Bull vs. Bear is a weekly feature where the VettaFi writers’ room takes opposite sides for a debate on controversial stocks, strategies, or market ideas — with plenty of discussion of ETF ideas to play either angle. For this edition of Bull vs. Bear, James Comtois and Nick Peters-Golden discussed whether crypto ETFs are back in play for investors and advisors.
Nick Peters-Golden, staff writer, VettaFi: Hi James! I’ve been looking forward to this topic for a while. A lot has happened in crypto-land since last year’s FTX debacle. Markets have, I believe, since emerged from the dead of “crypto winter” and the space has grown better, for it. Crypto ETFs are some of the top-performing funds based on YTD returns, and we can’t ignore that any longer.
The regulatory outlook remains tough, but it is progressing, nonetheless, while the use cases for crypto ETFs are still pretty applicable to the current market, too.
A Haven for Fraud
James Comtois, staff writer, VettaFi: Ahoy there, Nick! I agree, things are indeed looking up for crypto. But despite the crypto winter ending, I think cryptocurrency’s benefits will freeze up before we know it.
The asset class (if it can even be called that — more on that later) is a haven for fraud. The collapse of FTX and the arrest of Sam Bankman-Fried are features, not bugs. They’re a Ponzi scheme wrapped in a pyramid scheme.
Just look at the way the SEC has dealt with cryptocurrency. The U.S. regulatory agency has recently charged Coinbase and Binance for operating as unregistered securities exchanges, brokers, and clearing agencies. And, as I was writing this, news broke that the SEC filed charges against a U.S. citizen for allegedly defrauding investors out of millions through his Hex crypto asset. I think we can expect more lawsuits like this.
That the SEC has yet to approve a bitcoin ETF – even from issuers like BlackRock and Fidelity – is a huge red flag. If the SEC does approve a crypto ETF and the asset is regulated, perhaps there could be a there there. But until then, I think it’s better to stay far away from the asset, regardless of any thawing ice.
See more: “Bull vs. Bear: Betting on the Blockchain“
Crypto ETFs’ Eyeball-Inverting Returns
Peters-Golden: I’ll get to regulation in a moment. However, let’s start with crypto ETF returns – both crypto-related equity ETFs and bitcoin futures ETFs – before getting into why they might be doing so well. Bitcoin futures ETFs try to get closer to a spot product, while crypto equities ETFs look to benefit from the infrastructure around crypto like the miners, servers, and hardware that make it all possible.
In crypto equity ETFs, take, for example, the Valkyrie Bitcoin Miners ETF (WGMI). The crypto equity ETF has returned an eyeball-inverting 255% YTD. Yes, much of that rebound owes to the low point reached in the crypto winter, but the returns remain staggeringly high. That return isn’t just high; it’s the fifth-highest returning ETF YTD in the entire ETF Database. The only funds with higher returns are leveraged products.
WGMI, which actively invests in firms with at least 50% exposure to Bitcoin mining via chips, software, and other infrastructure, isn’t alone. The VanEck Digital Transformation ETF (DAPP), another crypto infrastructure ETF, invests passively but also saw massive returns, at 212% YTD.
Interestingly, those crypto equity ETFs are actually outperforming crypto futures ETF BITO, the ProShares Bitcoin Strategy ETF, YTD. BITO’s exposure to Bitcoin futures may be lagging a broader crypto recovery because of specific, though indirect, ties to one coin. Bitcoin has recovered modestly, back up to the $30,000 range, but it still has some ways to go considering it was once trading above $60,000. Despite these qualifications, mind you, BITO has still returned 70% YTD. That’s nothing to sneer at.
According to YCharts, the digital asset ETFs category, which includes both those subcategories, stands out as the top returning ETF category YTD. Digital asset ETFs have returned 72.4% YTD, more than double the next highest-returning category, tech ETFs, which have returned 35.3%. The category has also led all others over the last month, returning 12.5%.
Both categories of crypto ETFs have done well amid the crypto winter thawing. What of their outlook moving forward, however? Crypto ETFs are more volatile than other ETFs, of course, so the usual warnings about predicting the future apply.
That said, crypto ETFs still have some way to go in recovering from the crypto winter. I’ll get to the intriguing use cases later on, but looking at tech charts, crypto ETFs have momentum. DAPP, WGMI, and other peer crypto funds are all sending tech chart buy signals while avoiding overbought territory.
Meanwhile, crypto futures ETFs like BITO and the VanEck Bitcoin Strategy ETF (XBTF) which has also returned 70% YTD have plenty more space to grow. Those who would argue that the crypto infrastructure ETF rebound that led DAPP and WGMI to deliver those eye-popping returns YTD owes solely to how far down they fell are only boosting the case for BITO or XBTF. There’s still more room for them to rebound, themselves.
Pick a Lane, Crypto
Comtois: I won’t deny that those numbers are impressive. In fact, they’re extraordinary. But we’ve seen these spikes before… And seen where they’ve led. Triple-digit returns in a short time just don’t seem sustainable. It suggests a bubble.
But this brings me to my next point. While crypto has been described as volatile, it goes even further than that. Earlier I had suggested that crypto may not even deserve to be called an asset class. That’s because it’s unclear whether it’s a speculative investible asset like private equity or a form of currency.
The fact that it’s unclear what role cryptocurrency plays in a portfolio is a real problem. Even its most ardent boosters can’t decide whether it’s a volatile asset that can go “to the moon” or analogous to cash. But the thing is: it can’t be both. And money is absolutely never supposed to be this volatile.
So, for investors who want strong returns without having any crypto in their portfolio, funds like the Bitwise Crypto Industry Innovators ETF (BITQ) or the Amplify Transformational Data Sharing ETF (BLOK) target the technology behind cryptocurrency. BITQ and BLOK are up nearly 197% and 72% year-to-date, respectively, as of July 28.
Progress Towards Clear Regulation for Crypto ETFs?
Peters-Golden: Listen, these are fair points to have some concern about crypto volatility. Let’s take a look at some positive news, however, in the form of progress toward regulation. Yes, the situation is such that new digital assets-focused firms may be looking abroad when they’re starting. We all know that the SEC has been harsh on the crypto community. That said, there are signs that we’re getting closer to some clear regulations.
Specifically, I’m looking at BlackRock entering the Bitcoin ETF conversation. BlackRock is a huge name, big enough to move metaphorical mountains, and I think the fact that they not only filed for a Bitcoin ETF but also refiled it after the SEC denied the first application, can be a signal moment in crypto ETFs. The firm brings an air of seriousness to this discussion that some may have found lacking in prior spot Bitcoin discourse.
BlackRock, Fidelity, and others have offered up a “safety measure” in recent filings that seem to point toward progress on a regulatory resolution. BlackRock’s not the only story here, though. Indeed, the crypto industry scored a recent win against regulators. Ripple Labs, which offers the XRP asset, beat the charge that the firm had violated securities law. U.S. District Judge Analisa Torres ruled that sales of XRP on public crypto exchanges did not count as sales of securities.
VettaFi financial futurist Dave Nadig had a great chat on crypto writ large, and regulation specifically, with Canopy founder Eric Golden that bears mention here. Dave’s work is some of the best out there on crypto regs, so go check that out.
But I’ll close by saying that while the picture is murky, the question of spot Bitcoin ETFs, and all that implies about crypto ETFs overall, is moving forward. Whether the BlackRock application and Coinbase’s recent battle for clarity will bring the question to a head remains to be seen. However, we’re a long way from the quiet of crypto winter. We may even be seeing the stirrings of a legislative solution.
Takes More Energy Than Entire Nations
Comtois: I would agree that we’re a long way away from the crypto winter. However, it’s interesting that you (obliquely) bring up seasons, since that brings me to my final point: crypto is terrible for the environment. Crypto mining uses massive amounts of power. In fact, it uses more power than some countries.
Bitcoin mining operations globally use more than 137 terawatt hours of energy per year. That’s more than the annual domestic consumption of Pakistan, Sweden, or Ukraine. One Bitcoin transaction uses as much power as an average American household consumes in a month.
This is all at a time when the world needs to dramatically reduce its carbon emissions. So, that makes me wonder, why invest in a highly volatile asset that uses more energy than entire nations?
Crypto ETFs: More Than Just Returns
Peters-Golden: Crypto ETF returns have been robust, no doubt. So robust that they merit a closer look from investors and advisors, if only for an edge case allocation. That said, for those who want more than just returns from an investment, crypto offers other benefits. Investors and advisors can use crypto ETFs for diversification, too. Crypto offers not only diversification benefits but also inflation protection and transparent asset movement.
Last year showed us that there are real merits for alts including crypto strategies. Equities and bonds both struggled in 2022 amid a broad selloff, while rate hikes had yet to return income to fixed income. That helped build the case for looking outside of equities or fixed income. In certain time frames, digital assets including Bitcoin do deliver a low correlation to traditional assets that investors and advisors might want.
We can see this low correlation play out right now. Crypto analytics firm Block Scholes found that the 90-day correlation between Bitcoin and the Nasdaq and S&P 500 reached its lowest point since July 2021.
Why consider adding crypto-based diversification? We know that the market is very top-heavy and concentrated right now. The big mega-cap tech firms have been responsible for a great deal of the S&P 500’s success this year. Should they dip, whether due to the lagging impact of rates or other events, diversification can help. Crypto even offers diversification with some advantages on certain fixed income offerings, too, given that it avoids reinvestment risk.
What’s more, cryptocurrency could be a source of inflation protection. Given how young the asset class is and of course, the limits placed upon it by regulation, we don’t have all the data we need. However, the S&P Global has shared that the asset class could theoretically be a source of inflation hedging. With the Fed set to hold rates higher for longer, they clearly anticipate continued stubborn inflation. Crypto assets could offer one more tool for advisors.
Comtois: Those returns look amazing, and I’m all in favor of diversification. And I’m no prude — I can get behind long-term investors looking to include some riskier assets in their portfolios. But alas, I still can’t climb aboard the crypto train. I still think it’s a scam that hurts the environment and can’t decide if it’s an investible asset or cash.
Fortunately, investors still can’t invest directly in crypto through an ETF, thanks to the SEC. But until then, if you must invest in crypto, make sure it’s a very, very small part of your portfolio.
Until next time, Nick!
Peters-Golden: I think that’s where we can agree, James. If one believes in crypto, it shouldn’t be a core holding, of course. But a properly-sized crypto allocation can really do well right now. Crypto ETFs have space to recover in terms of returns even despite their significant performance already YTD. Beyond just recovery, however, crypto strategies offer a variety of positives for portfolio health. For investors looking at a way to respond to concentration risk, too, crypto funds can play a solid role.
We’ll have to leave it at that, then. Thanks for your time, James!
For more news, information, and analysis, visit the Crypto Channel.