cryptocurrency

As a relatively young asset class, the cryptocurrency space is evolving rapidly. In today’s post we review some recent developments and provide a brief look into what we expect from the cryptocurrency market in 2022.

Crypto volatility creates opportunity

Historically cryptocurrency investors have experienced very high volatility. Since 2014, Bitcoin has had an annualized volatility of 81%. This eye-popping number is nearly six times higher than the realized annual volatility for the S&P 500. (Source: portfoliovisualizer.com BTC Jan 2014 – Dec 2021)

Last year saw a similar trajectory. Even though Bitcoin was up 59%, volatility still remained high at 80% with negative returns in six of the 12 months.  (Source: portofoliovisuializer.com BTC 2021)

I write this not to scare you, but to illustrate that volatility can be a good thing. If paired with a dollar cost average strategy, volatility can capitalize on opportunities to access this new and developing technology. We see no reason for this volatility to change in 2022, with the first few weeks of the year serving as an admittedly small sample size.

SEC likely to approve BTC ETF

In 2021 the U.S. Securities and Exchange Commission (SEC) approved the first bitcoin ETF,  which follows a futures-based strategy.

However, a futures-based strategy may not live up to investor expectations of accurately tracking the price of the underlying asset. Bitcoin futures typically trade in “contango,” a futures market situation in which longer-dated contracts trade at a higher price than shorter-dated contracts.

This can result in significant underperformance, which may persist for as long as Bitcoin remains in contango.

According to the SEC, its mission is “to protect investors; maintain fair, orderly, and efficient markets,” and it “strives to promote a market environment that is worthy of the public’s trust and characterized by transparency and integrity.” Given the potential short-comings of a futures-based strategy, we believe the SEC will likely approve a spot Bitcoin ETF before the end of 2022.

Ethereum moves to PoS

The primary goal of an effective decentralized network is to ensure that nobody spends the same money twice. In order to ensure this goal holds true, networks use consensus mechanisms to validate legitimate transactions. Proof of Work (PoW) and its newer sibling Proof of Stake (PoS) are the two consensus mechanisms used by most cryptocurrencies. PoW networks include Bitcoin and Ethereum, while newer cryptocurrencies like Ethereum 2.0, Cardano and others rely on PoS validation.

While PoW networks have developed a well-established technology and trusted network, there are limits to their growth. Steady increases in the number of transactions result in a serious drawback of PoW networks, the significant energy consumption needed to validate these transactions. In a quest to solve this dilemma, the cryptocurrency community set out to solve the energy consumption issue by creating PoS. Improved energy efficiency is a major driver for the validators staking the network and the driving force behind Ethereum’s move to a PoS network from PoW. It’s expected that this transition will take place during the second quarter of 2022.

Countries adopt Bitcoin as legal tender

2021 proved to be a milestone year for Bitcoin as it continues to evolve from being a small technology project into fulfilling its promise as a medium of exchange. El Salvador was the first country to adopt Bitcoin as legal tender. The rationale for the adoption was threefold:

• to formalize the country’s economy, as most Salvadorans don’t have bank accounts;
• to make it faster and cheaper to send remittances abroad; and
• to attract foreign direct investment into the country.

We fully expect to see other countries to follow El Salvador’s lead and adopt bitcoin as legal tender.

The Global Crypto Adoption Index tracks the on-chain cryptocurrency value received, on-chain retail value transferred and the peer-to-peer exchange trade value, all weighted against the purchasing power parity per capita.

This index shows that Vietnam is well ahead of the world on Bitcoin adoption and is a likely candidate to consider adding crypto as legal tender. Asian countries round out the top three adopters with India and Pakistan coming in second and third, respectively. Ukraine leads adoption in Europe, while Kenya and Nigeria lead in Africa.

These developments suggest 2022 to be an important year in the continuing adoption of cryptocurrencies. Stay tuned for future posts on how to weight cryptocurrency within a well-diversified portfolio.

Source: https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index/

Disclosures

The products and services offered by Arxnovum are available to qualified investors in certain provinces and territories of Canada. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
 
All investments contain risk and may lose value. Investing in the cryptocurrency market is subject to risks.  Cryptocurrency, often referred to as “virtual currency” or “digital currency”, operates as a decentralized, peer-to-peer financial exchange and value storage that is used like money. Cryptocurrency operates without the oversight of a central authority or the banks and is not backed by any government. Even indirectly, cryptocurrencies such as bitcoin may experience high volatility, and related investment vehicles may be affected by such volatility. Cryptocurrency is not legal tender. Federal, state, provincial, territorial or foreign governments may restrict the use and exchange of cryptocurrency, and regulation in North America is still developing. Cryptocurrency trading platforms may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware, which could have an adverse impact on the net asset value per unit of the Fund. Please consult the Funds Term Sheet for a complete list of risks.
 
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Arxnovum Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither Arxnovum Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.