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Some experts expect digital assets to rebound once central banks pivot on interest rates.DADO RUVIC/Reuters

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What a wild six months it has been for crypto. The asset class’s market capitalization plummeted to less US$800-million this month from record highs of US$2.7-trillion a year ago, according to CoinMarketCap.com.

The category’s bellwether – bitcoin – lost three-quarters of its near-US$67,000 value from November, 2021, languishing at just over US$16,000 a year later.

A streak of stunning disasters stoked the decline. The collapse of the TerraUSD and Luna stablecoin pair this past May wiped billions from the cryptocurrency market. The unravelling of the FTX cryptocurrency empire in November stunned an already rattled sector.

No wonder, then, that cryptocurrency exchange-traded funds (ETFs), which reflect the market’s fortunes, are also on the ropes.

Toronto-based Purpose Investments Inc., which launched the first Canadian bitcoin ETF, Purpose Bitcoin ETF BTCC-B-T, saw its price rise from $9.80 a unit at inception in 2021 to a high of $13.17 last November. It has now dropped to $3.39, as of Friday afternoon. But the company’s chief operating officer and head of product, Vlad Tasevski, is not worried.

He is eager to distance Purpose Investments’ regulated ETF from FTX, most of which was not regulated and is now under investigation by the U.S. Securities and Exchange Commission and the U.S. Department of Justice.

Purpose Investments worked closely with regulators to ensure that its bitcoin ETF met their standards before launching, he explains.

The company stores its bitcoin assets with the Winklevoss twins’ Gemini Trust Co. LLC, which is a New York State Department of Financial Services-regulated exchange and custodian that stores the ETF’s assets offline to avoid cryptocurrency hacks.

Price notwithstanding, Mr. Tasevski is optimistic about the bitcoin fund along with the company’s other ETFs that include an ethereum fund, and yield funds for both bitcoin and ethereum that derive their profit from selling covered-call options on the ETF.

“We have seen net positive inflows in the year to date despite all the challenges,” he says of the cryptocurrency funds, adding that the company was still seeing that trend during November, after the FTX collapse.

“Obviously, prices haven’t been this low for a while, so most people are seeing it as an opportunity to buy more,” he says.

What has been most surprising is the firm has not seen a lot of sellers, he adds.

Poor management might have felled FTX, but investors should still trust in what now stands as the sector’s old-guard assets, says Julian Klymochko, chief executive of Accelerate Financial Technologies Inc. in Calgary.

“Besides bitcoin, ethereum has a use and will provide sustainable value. In addition, blue-chip [non-fungible tokens (NFTs) used mostly for digital art] have a bright future,” he says. “Other than those select digital assets, I believe 99 per cent of cryptocurrencies and NFTs will go to zero.”

Accelerate Financial has a Carbon-Negative Bitcoin ETF ABTC-T among its cryptocurrency-based funds. The ETF, which exposes investors to bitcoin’s performance by investing in bitcoin futures on the Chicago Mercantile Exchange, dropped about 69 per cent in value over the past year.

Nevertheless, like his peers, Mr. Klymochko sees no reason to close down or otherwise change the ETF in spite of a rough year. He praises bitcoin’s inflation-proof monetary mechanism – the cryptocurrency’s code limits the total number of bitcoins.

“As the world’s only self-sovereign hard money, it has a bright future despite short-term volatility,” he says.

CI Global Asset Management, another company offering cryptocurrency ETFs, also has no plans to change the investment objectives or strategies of the funds.

“We expect digital assets to rebound once central banks pivot on interest rates,” says Paul Cappelli, portfolio manager and head of liquid passive strategies at CI GAM’s specialist portfolio adviser, Galaxy Digital Capital Management LP.

“We’ve already seen some signs of inflation slowing. A sustained pullback in inflation should allow the Federal Reserve and other central banks to ease up on rate hikes, bringing more liquidity into the system.”

But who will direct that liquidity toward crypto?

“There needs to be a fresh injection of money into the space and I just don’t see where that will come from,” says Adam Button, cryptocurrency analyst and managing editor at currency analysis site ForexLive.

Mark Connors, head of research at 3iQ Digital Asset Management, believes the money will come from institutions.

“The gateway drug for some of these institutions, especially the asset managers, is the actual bankruptcy of the FTX group itself,” he says, predicting that banks on the lookout for distressed assets will find opportunities in an ailing crypto market.

Some institutions will be understandably cautious. The Ontario Teachers’ Pension Plan, which had committed 0.05 per cent of its funds to FTX, wrote down its investment to zero and warned that it would “use this experience to further strengthen our approach.”

Nevertheless, Mr. Connors sees opportunities for traditional finance players to build consulting and educational services around this sector, bringing it further into the mainstream.

With once-strong cryptocurrency ETFs at all-time lows, institutional and retail investors alike might be encouraged to buy the dip. The question is how long that dip will last, and whether the mainstay digital assets will repeat past performances and bounce back.

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