Industry Updates

Cryptocurrency explosion: Where next in 2022 and beyond?

Understanding the rise of crypto and trading through the ETP wrapper

Theo Andrew

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The outlook for cryptocurrencies over the next 12 months and beyond, the development of the crypto exchange-traded product (ETP) market and how they can be integrated into investors’ multi-asset portfolios were some of the topics discussed in ETF Stream’s webinar, in partnership with HANetf.

The webinar, titled Cryptocurrency explosion: Where next in 2022 and beyond?, started by discussing the recent performance drivers of the crypto market. Taking place hours after Russia’s invasion of Ukraine, which sent bitcoin tumbling 7.5% to below $35,000 on the morning of 24 February, the panel assessed the impact of the conflict on crypto’s performance.

Rafael Zanatta, head of business development at ETC Group, said: “Crypto markets have been volatile on the events of the past few weeks, with a strong correlation to risk assets such as equities, and we have seen a significant drop across markets. As the situation continues to escalate in Ukraine, I expect the crypto market to remain volatile in the short-term.”

More broadly, Zanatta said the adoption and legalisation of crypto by countries and states across the world have been fundamental driver, highlighting recent legislation in California allowing people to pay for government services through crypto as well as wider adoption in Brazil and Canada.

He also pointed to the news that BlackRock announced it would be allowing its clients to invest in cryptocurrencies directly. “The biggest asset manager in the world, with over $10trn in assets under management (AUM), allowing their clients to invest directly into crypto will only bring more investors into this market,” he said.

Crypto is growing up

Given the recent volatility, the panel also took a view on where the nascent asset could be heading over the next 12 months. Charlie Morris, CIO of ByteTree Asset Management, said while volatility remains, it is much less severe than in previous cycles and expects that trend to continue.

“It is outperforming speculative tech stocks and it is not much worse than the Nasdaq, which shows bitcoin is growing up, volatility is coming down, distribution is increasing and the next cycle will be driven by the adoption of institutional investors,” he said.

Zanatta added: “As adoption grows, we should see volatility coming down over the long-term.

It has come down already, but it is a market of 200 million cryptocurrency investors and there is room for growth.”

In addition, Morris said it is still in the process of building its “inflationary credentials”.

“If you look at gold in the 1970s, it went up 27x but had some nasty corrections during that period. If the market does have this inflationary era, what I hope we see is correlations to remain but performance to diverge between traditional assets and bitcoin.”

There is a long-standing comparison between gold and bitcoin as a store of value, but Tom Bailey, head of content at HANetf, said there are a few more similarities that investors should be aware of.

“A lot of people believe that bitcoin will retain its value in a future world of financial anarchy, for gold, it is the belief that it will keep its value in the face of a financially catastrophic event,” he said.

Zanatta added: “Except for being a physical object, bitcoin has most of the characteristics of gold. On top of that, it is easier to store, cheaper to transport and has a finite supply so I suspect it to behave like gold over the long term.”

Away from bitcoin, Thomas Uhm, trader at Jane Street, said different use cases will eventually emerge from different coins. “Over time, as investors become more familiar with the crypto space and innovation occurs across the ecosystem, there will start to be more correlations based on utility and use cases away from bitcoin.”

The growing role of ETPs

While the debate is open as to whether an ETP is the best way for a retail investor to get exposure for crypto, there is little doubt institutional clients are best served by the product when it comes to simplicity, security and portfolio integration.

“It is a superior and easier product to trade for many different reasons,” Uhm said. “It is extremely difficult to trade spot crypto so it solves a lot of problems around access. There are also security issues that using a wrapper like an ETP means investors do not have to worry about, such as losing access to their wallets.”

Baily added: “It is far easier to integrate crypto into a portfolio with an ETP than it is with crypto held elsewhere. It is much easier to rebalance with an ETP and also to manage a portfolio as a whole.”

Crypto ETP investors are also likely to be able to benefit from innovations in the product space such as baskets, staking and thematics.

Zanatta said: “We are going to see the introduction of more sophisticated ETPs into the markets beyond single asset cryptocurrencies. We will start to see baskets based on indices, thematics and products that will allow investors to earn income from staking their crypto assets. We will also see more jurisdictions coming to market. It would be great to see the UK approving crypto, it is a big market that has diverged from the rest of Europe.”

While positive on the product innovation and the emergence of basket ETPs space, Zanatta added there are limitations to the coins that an ETP would be able to track.

“It is about which ones can be tracked,” he continued. “There is a whole ecosystem behind issuing an ETP. You need market makers to be able to trade the assets. It is not possible to simply pick a niche coin and decide to list an ETP on it. At ETC Group, for example, we only work with regulated custodians and they need to be able to take custody of those coins.”

To watch the full webinar, click here.

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