This story will appear in the forthcoming December issue of Investment Executive.
As 2022 began, cryptocurrencies appeared to be going mainstream. Prominent institutional investors had made significant crypto-related investments the year prior, lending legitimacy to the space.
But following a series of failures in the industry, including the collapse of Bahamas-based FTX Trading Ltd. in November, bitcoin and ether prices are now down by about 75% from their all-time highs a year earlier — and financial advisors and crypto experts are divided as to the industry’s fate.
Many crypto skeptics see the collapse of FTX as confirming their worst suspicions.
“[Cryptocurrency] is highly speculative, highly volatile and it’s something you steer away from until we see signs of maturity in that sector,” said Andrew Pyle, investment advisor with CIBC Wood Gundy in Peterborough, Ont.
While the blockchain technology that underpins cryptocurrency is likely to offer investment opportunities in the future, the sector has no place today in the portfolios of the “vast majority” of clients, said Pyle, who has never recommended crypto investments.
The fallout from FTX’s collapse means “you’re looking at a number of years before you get broader public trust in cryptocurrencies,” said Mark Noble, executive vice-president of ETF strategy with Horizons ETFs Management (Canada) Inc.
“That said, I don’t think the crypto ecosystem goes away,” Noble said, suggesting that blockchain innovations will continue during what could be a long “crypto winter” of little investor interest. Horizons ETFs offers both long and short bitcoin funds.
Institutional investors who believe in the transformative potential of blockchain technology are likely to “double down” on investments, said Michael Zagari, an investment advisor in Montreal with Burlington, Ont.-based Mandeville Private Client Inc.
“Just because one investment [FTX] didn’t work doesn’t mean they’re going to stop there,” said Zagari, who suggests there will be “a lot of deals to be had” but believes the industry will remain volatile for the next 12–18 months.
He recommends allocating no more than 10% of a portfolio to cryptocurrency or crypto-related investments for risk-tolerant clients with at least a 10-year horizon, as part of their equity exposure.
FTX’s bankruptcy has caused other crypto exchanges to suspend withdrawals, with some struggling to continue operating.
And “there are going to be more shoes to drop. We just don’t how many or how big,” said Alex Tapscott, managing director of the digital asset group with Ninepoint Partners LP, during a Nov. 24 webinar.
Characterizing himself as “short-term bearish, long-term bullish” on cryptocurrency, Tapscott suggested that the Ontario Teachers’ Pension Plan Board and the Caisse de dépôt et placement du Québec exposed themselves to “huge concentration risk” by each investing in a single crypto firm rather taking positions in established cryptocurrencies. (See “Highs and lows,” below.)
Brian Mosoff, CEO of Toronto-based Ether Capital Corp., also said bitcoin and ether will endure through this crash, even if some exchanges don’t. “Nothing has changed [in terms of the technology],” Mosoff said. Bitcoin and ether “still do exactly what they set out to do: the fundamentals are the same; the value proposition is the same.”
Retail investors seem to agree. While crypto ETF assets under management dropped by $4.1 billion between Jan. 1 and Nov. 30, only $66 million of the decline was due to outflows, according to data from National Bank Financial Markets (NBFM).
“It seems like the crypto ETF users in Canada are sticking to their allocations,” said Daniel Straus, director of ETF research and financial products research with NBFM, in an email to Investment Executive. “Bitcoin and ether are both extremely risky and speculative, but the anemic outflows from Canadian crypto ETFs suggest their investors may be treating them like ‘moonshot’ long-term bets.”
Mike Tropeano, senior director of wealth consulting with Broadridge Financial Solutions Inc. in Boston, said he expects global regulators to “be much harsher” on the crypto industry after the collapse of FTX. What will follow over the next few years is “a thinning of the herd,” a flight to safety to the most established names, and more innovation.
“The information is still flowing daily, [not only] with regard to FTX but [also] with the overall market,” Tropeano said. “Anyone who is looking to play a role in the market — the [financial] advisor especially — requires a lot of diligence to stay on top of what is happening.”
Mosoff suggested some “advisors are probably relaxing a little bit,” knowing that clients are less likely to be asking about investing in cryptocurrency “until the next cycle starts.” But he said that cycle will come, and advisors should use the crypto winter to educate themselves.
While the fall of FTX and BlockFi Lending LLC have shaken the market, the depth of the crypto winter may depend on how the industry’s established behemoths weather the storm, said Daniel Gonzalez, research analyst and consultant in Toronto with California-based Javelin Strategy & Research: “If a Coinbase, crypto.com or Binance were to go down the drain, I think that would end crypto adoption for retail investors for a while.”
In many ways, the advisor’s role now isn’t different from what it was when cryptocurrencies were trading at their peaks.
“There’s absolutely a role for advisors to play here, and it’s to be the voice of reason [in terms of allocation to cryptocurrency],” Mosoff said. “But I don’t think that’s saying, ‘I’m going to rule out an asset class entirely.’”
That said, cryptocurrency has not proven to be an inflation hedge or a diversifier, said Jason Heath, managing director of Objective Financial Partners Inc. in Markham, Ont. Furthermore, “higher interest rates and a likely recession are sure to hinder speculative investments like cryptocurrency in 2023.”
Pyle said expecting retail investors to understand is unreasonable “if institutional investors, traders, analysts, portfolio managers, hedge fund managers and even regulators can’t understand this space.”
An advisor’s “paramount responsibility is to protect your clients’ wealth,” Pyle added. “Protect it from inflation, protect it from running out and protect it de facto from things that most people don’t understand.”
Highs and lows in the crypto space
2021
Feb. 18: Toronto-based Purpose Investments Inc. launches world’s first bitcoin ETF.
October: Ontario Teachers’ Pension Plan Board (OTPP) invests US$75 million in FTX Trading Ltd. through its Teachers’ Venture Growth platform.
Oct. 12: Caisse de dépôt et placement du Québec invests US$150 million in New Jersey-based Celsius Network LLC, a crypto lender.
Nov. 10: Bitcoin hits its all-time intraday high of US$68,789.63.
Nov. 16: Ether hits its all-time intraday high of US$4,891.70.
2022
January: The OTPP invests another US$20 million in FTX.
Jan. 10: Fidelity Investments Canada ULC announces it will add 1%–3% exposure to bitcoin in its asset-allocation ETFs. (The target allocations remain the same as of press time.)
Feb. 14: New Jersey-based BlockFi Lending LLC agrees to pay the U.S. Securities and Exchange Commission US$100 million in penalties and pursue registration of its crypto lending product.
March 31: Canadian cryptocurrency ETFs amass $6.1 billion in assets under management, according to data from National Bank Financial.
May: TerraUSD stablecoin and Luna, a linked token, crash.
June 18: Bitcoin plunges below US$25,000. It was trading above US$50,000 in early May.
July 6: Voyager Digital Ltd., a New York-based crypto broker, files for Chapter 11 bankruptcy.
July 13: Celsius Network files for Chapter 11 bankruptcy.
Aug. 17: Caisse de dépôt et placement du Québec announces it is writing down its entire investment in Celsius Network.
Nov. 11: FTX files for Chapter 11 bankruptcy.
Nov. 17: OTPP announces it will write down its entire investment in FTX.
Nov. 21: U.S. senators Elizabeth Warren, Dick Durbin and Tina Smith send a letter to FMR LLC (Fidelity Investments) asking the firm to reconsider a decision to allow 401(k) plans to offer access to bitcoin.
Nov. 27: Bitfront, a U.S. crypto exchange, announces it will cease operations in March 2023. The platform stated the decision “is unrelated to recent issues related to certain exchanges that have been accused of misconduct.”
Nov. 28: BlockFi files for Chapter 11 bankruptcy, citing exposure to FTX.