Highly speculative crypto coins and tokens are slumping.

  • Crypto coins and tokens rallied through much of 2021 despite regulatory pressure, fraud, and other risks.
  • Now, the Fed's aggressive signaling that it will hike interest rates from March has unsettled investors.
  • Bitcoin and ether are now down 38% and 34%, respectively, from their November 2021 highs.

But the underlying technology and its application show obvious promise.

  • Financial services appears most ripe for DLT-led disruption in areas like payments, lending, private placements, and trade finance.
  • More broadly, decentralized finance (DeFi) could help reduce financial system frictions, broaden access to underbanked communities, and address inequality.
  • Self-executing "smart contracts" could enable previously unviable products or services in industries like healthcare, public services, consumer and luxury goods, and more.

So we advise investors to consider other ways to position for distributed ledger technology adoption.

  • We view direct exposure in crypto coins or tokens as attractive only for highly risk-tolerant and speculative investors.
  • Instead, we focus on DLT enablers and service providers, like select chipmakers, software companies, and data center players.
  • We also like platform companies that can tap DLT growth in their own sectors, ranging from financial services and technology to supply chain management.

Did you know?

  • Bitcoin's total market share within the broader crypto market declined from around 68% one year ago to around 40%, as of 10 January, according to CoinMarketCap data.
  • Crypto coins are highly correlated to each other, making diversification challenging. They are also highly volatile, and their track record as either portfolio diversifier or inflation hedge is mixed at best.
  • El Salvador on 7 September officially adopted Bitcoin as legal tender, alongside the USD. The deployment day was met by a sell-off in Bitcoin prices and violent street protests.

Investment view

We view crypto coins and tokens as highly speculative, and we think that investors should not build strategic exposure to them within their financial portfolios. Instead, we recommend considering DLT enablers, platform operators, and companies servicing the crypto ecosystem. For more on how to invest in long-term themes, click here.

Content is a product of the Chief Investment Office (CIO).

Original report - Is another crypto winter here?, 10 January 2022.