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Investors should be early movers on digital assets, crypto ETF demand seen to rise

By VanEck*   
November 29, 2021

"Science really does advance one funeral at a time", proclaimed a 2019 headline in the trade magazine Chemistry World. It explained the phenomenon by which superstar academics often hoover up outsized funding, crowding out potential disruptive ideas which often flourish after the demise of the superstar.

The idea is not so different from that of German theoretical physicist Max Planck, who famously observed in 1950 that "a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it".

Lessons can be drawn for cryptocurrency and bitcoin from these insights.

Many have observed that Covid-19 helped to accelerate digitalisation trends and spurred innovation. These are some historic events that took place in the space:

  • Fintech and traditional payments embraced blockchain and co-opt crypto solutions;
  • Major payment companies, including Paypal, Square, Venmo, Robinhood, Mastercard and even Twitter, adopted bitcoin;
  • Explosive growth in blockchain transaction usage and smart contract adoption, to US$3.5 trillion in volume on ether and $3.9 trillion on bitcoin as of October 11;
  • Bitcoin started to realise its potential as a fiat currency disruptor, especially for emerging- market countries such as El Salvador, which went so far as to accept it as legal tender; and
  • Market cap of “crypto enablers” surged and approached the market cap of gold shares2 (Chart 1).

Chart 1: Market value of crypto enablers approaching gold shares

Source: Bloomberg, MVIS, JPMorgan, VanEck research. Data as of 30/9/2021. MVDAPP Index is represented by the MVIS Global Digital Assets Equity Index. GDMNTR Index is represented by the NYSE Arca Gold Miners Index. Past performance is no guarantee of future results. You cannot invest directly in an index.

Long-term potential

The digital assets space has seen exponential growth in recent years. Companies at the forefront of the industry range across business lines, including digital asset exchanges, miners, and other infrastructure companies. These companies develop and utilise blockchain technologies, representing a disruptive force that is poised to reshape industries, hence fueling the growth in digital assets.

As the space continues to mature, we believe it is an opportune time for investors to be early movers and tap into the long-term potential of this sector.

There are distinct investment opportunities in digital assets. They are a good store of value, and growth opportunities are abundant through private companies, public equities and tokens.

Bitcoin, for example, has grown at an exponential rate, with tens of millions of owners3. It is used by mainstream payment applications4 and held on large-cap companies’ balance sheets5.

The digital assets ecosystem has also disrupted traditional business, including the banking, brokerage, payments and lending sectors worldwide. We expect to see more blockchain disruption in consumer- facing sectors such as gaming, internet services, e-commerce and travel booking.

Next year and beyond

We expect more crypto-intensive businesses, such as miners and payment companies, to go public, Bitcoin will continue to mature, with broader institutional ownership and involvement, and another emerging market may declare it as legal tender.

Ethereum will undergo major software upgrades next year, moving away from energy-intensive mining and increasing the network capacity. Non-fungible token (NFT) usage is expected to enter mainstream culture, with millions of users.

We also think environmental, social and governance (ESG) capital investors will rediscover crypto as an accelerant of green energy and financial inclusion.

Notably, four of the top five best-performing digital assets (above $1 billion market cap) since the market peak in August 2020 are smart contract protocols, defined as open-source blockchain protocols designed to host a variety of self-developed and third-party adoption apps.

Smart contract protocols have been on the rise in the past year. They are important components that power decentralised finance, NFTs and web 3.0 applications.

Ethereum is an example of a smart contract protocol — it was an early innovator, and others are now catching up. We view them as a large opportunity set going into 2022.

Crypto ETFs

As bitcoin’s popularity and usage continue to skyrocket, we also expect investor demand for easier access through a more traditional wrapper, such as an exchange-traded fund, to increase in tandem.

Investors seeking exposure to bitcoin or cryptocurrency can do so in a few ways: direct investment, over-the-counter listed vehicles, and crypto hedge funds. However, these methods have their drawbacks.

An ETF offers investors a simpler way to access this emerging asset. It allows them to access bitcoin without going through the complicated process of actually trading bitcoin.

Moreover, it simplifies the complexities of direct bitcoin ownership, such as issues of complex storage and security procedures required of cryptocurrency investors, and also offers higher protection.

We continue to expect investors to demand easier access through cryptocurrency ETFs.

In the future, we will start to see digital assets being adopted in the retail sector and considered in the same breath as physical assets.

Digital assets usage and implementation will expand as global adoption continues, opening up growth opportunities for investors. The time is ripe to be early movers in this space.

*VanEck has been a leader in the digital assets space. The firm recognised in early 2017 that digital assets could provide a store of value alternative to existing currencies and gold, as well as technology solutions that may lower costs in the payments and financial investing industries. VanEck produces a prolific amount of cutting-edge research on the digital assets space. If you would like more information or analysis about the digital assets space, please visit our website or contact.

1 Coinmetrics, VanEck estimates, data as of 1/10/2021
2 Bloomberg, MVIS, JPMorgan, VanEckresearch. Data as of 21/10/2021
3 Statista

4 Square, Paypal
5 Tesla, Square