2022 was a turbulent year for the financial markets, and cryptocurrencies were no exception. As macroeconomic headwinds intensified, a particular segment of the investment world felt the chill more acutely than others: Exchange Traded Funds (ETFs) tracking crypto companies. If you’re wondering how deeply the crypto winter bit, look no further than the performance charts. Crypto-related ETFs didn’t just underperform; they dominated the list of the year’s worst performers, both in Australia and the United States. Let’s dive into why these once-promising investment vehicles faced such dramatic drawdowns.
Crypto ETFs: Topping the ‘Worst of’ Charts
It’s a stark reality: cryptocurrency-related ETFs grabbed the top two unenviable positions for the worst-performing ETFs in Australia in 2022. And it wasn’t an isolated incident; the same narrative unfolded in the United States. Which ETFs are we talking about?
- In Australia, the spotlight fell on:
- BetaShares Crypto Innovators ETF (CRYP)
- Cosmos Global Digital Miners Access ETF (DIGA)
These ETFs delivered eye-watering negative returns to investors:
| ETF Name | Ticker | Year-to-Date Return (as of Dec 30) |
|---|---|---|
| BetaShares Crypto Innovators ETF | CRYP | -82% |
| Cosmos Global Digital Miners Access ETF | DIGA | -72% |
Imagine investing and seeing over 70-80% of your investment vanish in a single year! But what exactly are these ETFs and why did they plummet?
BetaShares CRYP: Riding the Crypto Wave at the Wrong Time?
BetaShares launched its Crypto Innovators ETF (CRYP) on the Australian Securities Exchange (ASX) in October 2021. This timing, unfortunately, proved to be less than ideal. It coincided almost perfectly with the peak of the crypto market frenzy, just weeks before most cryptocurrencies, including Bitcoin and Ethereum, reached their all-time highs. Those highs, as we now know, were followed by a significant and prolonged downturn.
What does CRYP invest in? CRYP is designed to provide exposure to publicly listed companies operating in the blockchain and cryptocurrency space. Think of companies like:
- Coinbase: A leading cryptocurrency exchange platform.
- Riot Blockchain: A major Bitcoin mining company.
- Galaxy Digital: Mike Novogratz’s investment firm focused on digital assets, which, notably, is CRYP’s largest holding, representing 12.3% of the ETF’s portfolio.
Cosmos DIGA: Mining for Trouble?
The Cosmos Global Digital Miners Access ETF (DIGA) took a similar path. It aimed to track the performance of companies involved in cryptocurrency mining, particularly Bitcoin mining. DIGA also listed on the Cboe Australia exchange in October 2021 – the same inopportune timing as CRYP.
However, the story took a further negative turn for DIGA. Just a year after its launch, in October 2022, Cosmos requested the delisting of DIGA, along with two other ETFs tracking Bitcoin and Ether, from Cboe. The reason? A sharp decline in investor interest in cryptocurrencies. This lack of interest pushed the funds’ net asset value below the critical $1 million mark, making them unsustainable.
US Crypto ETFs: Mirroring the Downward Trend
Across the Pacific, in the United States, the picture for crypto ETFs was equally bleak. According to data from ETF.com, the top four worst-performing ETFs in the US were also crypto-related (excluding inverse and leveraged funds which are designed for different strategies). Leading the pack of underperformers was:
- Viridi Bitcoin Miners ETF (RIGZ): This ETF, similar to DIGA, focuses on publicly traded crypto mining companies like Riot and CleanSpark. It recorded a staggering -87% year-to-date return, making it the absolute worst performer.
Hot on RIGZ’s heels were other crypto-centric ETFs:
- VanEck Digital Transformation ETF (DAPP)
- Bitwise Crypto Industry Innovators ETF (BITQ)
- First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT)
These ETFs shared a common theme: tracking the crypto industry by investing in companies deeply involved in the ecosystem, such as:
- Block Inc. (formerly Square): Founded by Jack Dorsey, with significant crypto initiatives.
- Coinbase
- Riot Blockchain
- Galaxy Digital
The performance figures for these US-listed ETFs are just as concerning as their Australian counterparts:
| ETF Name | Ticker | Year-to-Date Return (as of Dec 30) |
|---|---|---|
| Viridi Bitcoin Miners ETF | RIGZ | -87% |
| VanEck Digital Transformation ETF | DAPP | -86% |
| Bitwise Crypto Industry Innovators ETF | BITQ | -84.5% |
| First Trust SkyBridge Crypto Industry and Digital Economy ETF | CRPT | -81.5% |
Why Did Crypto ETFs Suffer So Much?
The dismal performance of crypto ETFs in 2022 can be attributed to a confluence of factors, primarily:
- Macroeconomic Headwinds: Global economic uncertainty, rising inflation, and interest rate hikes by central banks created a risk-off environment. Investors became more cautious and moved away from riskier assets like cryptocurrencies and related investments.
- Crypto Market Downturn: The entire cryptocurrency market experienced a significant correction in 2022. Bitcoin, Ethereum, and many other cryptocurrencies saw massive price declines from their 2021 highs. This ‘crypto winter’ directly impacted the value of companies within the crypto ecosystem, which in turn dragged down the performance of crypto ETFs holding these stocks.
- Timing of ETF Launches: As highlighted with CRYP and DIGA, the launch of many crypto ETFs coincided with the peak of the crypto market. Buying high and then experiencing a market crash is a recipe for negative returns.
- Declining Investor Interest: The prolonged downturn in the crypto market led to decreased investor enthusiasm and trading volumes, further impacting the net asset value of crypto funds.
Key Takeaways for Investors
The 2022 performance of crypto ETFs serves as a critical reminder of several important investment principles:
- Volatility of Crypto Assets: Cryptocurrencies and related investments are inherently volatile. The potential for high returns is accompanied by a significant risk of substantial losses, as clearly demonstrated by the ETF performance.
- Market Timing Risks: Trying to time the market, especially with volatile assets, is extremely challenging. Launching or investing in ETFs at market peaks can lead to significant losses when the market corrects.
- Diversification is Crucial: While crypto ETFs offer diversification within the crypto sector, they are still concentrated in a single, high-risk asset class. A well-diversified portfolio should include a mix of asset classes to mitigate risk.
- Due Diligence is Essential: Understand what an ETF invests in and the risks involved before investing. Don’t get caught up in market hype; consider the long-term prospects and your risk tolerance.
Conclusion: Navigating the Crypto Investment Landscape
The year 2022 was a harsh lesson for crypto ETF investors. While these ETFs offered a seemingly easy way to gain exposure to the burgeoning crypto industry, they also amplified the downside risks during a market downturn. The extreme negative performance underscores the importance of understanding the volatile nature of crypto assets and the broader macroeconomic factors that can influence their value. As the crypto market continues to evolve, investors need to approach crypto-related investments with caution, a long-term perspective, and a thorough understanding of the risks involved. The story of 2022’s worst-performing ETFs serves as a valuable case study in the inherent risks and rewards of investing in the dynamic world of cryptocurrencies.
Disclaimer: The information provided is not trading advice, Bitcoinworld.co.in holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.