Crypto investors still have a lot to be thankful for as 2022 comes to a close – but it’s difficult to ignore the obvious...
That being the collapse of crypto exchange FTX and the contagion it continues to spread across the industry, made evident again this week when crypto lender BlockFi declared bankruptcy.
Of course, we should take note that BlockFi’s difficulties are not at all unexpected because the company began reducing headcount as its value dropped by more than 66% earlier this year. The FTX collapse was just a nail in the troubled firm’s coffin.
All that said, those of us who are experienced investors know that often the times of greatest calamity provide some of the best investment opportunities.
In addition to seeking advice on how to protect and store their own digital assets amid the chaos, the crypto-curious clientele of financial advisors are surely interested in hearing about these opportunities – but where are they?
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One likely source of opportunity is already being exploited by leading investors like Cathie Wood, chief investment officer of technology-oriented ARK Investment Management: crypto funds.
The Grayscale Bitcoin Trust (GBTC) has been trading at as much as a 45% discount to their net-asset value in recent weeks. (Grayscale is a CoinDesk sister company.) Several other closed- and open-ended crypto funds have been trading at similarly steep discounts.
If one feels fairly confident that the value of the digital assets these funds hold will start to rise once again, then buying funds at such a large discount could be the rough equivalent of buying a dollar for 55 cents.
Of course, there’s no guarantee that such funds will trade at a premium to their assets – or even reach par in the future – but most financial assets demonstrate some level of reversion to the mean.
Options and futures
Another potential option for crypto-curious investors seeking a little security: options, according to emailed comments Simeon Hyman, global investment strategist at exchange-traded fund (ETF) issuer Proshares Investments.
“Bitcoin futures-linked ETFs, such as ProShares Bitcoin Strategy ETF (BITO) and ProShares Short Bitcoin Strategy ETF (BITI), provide a belt-and-suspenders approach,” wrote Hyman. “They use regulated futures to gain exposure to bitcoin-linked returns, and they do so in the efficient, regulated wrapper of an ETF.”
Hyman noted that ProShares bitcoin futures ETFs have been trading with tight spreads and little deviation from their NAV, despite the recent volatility in crypto asset prices.
Major institutions, including large pension funds such as the Ontario Teachers Pension Plan and private investment specialists like Sequoia Capital are writing off millions of dollars of investments in FTX.
As a result of these tax deductions, there should be a bit of a chill in institutional investment into the crypto space as public pensions in particular are scrutinized for their allocations. This chill is also spilling over into retail investors spooked by the swoon in token prices and the wave of bankruptcy filings.
Publicly traded crypto stocks such as Coinbase Global (COIN), operator of the Coinbase crypto exchange, have experienced declines in value of nearly 90% from their 52-week peak. While many crypto stocks may have been overvalued during retail investors’ digital gold rush, today’s stock pickers may find opportunities for valuation expansion in some companies.
Or, you know, just buy the tokens
Despite the recent swoon in token prices, rising uncertainty about their future trajectory and even the doubts about the current crop of crypto tokens’ long-term viability, it might not be such a bad idea just to buy the tokens themselves, according to recent research from the CFA Institute.
Over the past 12 to 18 months, crypto critics have seized upon token prices’ growing correlations to U.S. equity indexes, particularly large-capitalization indexes like the S&P 500 and sector funds like XLK, the iShares ETF covering the U.S. technology sector.
The CFA Institute, in researching asset prices from the past three years, dispelled some of these concerns by finding that five of the largest crypto tokens – BTC, ETH, LTC, XRP and ADA – have relatively weak correlations compared to a full range of equity style indexes and sector ETFs. While the correlation is still positive – when the indexes go up or down the tokens follow in the same direction – it's not a one-to-one correlation.
“Cryptocurrencies’ low positive correlation with mutual funds and ETFs may indicate an increase in cross-market trading and signal crypto’s growing popularity,” wrote the CFA Institute’s researchers.
“Moreover, in a rising interest rate environment and amid the diminished efficacy of the traditional 60/40 equity/bond portfolio, crypto’s weak correlation to traditional assets may offer potential diversification benefits for long-horizon investors who can withstand added short-term volatility. Not all cryptocurrencies display the same lack of correlation to traditional assets, however, so investors need to be discerning about which ones they target.”
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