Crypto Logs: Crypto Goes from Meme to Mainstream

05/02/22 | Roxanna Islam, CFA

Much like both the broader equity market and Bitcoin (BTC) prices, YTD performance for crypto and blockchain equities has been weaker than desired. Correlations between Bitcoin and broader equity indexes have increased significantly through this year’s volatile market. Although the macro environment is a headwind for riskier assets like crypto and crypto-related equities, broader adoption of Bitcoin—particularly for institutional investors—has been encouraging for longer-term fundamentals, suggesting that crypto is not just an internet fad. More details on key developments from April are below:

Institutional investors are continuing to show interest in cryptocurrencies despite a drop in prices and lower trading volume. Regulatory hurdles and lack of crypto research are currently a deterrent to institutional investor involvement in crypto markets, but last month’s U.S. executive order could serve as a stepping point toward wider adoption (read more here). An increase in institutional trading, along with more institutional research, could add more rationality to Bitcoin markets and stabilize volatility.

  • On April 19, Silvergate Capital (SI), which is one of the largest providers of digital currency infrastructure, announced an 8.9% sequential increase in its number of digital currency customers. Customer growth has already been strengthening for the past few years with a 42.5% annual increase in customers at the end of 2021 (after a 20.5% increase during the prior year). Approximately two-thirds of these customers are institutional investors whose long-term conviction would outweigh short-term price volatility.(1)
  • On April 26, Fidelity, which is the largest 401(k) provider in the U.S., announced that it would be adding an option to invest in Bitcoin within its retirement plans.(2) While details regarding the exact number of employer participants have not been provided, this decision supports investor demand for greater accessibility to add crypto to their long-term investment plans.
  • During April, BlackRock and Fidelity both launched ETFs focused on blockchain and crypto equities—further illustrating investor demand for crypto/blockchain as a thematic investment.(3)

While many investors initially saw Bitcoin as an inflation hedge (like gold), volatility has caused correlations with the broader equity market to increase significantly. Thirty-day correlations between Bitcoin and the S&P 500 Index have climbed to their highest levels since the start of the pandemic in early 2020. Bitcoin’s correlation with tech stocks (measured by the Nasdaq-100) has also increased, and this relationship has been even stronger for crypto-related equities. Both Alerian blockchain and crypto indexes (BCHAIN and CRYPTO) are exhibiting correlations greater than 0.90 to the Nasdaq-100. The recent tech sell-off, which has largely contributed to crypto price declines, has continued to make headlines throughout April, as exemplified by subscriber losses from Netflix (NFLX) and a 1Q22 earnings miss from Alphabet Inc (GOOG, GOOGL). 

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Bottom Line:

Although broader crypto adoption remains one of the strongest drivers of the industry, Bitcoin’s rising correlation with broader equities and vulnerability in the tech sector have contributed to a weaker start to 2022. But as investor participation increases (particularly from larger, institutional investors) Bitcoin (and related equities) could reap benefits from more efficient trading and institutional research.

The Alerian Galaxy Global Blockchain Equity, Trusts & ETPs Index (BCHAIN) is the underlying index for the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC).

The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts & ETPs Index (CRYPTO) is the underlying index for the Invesco Alerian Galaxy Crypto Economy ETF (SATO).

 

Related Research:

Crypto Logs: Geopolitics and Digital Assets

Crypto Mining for Digital Gold is Turning Green

Investing in the Digital Transformation: Accessing Blockchain and Crypto Through Equity Investments

Four Megatrends Elevating the Commercial Space Industry

Investing in Electric Vehicles: What the FUTURE Could Bring

 

(1) SI 1Q22 Earnings Call

(2) Fidelity Launches Product for 401(K) Plan Crypto Investments - Bloomberg

(3) BlackRock Launches Its First Crypto-Exposed ETF With Sizable Coinbase Allocation - Decrypt

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