Is blockchain suffering an identity crisis?

Blockchain companies are being buffeted by a mix of headwinds and tailwinds. As regulators increase their focus on the sector, companies are diversifying their businesses away from troubled assets. Meanwhile, the forces that initially led to the crypto winter have sparked crypto’s resurgence.

- SkyBridge Capital founder Anthony Scaramucci calls for regulators to be a “trellis” as well as “weed killer” for blockchain companies.

- Despite increased regulation and toxicity, cryptocurrencies are enjoying a strong 2023.

- Global X Blockchain ETF offers broad blockchain exposure and is up 53% year-to-date.

Anthony Scaramucci, founder and managing partner of SkyBridge Capital, has called on US regulators to provide “well-crafted government policy”, which he says is “as much of a trellis for good plants as it is a weed killer” when it comes to blockchain technology companies.

In an article for CNBC, Scaramucci argues that such policy “doesn’t just stop bad actors” but also “promotes progress and prosperity”.

Scaramucci’s comments come during something of a crisis of confidence for blockchain businesses. Even some of the wording around blockchain technology, such as the terms “NFT” and “Web3”, is becoming toxic, according to Katie Baron, head of retail at trends intelligence firm Stylus.

Reflecting this, Bitcoin miner Riot Blockchain [RIOT] rebranded itself to Riot Platforms on 3 January.

Riot stock suffered during the so-called ‘crypto winter’, falling 64.8% in the past 12 months. However, it has exploded since the rebrand gaining 137.2% year-to-date.

This surge highlights that, despite increasing regulatory scrutiny and investor concerns, cryptocurrencies are enjoying a resounding recovery.

Crypto winter thaws

Despite having fallen 42.6% over the past 12 months, Bitcoin has gained 63.3% year-to-date and 16.8% in the past month alone. In the same timeframes, Ethereum is down 48.3%, but up 44.1% and 7.4%.

There is a certain irony in the fact that the forces which drove the crypto winter have sparked its recent resurgence.

Alongside scandals like the collapse of cryptocurrency exchange FTX in November last year, increased interest rates were the key driver of crypto losses throughout 2022. While these are now decimating the bond holdings of banks as large as Credit Suisse [CS], they are also driving investors towards crypto as a hedge against banking sector turmoil.

“The banking contagion is uniquely positive for crypto in multiple ways,” Hal Press, founder of crypto hedge fund North Rock Digital, tweeted on 19 March. It both validates cryptocurrencies’ original use cases as an alternative to traditional finance systems, and increases the likelihood of future monetary easing, “which provides a long runway of future crypto friendly environments”, said Press.

“It is unusual to have such a broadly risk-negative event be so positive for a specific asset class (stocks down, crypto up) and this is why it is hard for people to wrap their heads around the current situation.”

Diversifying for survival

Coinbase [COIN], the US’s largest crypto exchange following the collapse of FTX, was benefitting from this trend until 22 March, when the US Securities and Exchange Commission served a letter of intent to sue over investor protection violations. COIN stock had gained 137.3% in the year to 21 March, but has fallen 25.5% since.

The move is representative of the complex mix of headwinds and tailwinds currently buffeting Web3. Investors in the space are taking bets on whether blockchain and cryptocurrencies will emerge as foundational components of a new, ever-more decentralised economic reality, or whether they will be regulated out of significance.

Given the unpredictability of the situation, it is perhaps understandable that crypto companies like Riot are taking steps to diversify their business as well as their brand.

Some are selling their high-performance computing power to companies in sectors like cybersecurity or artificial intelligence. Applied Blockchain [APLD], for example, changed its name to Applied Digital in November to reflect its “broader business offerings to serve customers that require large amounts of computing power for applications”, having previously focused its business more directly at data hosting for blockchain companies.

Funds in focus: Global X Blockchain ETF

The Global X Blockchain ETF [BKCH] offers investors exposure to companies operating across the range of blockchain technology. As of 24 March, Coinbase and Riot Platforms are the fund’s second- and third-largest holdings with 67.83% and 8.63% of assets, respectively. Applied Digital is the seventh-largest holding with a 4.67% weighting.

The fund is up 52.9% year-to-date, but down 1.1% in the past month and down 74.2% in the past 12 months.

Investors keen to tap into the potential of bitcoin mining can select the Valkyrie Bitcoin Miners ETF [WGMI], an actively managed ETF investing in bitcoin miners or companies supplying specialised hardware to them.

Riot stock is the fund’s largest holding with 11.56% of assets as of 28 March. Due to its focus directly on miners, the fund doesn’t hold Coinbase or Applied Digital.

WGMI has gained 83% year-to-date and 5.1% in the past month, but is down 71.1% over the past 12 months.