the conversion ratio of 0.1). If the bitcoin price increases by US$100, the price of the certificate will decrease by US$10. In addition, there will be an early termination of the product once bitcoin reaches the stop loss level of US$15,620. The product is publicly offered in Switzerland and will expire on January 12, 2018. The minimum investment is one certificate or, currently, US$1,400.

Bitcoins have become increasingly popular, with over 16 million people holding the cryptocurrency with not only the digital community making use of it as the “acceptance of bitcoins by businesses and, more recently, also by certain countries has grown”, according to Duerr. In the first quarter of 2017, Japan became the first country to recognise the digital currency as a legal means of payment, with Australia following in July.

“Clients appreciate the possibility of choosing between a long or short investment in bitcoin, while, at the same time, the products can be traded as simple as a bond or a share without the need to open a new account,” said Duerr.

Related stories:

Product snapshot: Vontobel expands Bitcoin offering in Germany

Virtual currency ETNs get hot as first Ethereum trackers follow Bitcoin

Leonteq moves to capitalise on the 'rapid rise' of bitcoin

NYSE rolls out bitcoin benchmark as Nasdaq debuts tracker