As we try to get a hand on the sudden rise of digital assets, including cryptocurrencies like bitcoin and blockchain technology, investors can turn to exchange traded funds to access this growing space.
In the recent webcast, Digital Assets 101: What Crypto Means for Portfolios, Rene Reyna, head of thematic and specialty product strategy ETFs and indexed strategies at Invesco, explained that the total cryptocurrency market capitalization was near $3 trillion in November, with the combined shares of bitcoin and ethereum making up 62% of the total market. Bitcoin, the most popular and valuable coin, was up 126% year-to-date.
Reyna argued that bitcoin has been a great portfolio diversifier for any traditional mix of stocks and bonds, despite its history of volatile swings. For example, bitcoin tokens have exhibited a 0.25 correlation to the S&P 500, a -0.19 correlation to the U.S. Agg, and a -0.23 correlation to the U.S. dollar.
Cryptocurrencies are also making headway into mainstream investments as traditional centers of influence are beginning to buy into the nascent asset class. For instance, nearly eight in 10 institutional investors feel that digital assets have a place in a portfolio. About 89% of companies believe that their current business models will not be economically viable through 2023. Additionally, 81 countries representing 90% of global GDP are now developing a Central Bank Digital Currency or CBDC.
Reyna pointed out that while new areas are always emerging, four key spaces to keep in mind are digital payments, decentralized finance, stores of value (like bitcoin), and “Web 3.0”, which is a new ecosystem based on blockchain, including things like digital property and contracts.
“Blockchains are like plumbing; if they run smoothly, a user shouldn’t hear about them. A blockchain is an immutable database or ledger that allows data to be recorded and distributed,” Reyna said.
Specifically, Reyna explained that like the internet itself, blockchain has no central computer, relying on a global network of computers or “nodes.” All entries or transactions are validated and agreed upon by consensus across the network, ensuring accuracy. Any changes to the system’s operations or information require a majority of the network’s computing power to agree to them.
Meanwhile, cryptocurrencies are decentralized digital money based on a distributed ledger called blockchain. The global cryptocurrency market is comprised of over 11,000 coins across hundreds of exchanges and has reached a total market capitalization of over $2 trillion, with 62% allocated to bitcoin and ethereum. Managing coin investments directly comes with risks, especially managing a digital account or “wallet.”
Looking ahead, Reyna theorized that as digital assets mature, a new taxonomy is growing around emergent business silos, and new ones are constantly being created. The new avenues of growth are being created on these basic technological building blocks. Specifically, these include the four previously mentioned key spaces.
As more investors look into digital assets, Reyna highlighted three ways to access the space, including broad ecosystem exposure through companies that engage in digital assets, derivative ownership that accesses cryptocurrencies via derivatives, and physical ownership or directly holding cryptos.
“The road to wider adoption can see volatile swings, especially when investing more narrowly in a single coin,” Reyna said. “None of this negates the incredible importance of this transformative technology, though it does complicate the investment case. As the crypto economy grows, including crypto-related equities could better fit an investment portfolio while targeting the business opportunity the blockchain represents.”
Investors who are interested in gaining exposure to the digital assets market have a number of options to choose from, such as the recently launched Invesco Alerian Galaxy Crypto Economy ETF (SATO) and the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC).
Both new ETFs use equity-based approaches to deliver to investors participation in the growing digital assets ecosystem. That’s relevant for multiple reasons, one prominent example being the increasing adoption rates of crypto, which are generating buzz among market participants. Likewise, many investors find this asset class compelling, but they may prefer indirect exposure over the volatility associated with owning specific digital tokens.
SATO tries to reflect the performance of the Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index. The underlying benchmark is comprised of stocks of digital asset companies, which are companies that are materially engaged in cryptocurrency, cryptocurrency mining, cryptocurrency buying, or enabling technologies and exchange-traded products and private investment trusts traded over-the-counter that are linked to cryptocurrencies.
BLKC tracks the Alerian Galaxy Global Blockchain Equity, Trusts and ETPs Index. The underlying benchmark is comprised of stocks of companies that are materially engaged in the development of blockchain technology, cryptocurrency mining, cryptocurrency buying, or enabling technologies and exchange-traded products and private investment trusts traded over-the-counter that are linked to cryptocurrencies.
Financial advisors who are interested in learning more about digital assets can watch the webcast here on demand.