It’s a big week for us at Purpose as we celebrate the one-year anniversary of launching Purpose Bitcoin ETF (BTCC), the world’s first Bitcoin ETF. And wow, what a year it’s been.
The past year has ushered in a lot of exciting new crypto and blockchain developments. We’re excited to see this momentum build and we’ll continue to drive innovation in the space in 2022. That said, crypto is still very much an emerging asset class. Investors will need to stomach volatility in the space and think about the long game. At Purpose and Ether Capital, we see five opportunities and five risks for investors to consider if they’re looking to get exposure to the crypto market.
Five Opportunities in the Space
1. Access Points for All Types of Investors
Our Purpose Bitcoin ETF launch was a big milestone and helped pave the way for retail investors to get access to the market in a fast, easy, and secure way. After our launch, other Canadian firms followed. Then, in October 2021, after years of regulatory pushback, the U.S. Securities and Exchange Commission (SEC) approved two Bitcoin futures ETFs for launch in the United States. Although the U.S. futures ETFs were criticized for being ineffective and costly, important progress continues to be made for crypto’s adoption into mainstream investing, allowing all different types of investors access to the space.
Why is this an opportunity? There are now several access points for different types of investors, ranging from small retail investors to large institutions. There are also credible exchanges for those who want to be crypto native. We have various options that we didn’t have before, including investing in crypto through structured products and participating natively at the protocol level. The public can also dip their toes in the market by signing up for crypto reward points on apps like Drop.
2. More Infrastructure than Ever
There has been a tremendous amount of development in the space over the past few years. In August 2021, Ethereum’s London hard fork upgrade took effect, marking a significant milestone for its transition from proof of work to proof of stake. Last November, Bitcoin executed Taproot – its first major upgrade since 2017, which opened the door for improved scalability and new privacy protection features.
Why is this an opportunity? There are more eyes and talent in the crypto space than ever before. Infrastructure is being built for the long term, regardless of the price in the short term. These are all signs that the asset class is here to stay, and it's important investors pay attention to what’s happening in the developer community to understand how fundamental this innovation is to our financial future.
3. Growing Crypto Use Cases
There appears to be growing support for innovation like stablecoins—crypto assets that can be pegged to fiat currency or precious metals—as fixed-value assets in both centralized and decentralized markets. The stablecoin market skyrocketed last year to reach more than US$177 billion in January 2022. Non-fungible tokens (NFTs) and decentralized finance (DeFi) also exploded in popularity last year with NFT sales reaching US$25 billion.
Why is this an opportunity? There’s a whole new group of investors who are paying attention to crypto because of these things like stablecoins, NFTs, and DeFi. As different use cases gain popularity, crypto will become more mainstream and could soon become an indispensable part of life, much like e-commerce, the Internet, and your morning coffee.
4. Regulation Clarity
Growing demand by businesses, investors, and institutions for clarity around crypto regulation has turned up the heat on regulators to issue appropriate guidance. Although there’s no specific timeline, we can expect there will eventually be a regulatory framework when it comes to the crypto market. Canada has done a great job so far when it comes to crypto adoption. Last year, the Purpose Bitcoin ETF (BTCC) was approved, making it the first crypto spot ETF in the world to be greenlit by market regulators. We’re seeing more structured products emerge and investors can now access different trading platforms that offer cryptocurrencies, which is an encouraging sign.
Why is this an opportunity? We believe as crypto gets regulated it’ll bring comfort to investors who might be on the fence, and help businesses use crypto to operate in a compliant manner. It will also help organizations determine where they fit into the industry so they can develop new products or expand their offerings.
5. Global Institutional Commitment to Support Crypto Demand
Following overwhelming demand in 2020 and 2021, banks are starting to figure out how to offer crypto custody and how to sell crypto products to their clients. We’re also seeing big corporations foray into the sector. Amazon is pushing forward with more crypto services for businesses, Reddit is turning karma points into crypto, and Budweiser is even launching Ethereum NFTs.
Why is this an opportunity? As cryptocurrency and blockchain technology integrate into mainstream culture, the concepts of crypto and DeFi will become a normalized, legitimate part of everyday life and business.
Five Risk to the Space
1. Interest Rate Hikes
The United States Federal Reserve has indicated it will soon increase interest rates, which could spook the market and cause investors to sell off their crypto assets. Although some view crypto as a hedge against inflation, we believe this practice is something that will play out over time and that crypto is still very much a risk-on asset vulnerable to rate hikes.
Why is this a risk? New crypto investors—whether institutional investors or 2019, 2020-era retail investors—may not yet have the conviction that it’s an asset they want in their portfolios long term. Because of this, we could see a pullback in the space in the face of rate hikes, similar to what happened during the broad market sell off in late January.
A blessing and a curse of crypto’s growing mainstream adoption is the increase in development of competing cryptocurrencies and blockchains. Currently, there isn’t direct competition with Bitcoin, but we’re seeing alternative Layer-1 networks compete Ethereum like Solana and Cardano.
Why is this a risk? Many people see the potential in these blockchains and are pouring time, energy, and effort into making them faster, more secure, and more energy efficient. It’s possible that investors might gravitate to one over the other, which could make it difficult for one particular cryptocurrency like Ether to increase in value as competition heats up in the sector.
3. Protocol Upgrade Bugs
Let’s not forget, this is new, disruptive technology we’re talking about and there could always be bugs in the system. Ethereum had a fairly major bug on the network when it first started in 2015. And while these bugs are often little and inconsequential, there’s always the possibility that a black swan event could impact the market.
Why is this a risk? There are a lot of upgrades in store for crypto protocols. The most significant upgrade this year is Ethereum 2.0—Ethereum’s transition from proof of work to proof of stake. Although we’re extremely excited about this upgrade and of course are bullish on Ether, there’s always the risk that a bug sets back its progress or shakes investor confidence in the protocol.
Blockchains like Ethereum and Bitcoin have been around for quite some time and are properly stress-tested. With armies of developers working on both networks around the clock, the possibility of a hack on the actual protocols is rather unlikely. Crypto exchanges and crypto wallets are most common targets of crypto heists and data breaches. So far, the main institutional-grade crypto custodians (e.g., Coinbase, Gemini, BitGo, etc.) have proven to be extremely secure, but we encourage investors to do their homework and properly research exchanges and wallets before directly investing in the crypto market. There are also concerns when it comes to token frenzies and rugpull scams, which is why it’s important to consider blue-chip assets like Bitcoin and Ether over the latest meme coin.
Why is this a risk? A big part of the hesitancy around crypto as an asset is its newness: this unfamiliarity leads to concerns about security. A major hack would not only be detrimental for the exchange and the investor, but it would set back progress made on crypto’s legitimacy and safety as an asset class.
5. New Regulations
Canadian and U.S. market regulations could be introduced that shift how the asset class is viewed and restrict access points. Last year, both China and EL Salvador made news as China banned cryptocurrency trading and mining and El Salvador adopted Bitcoin as its legal tender.
Why is this a risk? As an emerging asset class, regulators are still trying to figure out how to treat cryptocurrency. The U.S. has not yet greenlit a spot crypto ETF as the country tries to figure out how to properly regulate the nascent industry. Until further guidance is issued, there’s always a risk that the regulations passed will be restrictive and stifle innovation in the sector. That aside, earlier we outlined the bull case on crypto regulation, as we believe clarity surrounding regulations could also help guide the market and reassure investors.
Overall, despite the risks, we believe in the potential of cryptocurrency and take a long-term view at the possibilities for innovation in the space.
- Vlad’s Take: Crypto, blockchain technology, and DeFi will help usher in the next generation of finance from asset management and wealth management to SMB banking. There’s a lot to be excited about in the space, and we’re eager to continue to drive innovation in this area.
- Brian’s Take: Crypto will become part of our lives the way the Internet has. There’ll be some bumps in the road as crypto becomes normalized, but people are getting used to these concepts. Decentralization is no longer such a crazy idea and smart contracts are already starting to usurp traditional finance. We’re excited to see what’s next.
— Vlad Tasevski, COO and Head of Product at Purpose Investments, and Brian Mosoff, CEO of Ether Capital
Purpose Investments Inc. (“Purpose”) and Ether Capital Corp. (“Ether Capital”) are affiliated entities. Ether Capital also provides consultation to Purpose on digital asset investment products. You can read more about how Purpose and Ether Capital work together here.
The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “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 in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader and the viewer is cautioned to consider the FLS carefully and not to place undue reliance on the 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.