Portfolio Perspective –

Portfolio Perspective

February 1, 2022

Crypto assets – Risks magnified, Bitcoin myths dispelled

What happened

The repricing of risk assets since the beginning of the year has been especially pronounced in cryptocurrencies. The cryptocurrency ecosystem is experiencing its second 50% drawdown in the last nine months with a 30% correction year-to-date.

Bitcoin accounts for 43% of the the entire cryptocurrency universe’s market value. Its proponents hail it as –

  • An equity hedge
  • An inflation hedge
  • A store of value

These claims are specific to Bitcoin, not the broader cryptocurrency universe. Time will tell if these three attributes are validated but in the short term they have proven to be more myth than reality.

Short-term volatility is the price of admission to investing in digital assets such as cryptocurrencies, as it is with any emerging asset class, but should not be the only yardstick. New asset classes typically experience periods of euphoria balanced by periods of turmoil as they emerge. The long-term opportunity lies in the technology platform underlying various crypto-related protocols, including smart contracts, exchanges, and decentralized applications. 

Bitcoin and Ethereum trim gains

Bitcoin and Ethereum together comprise 62% of the total cryptocurrency token market value, dominating the space’s price action. Drawdowns in 2021 were largely highlighted by unique events such as China’s ban on crypto mining and ongoing regulatory concerns. More recently however, drawdowns have been somewhat synchronized with other risk assets like growth-related equities. Broad macro concerns such as a more hawkish Federal Reserve (Fed), slowing economic growth, and volatile geopolitics have been key drivers pushing Bitcoin and Ethereum below key support levels. Bitcoin has gained roughly 10% and Ether over 80% over the last year but it has been a roller coaster ride.Furthermore, fundamentals and demand for real estate should be supported by a U.S. economy that we expect to grow above trend through 2023 alongside society’s improved adaptability to new variants. We expect occupancy growth and rents to accelerate, ultimately supporting revenue growth. That said, demand growth is likely to vary based on sector, underscording our favorable view of REITs’ sector composition.

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