This is sentiment that wary bitcoin and crypto-correlated equity investors probably don’t want to hear but definitely need to.
Some market observers believe the largest digital currency could continue floundering in the first quarter, potentially setting off a string of bankruptcies among financially flimsy miners, before giving way to an impressive rebound in the second half of 2023.
Assuming that forecast, which was offered up in a recent note by VanEck head of digital assets research Matthew Sigel, proves accurate, it will affect bitcoin and exchange traded funds such as the VanEck Digital Assets Mining ETF (DAM).
“The MVIS® Global Digital Assets Mining Index median market cap is now only $180M, with nearly all constituents burning cash and trading well below book value. With Bitcoin mining largely unprofitable given recent higher electricity prices and lower Bitcoin prices, we predict that many miners will restructure or merge. Ripple losing its SEC lawsuit (possible in Q1, more on this below) may coincide with this final downdraft, which would take out nearly the entirety of the post-2020 halving bull market,” noted Sigel.
The MVIS Global Digital Assets Mining Index is the underlying benchmark for DAM — an ETF that debuted in March and holds 25 stocks. The fund is struggling this year as declining bitcoin prices weigh on miners’ profitability while forcing some to liquidate holdings of the cryptocurrency to raise cash.
Additionally, like many other digital assets and related fare, DAM is being pinched by the collapse of FTX. That punishment is arguably unjust because not all of the ETF’s lineup is exposed to FTX and some of the fund’s member firms have business lines that have nothing to do with crypto. The largest holding, Block (NYSE:SQ), is a prime example.
Still, there’s no denying the positive impact a bitcoin rally — assuming it materializes — would have on miners’ share prices and thus DAM. Sigel said it could be possible in the back half of 2023.
“In developed markets, we think consumers will see Bitcoin act as a store of value over time and a hedge against M2 inflation rather than overt CPI inflation. In emerging markets, the focus is more on remittances and neutral alternatives to dollar hegemony,” Sigel concluded. “Meanwhile, should our recession expectations materialize, the Federal Reserve would likely pause raising rates amidst softening inflation, while money printing and government budget deficits continue. Merely a lack of bad crypto-specific news, under the above scenario, could cause the price of Bitcoin to climb a wall of worry back to $30K again.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.