Obviously, the first half of 2022 has not been rewarding for investors. Between inflation, rising rates and the tense geopolitical context, only commodities have shown a positive return since the beginning of the year. In this environment, the cryptocurrency universe has been no exception. Indeed, the sector showed a high level of  correlation to  technology stocks over this period.

The wave of institutional adoption that supported the crypto bull market last year seems to have faded. Just during the month of July, Tesla announced that it had sold 75% of its BTC positions and Cathy Wood, the founder of Ark Invest, sold a portion of the funds’ Coinbase positions. More broadly, speculation on the major exchanges has declined, although volumes have remained high. Even, the main actors of the ecosystem have not been spared. The most notable example is, the hedge fund “Three Arrows Capital” which was liquidated following the bankruptcy of the Luna project.

However, given the historical volatility of this asset class, it is difficult today to support the thesis of a systemic crash of cryptos for several reasons.

Firstly, we observe a certain correlation in the performance of technology stocks such as Facebook (-51%), Paypal (-50%) or Netflix (-62%) and Bitcoin (-49%) since the beginning of the year.

Secondly, the protocols of the main blockchains have remained unaltered. In other words, there have been no major technical problems that could have lowered user confidence in the technology. It is important to remember that the various hacks within the ecosystem mainly concern cross-chain protocols (70%) or unaudited applications.

Third, funds raised supporting crypto projects in the first half of 2022 exceeded the amount raised for the entire year 2021. More than $30 billion were injected in 1,200 funding rounds according to data provider Messari. However, it should be noted that decentralized finance has been less popular (6% of funds raised) in favor of Web3/Nft projects (26%). Centralized finance (exchange, loan and deposit platform…) (35%) and infrastructure projects (33%) continue to be popular.

Fourth, the growing adoption of cryptos continues. According to the latest report from the Boston Consulting Group, only 0.3% of the world’s “individual wealth” is currently believed to be invested in cryptocurrencies, compared to 25% in listed stocks. The report estimates that there could be one billion cryptocurrency users by 2030 compared to 300 million today. An adoption that will be both by individuals, but also by institutional investors.

Fifth and finally, is that interest is still present among major institutions. Most recently, the Coinbase platform has announced a partnership with the asset manager BlackRock. BlackRock’s institutional clients (banks, cash managers, hedge funds, etc.) who were already using Coinbase will now be able to access the platform’s professional Prime service to trade in Bitcoin.

Bottom line,  the cryptocurrency sector is going through a bearish year in line with other markets. Still, interest and adoption continues to grow. We are seeing a consolidation of the sector and a refocusing around quality projects. Technology and applications continue to evolve and deliver promising innovations.

The market has its cycles that the investor must take into consideration. While there is no consensus on how to value cryptos, the economics and growth of the sector suggest significant potential.

  Steeven Panchaud

  Portfolio Manager

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