Is blockchain suffering from an identity crisis?

Blockchain companies are hit by a mixture of headwinds and tailwinds. As regulators increase focus on the sector, companies are diversifying their businesses away from troubled assets. Meanwhile, the forces that originally led to the crypto winter have sparked crypto’s resurgence.

– SkyBridge Capital founder Anthony Scaramucci calls for regulators to be a “trellis” as well as “weed killer” for blockchain companies.

– Despite increased regulation and toxicity, cryptocurrencies are enjoying a strong 2023.

– The Global X Blockchain ETF offers broad blockchain exposure and is up 53% year to date.

Anthony Scaramucci, founder and managing partner of SkyBridge Capital, has urged US regulators to provide “well-crafted government policy”, which he says is “as much of a trellis for good plants as it is a weed killer” when it comes to blockchain technology companies.

In an article for CNBCclaims Scaramucci that such policies “not only stop bad actors” but also “promote progress and prosperity”.

Scaramucci’s comments come during something of a crisis of confidence for blockchain companies. Even some of the buzzwords surrounding blockchain technology, such as the terms “NFT” and “Web3,” are becoming toxic, according to Katie Baron, head of retail at trend intelligence firm Stylus.

Reflecting this, Bitcoin miner Riot Blockchain [RIOT] rebranded as Riot Platforms on January 3.

Insurgency shares suffered during the so-called “crypto winter”, falling 64.8% in the last 12 months. However, it has exploded since the rebranding, gaining 137.2% year-to-date.

This increase highlights that despite increasing regulatory scrutiny and investor concerns, cryptocurrencies are enjoying a resounding recovery.

Crypto winter thaw

Despite falling 42.6% over the past 12 months, Bitcoin is up 63.3% year-to-date and 16.8% in the past month alone. In the same timeframe, Ethereum is down 48.3%, but up 44.1% and 7.4%.

There is a certain irony in the fact that the forces that fueled the crypto winter have sparked its recent resurgence.

Alongside scandals such as the collapse of cryptocurrency exchange FTX last November, rising interest rates were the key driver of crypto losses through 2022. While these are now decimating the bond holdings of banks as large as Credit Suisse [CS]they are also driving investors towards crypto as a hedge against banking sector turmoil.

“The bank contagion is uniquely positive for crypto in several ways,” Hal Press, founder of crypto hedge fund North Rock Digital, tweeted on March 19. It both validates cryptocurrencies’ original use cases as an alternative to traditional financial systems, and increases the likelihood of future monetary easing, “providing a long runway of future crypto-friendly environments”, Press said.

“It’s unusual to have such a broadly risk-negative event so positive for a specific asset class (equities down, crypto up) and this is why it’s hard for people to wrap their heads around the current situation.”

Diversify to survive

Coin base [COIN], the US’s largest crypto exchange after the collapse of FTX, profited from this trend until March 22, when the US Securities and Exchange Commission filed a letter of intent to sue over investor protection violations. COIN stock had risen 137.3% in the year to March 21, but has fallen 25.5% since.

The move is representative of the complex mix of headwinds and tailwinds currently hitting Web3. Investors in the space are betting on whether blockchain and cryptocurrencies will emerge as fundamental components of a new, increasingly decentralized economic reality, or whether they will be regulated out of importance.

Given the unpredictability of the situation, it is perhaps understandable that crypto companies like Riot are taking steps to diversify their business as well as their brand.

Some sell their high-performance computing power to companies in sectors such as cyber security or artificial intelligence. Used blockchain [APLD]for example, changed its name to Applied Digital in November to reflect its “broader business offering to serve customers that require large amounts of computing power for applications,” after focusing its business more directly on data hosting for blockchain companies.

Fund in focus: Global X Blockchain ETF

Global X Blockchain ETF [BKCH] offers investors exposure to companies operating across blockchain technology. As of March 24, Coinbase and Riot Platforms are the fund’s second and third largest holdings with 67.83% and 8.63% of assets respectively. Applied Digital is the seventh largest shareholder with a weight of 4.67%.

The fund is up 52.9% so far this year, but down 1.1% in the past month and down 74.2% in the past 12 months.

Investors looking to tap into the potential of bitcoin mining can opt for the Valkyrie Bitcoin Miners ETF [WGMI]an actively managed ETF that invests in bitcoin miners or companies that supply them with specialized hardware.

Riot shares are the fund’s largest holding at 11.56% of assets as of March 28. Because of its focus directly on miners, the fund does not hold Coinbase or Applied Digital.

WGMI is up 83% year-to-date and 5.1% over the past month, but is down 71.1% over the past 12 months.