{"id":456908,"date":"2022-12-12T00:31:00","date_gmt":"2022-12-12T05:31:00","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/?p=456908"},"modified":"2022-12-12T07:14:10","modified_gmt":"2022-12-12T12:14:10","slug":"after-ftx-is-crypto-as-an-investment-dead","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/newspaper_\/news-newspaper\/after-ftx-is-crypto-as-an-investment-dead\/","title":{"rendered":"After FTX, is crypto as an investment dead?"},"content":{"rendered":"

This article appears in the December 2022 issue of <\/em>Investment Executive. <\/em>Subscribe to the print edition<\/a>, read the digital edition<\/a> or <\/em>read the articles online<\/a>.<\/em><\/i><\/p>\n

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.<\/p>\n

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 \u2014 and financial advisors and crypto experts are divided as to the industry\u2019s fate.<\/p>\n

Many crypto skeptics see the collapse of FTX as confirming their worst suspicions.<\/p>\n

\u201c[Cryptocurrency] is highly speculative, highly volatile and it\u2019s something you steer away from until we see signs of maturity in that sector,\u201d said Andrew Pyle, investment advisor with CIBC Wood Gundy in Peterborough, Ont.<\/p>\n

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 \u201cvast majority\u201d of clients, said Pyle, who has never recommended crypto investments.<\/p>\n

The fallout from FTX\u2019s collapse means \u201cyou\u2019re looking at a number of years before you get broader public trust in cryptocurrencies,\u201d said Mark Noble, executive vice-president of ETF strategy with Horizons ETFs Management (Canada) Inc.<\/p>\n

\u201cThat said, I don\u2019t think the crypto ecosystem goes away,\u201d Noble said, suggesting that blockchain innovations will continue during what could be a long \u201ccrypto winter\u201d of little investor interest. Horizons ETFs offers both long and short bitcoin funds.<\/p>\n

Institutional investors who believe in the transformative potential of blockchain technology are likely to \u201cdouble down\u201d on investments, said Michael Zagari, an investment advisor in Montreal with Burlington, Ont.-based Mandeville Private Client Inc.<\/p>\n

\u201cJust because one investment [FTX] didn\u2019t work doesn\u2019t mean they\u2019re going to stop there,\u201d said Zagari, who suggests there will be \u201ca lot of deals to be had\u201d but believes the industry will remain volatile for the next 12\u201318 months.<\/p>\n

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.<\/p>\n

FTX\u2019s bankruptcy has caused other crypto exchanges to suspend withdrawals, with some struggling to continue operating.<\/p>\n

And \u201cthere are going to be more shoes to drop. We just don\u2019t how many or how big,\u201d said Alex Tapscott, managing director of the digital asset group with Ninepoint Partners LP, during a Nov. 24 webinar.<\/p>\n

Characterizing himself as \u201cshort-term bearish, long-term bullish\u201d on cryptocurrency, Tapscott suggested that the Ontario Teachers\u2019 Pension Plan Board and the Caisse de d\u00e9p\u00f4t et placement du Qu\u00e9bec exposed themselves to \u201chuge concentration risk\u201d by each investing in a single crypto firm rather taking positions in established cryptocurrencies. (See \u201cHighs and lows,\u201d below.)<\/p>\n

Brian Mosoff, CEO of Toronto-based Ether Capital Corp., also said bitcoin and ether will endure through this crash, even if some exchanges don\u2019t. \u201cNothing has changed [in terms of the technology],\u201d Mosoff said. Bitcoin and ether \u201cstill do exactly what they set out to do: the fundamentals are the same; the value proposition is the same.\u201d<\/p>\n

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).<\/p>\n

\u201cIt seems like the crypto ETF users in Canada are sticking to their allocations,\u201d said Daniel Straus, director of ETF research and financial products research with NBFM, in an email to Investment Executive<\/em>. \u201cBitcoin and ether are both extremely risky and speculative, but the anemic outflows from Canadian crypto ETFs suggest their investors may be treating them like \u2018moonshot\u2019 long-term bets.\u201d<\/p>\n

Mike Tropeano, senior director of wealth consulting with Broadridge Financial Solutions Inc. in Boston, said he expects global regulators to \u201cbe much harsher\u201d on the crypto industry after the collapse of FTX. What will follow over the next few years is \u201ca thinning of the herd,\u201d a flight to safety to the most established names, and more innovation.<\/p>\n

\u201cThe information is still flowing daily, [not only] with regard to FTX but [also] with the overall market,\u201d Tropeano said. \u201cAnyone who is looking to play a role in the market \u2014 the [financial] advisor especially \u2014 requires a lot of diligence to stay on top of what is happening.\u201d<\/p>\n

Mosoff suggested some \u201cadvisors are probably relaxing a little bit,\u201d knowing that clients are less likely to be asking about investing in cryptocurrency \u201cuntil the next cycle starts.\u201d But he said that cycle will come, and advisors should use the crypto winter to educate themselves.<\/p>\n

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\u2019s established behemoths weather the storm, said Daniel Gonzalez, research analyst and consultant in Toronto with California-based Javelin Strategy & Research: \u201cIf 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.\u201d<\/p>\n

In many ways, the advisor\u2019s role now isn\u2019t different from what it was when cryptocurrencies were trading at their peaks.<\/p>\n

\u201cThere\u2019s absolutely a role for advisors to play here, and it\u2019s to be the voice of reason [in terms of allocation to cryptocurrency],\u201d Mosoff said. \u201cBut I don\u2019t think that\u2019s saying, \u2018I\u2019m going to rule out an asset class entirely.\u2019\u201d<\/p>\n

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, \u201chigher interest rates and a likely recession are sure to hinder speculative investments like cryptocurrency in 2023.\u201d<\/p>\n

Pyle said expecting retail investors to understand is unreasonable \u201cif institutional investors, traders, analysts, portfolio managers, hedge fund managers and even regulators can\u2019t understand this space.\u201d<\/p>\n

An advisor\u2019s \u201cparamount responsibility is to protect your clients\u2019 wealth,\u201d Pyle added. \u201cProtect it from inflation, protect it from running out and protect it de facto from things that most people don\u2019t understand.\u201d<\/p>\n

Highs and lows in the crypto space<\/h2>\n

2021<\/h3>\n

Feb. 18: Toronto-based Purpose Investments Inc. launches world\u2019s first bitcoin ETF.<\/p>\n

October: Ontario Teachers\u2019 Pension Plan Board (OTPP) invests US$75 million in FTX Trading Ltd. through its Teachers\u2019 Venture Growth platform.<\/p>\n

Oct. 12: Caisse de d\u00e9p\u00f4t et placement du Qu\u00e9bec invests US$150 million in New Jersey-based Celsius Network LLC, a crypto lender.<\/p>\n

Nov. 10: Bitcoin hits its all-time intraday high of US$68,789.63.<\/p>\n

Nov. 16: Ether hits its all-time intraday high of US$4,891.70.<\/p>\n

2022<\/h3>\n

January: The OTPP invests another US$20 million in FTX.<\/p>\n

Jan. 10: Fidelity Investments Canada ULC announces it will add 1%\u20133% exposure to bitcoin in its asset-allocation ETFs. (The target allocations remain the same as of press time.)<\/p>\n

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.<\/p>\n

March 31: Canadian cryptocurrency ETFs amass $6.1 billion in assets under management, according to data from National Bank Financial.<\/p>\n

May: TerraUSD stablecoin and Luna, a linked token, crash.<\/p>\n

June 18: Bitcoin plunges below US$25,000. It was trading above US$50,000 in early May.<\/p>\n

July 6: Voyager Digital Ltd., a New York-based crypto broker, files for Chapter 11 bankruptcy.<\/p>\n

July 13: Celsius Network files for Chapter 11 bankruptcy.<\/p>\n

Aug. 17: Caisse de d\u00e9p\u00f4t et placement du Qu\u00e9bec announces it is writing down its entire investment in Celsius Network.<\/p>\n

Nov. 11: FTX files for Chapter 11 bankruptcy.<\/p>\n

Nov. 17: OTPP announces it will write down its entire investment in FTX.<\/p>\n

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.<\/p>\n

Nov. 27: Bitfront, a U.S. crypto exchange, announces it will cease operations in March 2023. The platform stated the decision \u201cis unrelated to recent issues related to certain exchanges that have been accused of misconduct.\u201d<\/p>\n

Nov. 28: BlockFi files for Chapter 11 bankruptcy, citing exposure to FTX.<\/p>\n","protected":false},"excerpt":{"rendered":"

Several recent failures in the market have eroded investor trust<\/p>\n","protected":false},"author":73592,"featured_media":452420,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3021],"tags":[],"yst_prominent_words":[22438,26222,73436,73437,73438,73452,73453,73454,90257,90262],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/456908"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/73592"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=456908"}],"version-history":[{"count":5,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/456908\/revisions"}],"predecessor-version":[{"id":459903,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/456908\/revisions\/459903"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media\/452420"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=456908"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=456908"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=456908"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=456908"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}