Crypto supply defies crash in fund values

In the eyes of many, cryptocurrencies defy convention simply by existing, supported by the fact that they are no more substantial than lines of computer code.

But despite a crash in value in recent months, the digital tokens have continued to attract investment via exchange-traded products.

Generally, people, like herd animals, tend to pile into financial assets that rise in value, and to run for the hills when valuations fall – ignoring the logic of the arguments for buying in at low prices.

However, crypto supporters have shown a contrarian bent in bucketloads this year – continuing to pump money into ETPs despite a brutal selloff that has reduced the market cap of cryptocurrencies from a peak of $3.2 billion in November 2021 to less than 1 dollar. tn.

Even amid this carnage, crypto ETPs – ie those that invest directly or via futures contracts, rather than just in stocks linked to the sector – have seen global net inflows of $379 million so far this year as enthusiasts have kept the faith , according to data from TrackInsight.

The prospect of throwing good money after bad has proved no deterrent. Investors have pumped a net $26 million into VanEck Vectors Avalanche ETN (VAVA) since its launch in December, according to TrackInsight. Nevertheless, the market value has decreased by 82 percent in value so far this year, to only 5.6 million dollars.

Similarly, the Purpose Ether ETF (ETHH) market cap has fallen to just $42.5 million, despite bringing in $176 million this year, TrackInsight data shows. Likewise, $107 million of net inflows into CoinShares FTX Physical Staked Solana ETP (SLNC), launched in March, have shrunk to a market cap of $34.3 million.

“It’s surprising because we typically see, for a high-risk/high-reward investment like crypto, money tends to follow performance,” said Todd Rosenbluth, head of research at VettaFi, an ETF data analysis company.

“People want to be part of something that works and they tend to move out of assets that are not working. But there are big believers in the long-term potential of crypto and the value it can add to a portfolio, so investors have taken advantage of the volatility to add exposure rather than move, he adds.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, says the surprisingly resilient flows likely reflect “huge pent-up demand.”

“The rationale is that [ETPs] allow a certain type of investor access to the asset class that doesn’t necessarily want to go out and set up a wallet etc., or can’t for regulatory reasons, so it doesn’t surprise me that there’s a significant level of interest,” Lamont explains.

Asset managers have also kept the faith rather than being disappointed by the losses. A total of 39 crypto ETPs were launched in the first seven months of 2022, according to TrackInsight. This pace is in line with the 68 launches during calendar year 2021, and far more than we have seen in all the years before 2021 combined.

Even the biggest suppliers are starting to show interest. In August, BlackRock, the world’s largest asset manager, unveiled plans for a spot bitcoin private trust in the US, where physical crypto-ETPs are still banned. This despite CEO Larry Fink saying in 2017 that “bitcoin just shows you how much money laundering demand there is in the world”.

But five years ago, BlackRock also admitted that despite a sharp downturn in the digital asset market at the time, they “still saw significant interest from some institutional clients in how they could access these assets in an efficient and cost-effective way”.

In July, British investment house Abrdn bought a stake in a digital asset exchange, just weeks after rival Schroders bought a minority stake in Swiss digital asset manager Forteus.

Meanwhile, Fidelity of the US, the biggest house so far to launch crypto ETPs, recently added a bitcoin alternative to its pension offering.

Rosenbluth says he “would have expected product development to have slowed, given that investors have lost money on these strategies in 2022.”

He adds: “I am surprised that asset managers are willing to be patient and let the pendulum swing back towards the long-term performance of these strategies.”

Rosenbluth suggests that one factor fueling the launch frenzy was the limited degree of product differentiation inherent in crypto ETPs. Competition is usually on the basis of cost or liquidity – so being an early mover can be critical to having long-term success in assembling assets at sufficient scale.

Lamont also believes crypto is one of the few fields where there is “virgin ground” for providers to claim, given how crowded most of the ETF landscape has become.

This provides sustenance for land capture. “There’s a clear feeling in the industry that everyone wants to be involved,” says Lamont. “It is a new asset class. Just because we’ve seen a global drop in prices doesn’t mean this isn’t here to stay in one form or another.”

As a result, products are “being launched in anticipation of the next crypto bull run,” says Lamont.

“Most people think so, unless [cryptocurrencies] are regulated out of existence, they will exist forever in one form or another. The genie is out of the bottle.”