The recent crypto market bust has left some investors more cautious, after hitting some of the hottest and most-hyped corners of the industry the hardest. It may also provide a boon to emerging strategies that seek to more actively manage risks.
The universe of crypto investment alternatives has expanded dramatically in just a few years and now includes direct cryptocurrency purchases, spot ETFs, derivatives like put and call options and futures, shares in mining and treasury companies, crypto exchanges and infrastructure providers.
But that is also bringing different investment results, with leverage, high valuations and funding concerns among the factors that have hurt various corners of the crypto markets. "Investment vehicles for bitcoin have exploded across both retail and institutional markets, fundamentally expanding access,” said John D’Agostino, head of strategy at Coinbase Institutional. However, “the nuances matter in terms of how people want to express leverage and to what degree they want to hedge their exposure.”
Bitcoin tumbled as much as 36% from a record $126,223 on October 6, and remains around 30% below its high. Bitcoin treasury companies, led by Strategy Inc (MSTR.O), opens new tab, have suffered even more.
These companies hold a significant portion of their corporate assets in cryptocurrencies as a treasury reserve and often raise capital through stock or debt to acquire more digital assets. For years, their share prices traded at a premium to the value of the bitcoin they owned and many investors assumed that premium would keep growing forever.
But when bitcoin’s price fell, those premiums collapsed. Strategy’s stock has dropped 54% from bitcoin’s October peak and is down 63% from its mid-July level.
Japan’s Metaplanet (3350.T), opens new tab and a long list of smaller imitators were hit just as hard. It became “a localized bubble,” said Lyn Alden, founder of Lyn Alden Investment Strategy. “Investors are now a lot more cautious of overpaying for those.”
"Those stocks have been the best performers of the year because they combine two powerful themes: digital assets via their bitcoin exposure and AI," said Matthew Sigel, portfolio manager of VanEck Onchain Economy ETF, which invests in the crypto ecosystem.
But many saw weakness on concerns about some of these companies’ profitability as they carry heavy debt and constantly need fresh cash to pay for the switch. “The macro environment turned a little bit and those companies got punished,” Sigel said.
Over the next few years, crypto and AI investments are expected to be increasingly intertwined, with crypto infrastructure seen as crucial for addressing power needs.
Morgan Stanley estimates U.S. data centers are facing a power shortfall of 47 gigawatts through 2028, but notes that converting crypto miners could alleviate a significant portion, potentially 10-15 GW or more.
