Brinker Capital Portfolio Manager Shares Insights On Cryptoasset Winter Causes, Importance Of Ethereum Merge And Options For Investing
“Winter is coming!” is the oft-cited phrase from the popular television show “Game of Thrones,” and meteorological winter is truly coming for the Northern Hemisphere, but winter isn’t coming for cryptoassets – it’s been here for months.
Within the past year, Ethereum’s price peaked at $4,867.00 per ether coin, dipped to $880.31, and as of Sept. 15 traded around $1,500. Bitcoin and other major cryptocurrencies all followed similar trajectories.
Many investors and advisors continue watching the latest developments in cryptoassets, such as the upcoming Bitcoin halving and Ethereum merge, convinced that the current bear market is only temporary and cryptoassets will come back stronger.
One such investor is Grant Engelbart, a Senior Portfolio Manager at Brinker Capital Investments, a provider of customized portfolio solutions and a brand entity of Orion Advisor Solutions. An Orion veteran since 2007, Engelbart manages several ETF and mutual fund separate account strategies and serves on committees across both Brinker Capital and the broader Orion organization.
We spent time with Engelbart to understand why cryptoassets are in a bear market, what to expect next, what’s happening with the Ethereum merge and how advisors can place clients in cryptoassets.
WSR: What are the drivers of the recent downturn in cryptoassets? What circumstances could bring the changes necessary to push the cryptoasset markets up again? What type cryptoassets should we watch closely, and why?
Engelbart: There are several reasons for the recent downturn in cryptoassets. To tame decades-high inflation, the Federal Reserve aggressively raised its target interest rate. This led to a repricing of risk assets broadly, but especially for “long-duration” securities like high-growth stocks and cryptocurrencies.
Also, overly accommodative monetary policy in 2021 led to bubble-like valuations and certain cryptocurrencies were bid up to levels that were unwarranted at the time. Inflation, geopolitical risk and declining liquidity adjusted investor risk appetite in 2022 and high-growth investments without the certainty of immediate cash flows (like dividends) have sold off dramatically.
In addition, cryptocurrencies tend to go through large cycles. Historically, Bitcoin and Ethereum have both crashed 50-80% on numerous occasions. We are in the middle of such a correction that will set us up for the next bull market run in the coming years.
Going forward, any dovish pivot by the Federal Reserve will be positive for risk assets broadly, including cryptocurrencies. Strong investment in the digital asset universe has continued despite prices falling dramatically – potentially setting up for a stronger and more mature ecosystem in the future. The Ethereum merge and the next Bitcoin halving are both major events that will support prices in the future.
Ethereum is very important to watch going forward as the merge occurs. Bitcoin and the adoption of the lightning network will also be important going forward. Next-generation layer-1 protocols (Ethereum being the original layer-1 blockchain) such as Solana, Avalanche and Polkadot have significant potential going forward. Ethereum-scaling technologies such as Polygon, Loopring and Optimism should also be closely watched as the merge progresses.
WSR: Tell us about the merge in Ethereum. How will that change Ethereum and ether’s standing in the crypto world? Should investors take into account proof-of-stake versus proof-of-work?
Engelbart: The much-anticipated Ethereum “merge” is the transition of the Ethereum network from proof-of-work (PoW) to proof-of-stake (PoS). PoW – which Bitcoin uses – requires heavy computational power to “mine” blocks and confirm transactions. PoS is much less power-consuming and computationally intensive, relying on validators to confirm transactions by “staking” their tokens.
It’s anticipated that the new PoS Ethereum network will be faster with lower transaction costs. This will help Ethereum maintain its place as the primary network to build applications, as many competitors offer faster and cheaper transactions.
The merge creates a couple of additional dynamics. First, Ethereum will go from an inflationary asset – meaning new tokens are being created all the time – to one with a smaller and more controlled supply because there will no longer be any mining of new ether. From a simple supply and demand point of view, this is bullish for prices.
Second, not all participants want to move to PoS. A version of Ethereum already exists – Ethereum Classic – that will continue with PoW.
WSR: How should an advisor place U.S.-based clients in cryptoassets? What options are available, and what are the pros and cons of those options?
Engelbart: There are two main ways to allocate client investments into cryptoassets. The first is direct exposure via a cryptocurrency separately managed account. Firms in this space work with advisors to allocate client assets to cryptocurrencies through a user-friendly format and enable integration with an advisor’s existing workflow.
There are many options for ownership, such as a single asset like Bitcoin or Ethereum or an index or custom basket. While direct exposure is generally preferable, it comes with drawbacks such as creating new accounts, rebalancing issues and potential restrictions at the broker-dealer level.
The other way to allocate into cryptoassets is via publicly traded and quoted cryptocurrency ETFs and trust products. ETF exposure is available through Bitcoin futures as well as equities such as publicly traded Bitcoin miners, cryptocurrency exchanges and other digital asset-related companies.
Trust products generally provide “direct” exposure to the underlying cryptocurrency but lack the creation/redemption mechanism of ETFs, so they trade at wide premiums or discounts to underlying value. This route can complement the existing financial infrastructure advisors are used to and make it easier to rebalance across accounts.
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org