This reinforces our views about the drawbacks of direct crypto exposure. But the technology underlying digital assets holds plenty of promise for investors, and we see a range of opportunities in companies involved in deploying Distributed Ledger Technology applications, or building the infrastructure behind them.

The recent price decline weakens key arguments in favor of direct crypto exposure.

  • Bitcoin and ether are now down 39% and 41%, respectively, from their November 2021 highs, undermining the view that cryptos provide protection against equity falls or higher inflation.
  • In January, a 17% fall in Bitcoin and 27% decline in Ethereum coincided with the worst January for the S&P 500 since 2009 and the release of the highest US inflation release since 1982.

But the technology underlying cryptos has plenty of potential.

  • Distributed Ledger Technology (DLT) has the potential to lower the cost of transactions, leading to a potential USD 1 trillion boost to global GDP over this decade.
  • Decentralized finance (DeFi) could help reduce financial system frictions, broaden access to under-banked communities, and address inequality.
  • We see applications in industries from healthcare, consumer and luxury goods, and more.

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

  • We advise investors to focus on DLT enablers and service providers, like select chip-makers, 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 42%, as of 14 February, according to CoinMarketCap data.
  • Crypto coins are highly correlated to each other, making diversification challenging. They are also very 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 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 in their financial portfolios. Instead, we recommend considering DLT enablers, platform operators, and companies servicing the crypto ecosystem.

Main contributors - Jon Gordon, Michael Bolliger, Dominic Schnider, Sundeep Gantori, Michael Gourd

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

Read original report - Is the crypto rally over?, 14 February 2022.