Bitcoin and other digital currencies are behaving like risk assets this year, making the cryptocurrency universe vulnerable to volatility in traditional asset classes.
With bond yields soaring owing to rising interest rates and equities faltering, there’s plenty of turbulence to go around. Count inflation, rate tightening by the Federal Reserve, and other macroeconomic concerns among the factors weighing on digital assets, including related equity-based strategies such as the VanEck Digital Transformation ETF (DAPP).
DAPP follows the MVIS Global Digital Assets Equity Index, a collection of companies that fit the bill as “crypto-correlated.” For such stocks, including DAPP components, part of the problem in 2022 is that crypto’s correlations to equities is rising.
“Historically, one of the benefits of a digital assets allocation has been a low to negative correlation with the broad equity market. While correlations to the S&P 500 remain relative low (low 60s), an increase in correlation to the broader market means that digital assets and the broad market are moving more in-sync than previously. It then follows that during an equity selloff, crypto markets are now more affected than before,” wrote VanEck’s Jack Hagan and John Patrick Lee.
Add in the recent collapse of TerraUSD (UST) and the pressure on growth equities of all stripes caused by rising interest rates, and crypto-correlated stocks are contending with a lot this year.
While it’s easy for investors to get caught up in near-term headlines, there is some silver lining as it pertains to DAPP. For starters, indiscriminate selling in the growth stock landscape is creating some bargains. Some might argue that higher-quality DAPP holdings such as Block (NYSE:SQ), Silvergate Capital (NYSE:SI), and Coinbase (NASDAQ:COIN) are attractively valued or close to getting there.
Second, despite undoubtedly weak price action in 2022, the disruptive status of digital assets isn’t altered. That is to say that the long-term outlook for blockchain, crypto, and the broader digital assets ecosystem remains compelling.
“We expect to see further integration of blockchain technology into more consumer-facing sectors, with new applications being used by the general population,” concluded Hagan and Lee. "We expect the ‘ease of use’ problem to be solved, as developers create new applications that are built on blockchain technology, which runs beneath the surface of the application without requiring any special know-how to participate. Currently, any serious participation or investment in digital assets projects (such as NFTs or DeFi) has a steep learning curve for new users to fully participate.”
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