DeFi and NFTs will continue to expand, but Jan van Eck, CEO of fund company VanEck, doesn’t see a spot-ETF coming in 2022.
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A year-end rally in cryptocurrencies appeared to fizzle on Tuesday, with Bitcoin and Ether both falling more than 6%, trading around $48,400 and $3,840.
Cryptos had been participating in a “Santa Claus rally” for risk-assets with Bitcoin up more than 13% since Dec. 17 to around $52,000. However, it remains well below its all-time high of $68,790 on Nov. 10.
What’s ahead for 2022? The crypto economy should continue to expand with more applications and uses for tokens and underlying blockchain networks. “DeFi,” or decentralized finance, is likely to continue its expansion, fueled by demand for swapping, lending, and borrowing cryptos—all based on “smart contracts” that automatically set the conditions of a trade or lending criteria.
Other burgeoning uses for blockchain networks and their tokens include online gaming, supply-chain management, distributed storage, and international money transfers, or remittances.
Also thriving are NFTs, or non-fungible tokens—digital collectibles that can be swapped like other assets. The NFT marketplace exploded in 2021 with more than $23 billion in volume, including surging market values for NFTs such as Bored Ape Yacht Club and NBA TopShots.
Adidas recently sold nearly 30,000 “Into the Metaverse” NFTs, granting owners the rights to exchange their tokens for hoodies, tracksuits, and a beanie emblazoned with popular NFT imagery. The sale earned more than $22 million for Adidas, which priced each NFT at 0.2 ETH token, or about $780 each at recent prices.
Yet even some crypto advocates say prices are looking frothy, following a 74% gain in 2021 for Bitcoin, 424% return for Ether, and even bigger gains for many alt-coins.
“Growth investments are very stretched and I think crypto is in that high price/sales multiple category,” said Jan van Eck, CEO of fund company VanEck, in an interview with Barron’s. “Prices are more reasonable than they were six months ago, but the only answer is to dollar-cost average,” he said, referring to continuously investing a set amount.
With inflation a top concern, Bitcoin is likely to be tested as a store of value or “digital gold,” as its proponents see it. Bitcoin didn’t pass that test as inflation readings soared recently, prompting equities and cryptos to sell off. Bitcoin trades similarly to high-growth tech stocks and assets that come under pressure as investors opt for safer investments in a tougher macro climate.
One compelling growth area is tokens used for DeFi and other smart contracts, says Van Eck. “Exposure to smart contracts protocols is the best thing for investors to focus on,” he says.
Ether is the giant in smart-contract protocols. But the Ethereum network is now clogged and suffers from high transaction fees. Other networks and tokens are gaining traction, including Solana, Polkadot, Cardano, Avalanche, and Algorand.
The MVIS CryptoCompare Smart Contract Leaders Index tracks a basket of these cryptos. It’s ahead 635% in 2021. However, there’s no way to invest directly in the index or through an exchange-traded fund—investors would need to buy the tokens individually or track them through a private fund.
Another headwind for digital assets, of course, may be tougher regulation. The Biden administration and Congress are looking at how to establish new rules for the industry, including stablecoins—tokens designed to maintain a fixed value.
But crypto is a tough legal area and Washington can’t seem to agree on how to oversee it. Congress recently held hearings on cryptos, revealing a wide rift between Democrats and Republicans on how to establish new rules.
“Washington is at a standstill in terms of crypto regulation,” says Van Eck. “I don’t see movement in any direction.”
The fund industry, of course, is lobbying hard for an ETF that owns Bitcoin directly, rather than through futures contracts—the type of Bitcoin ETFs that the Securities and Exchange Commission has approved.
But Van Eck, for one, doesn’t sound optimistic that the SEC, under chairman Gary Gensler, will sign off on a spot-based ETF. “It’s clear that the SEC wants jurisdiction over the cash crypto markets,” he said. “It doesn’t seem like they’ll approve a Bitcoin ETF unless they’re forced to by a federal court.”
The SEC rejected an application by VanEck for a spot-based ETF in November. Van Eck says he’s “not confident” that one such ETF will be approved any time soon.
ETFs such as the Global X Blockchain ETF (BKCH), Invesco Alerian Galaxy Crypto Economy ETF (SATO) or Bitwise Crypto Industry Innovators ETF (BITQ) provide exposure to the industry. The VanEck Bitcoin Strategy ETF (XBTF) and ProShares Bitcoin Strategy ETF (BITO) own Bitcoin through futures contracts.
It may be unrealistic to expect another big year for investment gains, though, even if blockchains are the new digital railroads and tokens make headway as the money of the future.
Write to Daren Fonda at daren.fonda@barrons.com
