Crypto equities vs cryptocurrencies: Is there room for both?

Justin Arzadon

BetaShares

Bitcoin and Ethereum cryptocurrency ETFs are set to hit the Australian market today. With the markets as volatile as they are, and with more choice soon available for crypto-oriented investors, does it make sense to hold both crypto equities exposures in the same portfolio?

In this article, we revisit the case for crypto equities alongside cryptocurrency exposure. We explore the attractive fundamentals of the crypto equities market and analyse what the recent positive sentiment towards crypto expressed by a number of governments could mean for a sector that has been beaten down heavily of late.

The current macro environment has not been kind to growth exposures. Investors have been going ‘risk-off’ and, year-to-date, the Nasdaq, S&P500, and bitcoin are down 25.1%, 15.9% and 31.7% respectively. Rising interest rates increase the cost of capital, draining liquidity from all financial markets, cryptocurrency markets included.

Source: Bloomberg data as at May 9th, 2022

Valuing cryptocurrencies

One of the major issues with cryptocurrency exposure is the difficulty in placing a value on the cryptocurrency itself. While we are confident that Bitcoin and Ethereum are here to stay, there are many direct competitors to Ethereum such as Solana, Cardano, and Polkadot which also use smart contracts, can create NFTs, may transact faster, already use proof of stake and are cheaper to use.

Bitcoin does not have many direct competitors, however it is being lumped in with, and traded like, tech stocks, and correlations between bitcoin and equity markets have been near all-time highs, likely because of macroeconomic factors and the changing investor base from retail to institutional.

Crypto equities have historically been correlated to Bitcoin’s (BTC) spot price to varying degrees, and a weak BTC should lead to weakness in crypto-focused stocks. While overall we continue to expect a relatively strong correlation between cryptocurrencies and crypto equities, there is a case for something of a decoupling over time, particularly with more institutional money coming, and an increasing realisation that a number of these crypto equities companies potentially can make money regardless of the price of BTC.

Fundamentals look cheap compared to counterparts

An advantage of looking at crypto equities is that you can value them based on current financials. While market fundamentals don’t always tell the full story, the metrics of a portfolio of crypto equities (using the Bitwise Crypto Innovators Index) look appealing in a number of ways. For example, the index looks attractive compared to a number of benchmarks on median revenue growth estimate, profit margin estimate and P/E estimate.

2022

Median Revenue Growth Estimate

Median Profit Margin Estimate

Median P/E Estimate

Median P/S Estimate

S&P 500 Index

8.3%

14.9%

18X

2.7X

Nasdaq 100 Index

12.7%

18.6%

23.2X

4.9X

Bitwise Crypto Innovators Index

41.5%

26.1%

10X

2.7X

Source: FactSet data as at May 6th, 2022. Estimates shown are subject to change over time. Actual outcomes may differ materially from estimated outcomes. A crypto equities index can be expected to be substantially more volatile than a broader global equities index.

Favourable regulation

Regions around the world are deciding how to deal with crypto and trying to get their regulatory settings right. Many countries such as the U.S, U.K., Singapore, U.A.E and Australia have declared they want to be leaders in crypto but are moving forward cautiously. Regulations still left to be written can affect individual protocols in sectors such as DeFi, stablecoins, and protocols that may be considered a “security”. While regulation can have an impact on specific coins and various crypto sectors, publicly traded companies that are a leveraged play on crypto are relatively insulated, offering general services such as banking, investment and mining services, mining hardware, exchanges, and trading platforms.

It’s not about ‘which crypto’ but the thematic as a whole

There are currently over 17,000 cryptocurrencies, with the number increasing every day. There are also many sectors within crypto which become ‘hot or not’ during different parts of the cycle including NFTs, DeFi, Metaverse, GameFi, Web3, memecoins and more.

While it is impossible to predict the outcomes of government regulation, or market returns over the short or long term, crypto and blockchain technology are here to stay. Crypto is changing the way business is done, disrupting industries, and is expected to continue to garner retail and institutional investment.

While it is still too early to know which specific cryptocurrencies will ‘win’ over time, the companies providing the ‘picks and shovels’ and laying down the infrastructure for the crypto economy to thrive have the potential to be the ultimate winners.

If the entire sector grows and adoption continues, whether through more cryptocurrencies being created, more investors entering the market, or more hash power joining the Bitcoin network, then crypto equities could stand to benefit even more than individual cryptocurrencies themselves. We favour a market-cap weighted approach to investing in crypto equities, as such an approach has the advantage of increasing exposure to the companies that grow and come to dominate the asset class and reducing exposure to the companies that falter.

We believe that crypto equities can be used alongside cryptocurrency exposure because of the potential for the sector to increasingly decouple from cryptocurrency from a valuation perspective, not being subject to specific protocol or sector regulation, and because the success of crypto equities is tied more to the entire asset class growing, rather than relying on one specific coin or token.

ETF
BetaShares Crypto Innovators ETF
Global Shares

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Justin Arzadon
Head of Digital Assets
BetaShares

Justin is the Head of Digital Assets, leading sales efforts on cryptoassets, educating and informing clients as they consider investments into this emerging and exciting asset class. He also contributes to the formation of digital asset strategy...

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