Investing comes with no guarantees, but it’s almost a guarantee that investors can expect a wild and bizarre rollercoaster ride in the nascent cryptocurrency market. Both investors and financial advisors who were already aware of crypto volatility have been re-familiarized with that notion.
After zooming from just under $10,000 per coin last year to almost $65,000 in mid-April this year, bitcoin recently crashed more than 52%, to $30,681. With a commanding $717 million market cap, bitcoin is still the top crypto and has since settled in the $36,000 to $39,000 range. Other top-ranked coins by market size—including ethereum, dogecoin and cardano—have seen a similar crazy ride, too.
The extreme peaks and valleys in cryptocurrencies makes the dot-com era of risky stocks look almost sane.
In early 2020, ethereum traded for less than $200 per coin. Two weeks ago, on May 11, it peaked at $4,142. The second-largest crypto by market size subsequently slumped to $1,741, and has since settled in the $2,300 to $2,600 range.
Trusts linked to cryptos also have made big moves in all directions.
After a sizzling start to the year, the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETH) have seen their share prices sink 31.6% and 26.9%, respectively, during the past two weeks. With $24.9 billion under management, GBTC is the largest cryptocurrency-linked exchanage-traded product by assets. Although the trust charges a hefty 2% annual fee, the historical performance has been nothing short of spectacular. Since its 2013 inception, GBTC has skyrocketed 25,635%.
Since late-March, ETH has outperformed GBTC with an impressive 155% run-up before giving up 100% of that gain during the past few weeks. ETH has $8.2 billion in assets and charges a plump 2.5% annual fee.
“Given the many decentralized finance applications and the mind-blowing non-fungible token sales, we believe ethereum will grow to become bigger than bitcoin,” said Dave Kreinces, founder at ETF Portfolio Management in Westlake Village, Calif. “Passive investors can start with allocations of 1% to 3%, while our aggressive portfolios often limit this type of exposure to under 10% to 25% total.”
GBTC, ETH and similar products use a trust structure versus a traditional ‘40 Act ETF wrapper. As a result, the trusts are more likely to trade with premiums and discounts to their net asset value with price action that widely veers from real-time bitcoin and ethereum prices. That makes them look and behave more like closed-end funds than ETFs.
While nobody knows when the Securities and Exchange Commission will approve a true bitcoin ETF, many industry observers hope U.S. regulators will follow Canada’s lead. Launched in February on the Toronto Stock Exchange, the Purpose Bitcoin ETF (BTCC) is the first crypto ETF of its kind. BTCC tracks the price of bitcoin in Canadian denominated dollars.
On a side note, that’s not the first time Canada has beaten the U.S. with creative securities offerings. In 1990, Canada introduced the Toronto 35 Index Participation Units, the world’s first ETF. It wasn’t until three years later that the first U.S.-listed ETF, the SPDR S&P 500 ETF Trust (SPY), began trading.
Like stocks, bonds and other markets, investor sentiment weighs heavily on the crypto marketplace.
The Crypto Fear & Greed Index, a compilation of social media chatter, price volatility and trading volume, has been stuck in extreme fear territory over the past few weeks. What’s next?
The short-term pullback in cryptos may offer an interesting setup for long-term investors. Or as a wise old trader once quipped: “Buy the fizzle, sell the sizzle!”
Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of "Habits Of The Investing Greats."