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This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

2022 was a year to forget for cryptocurrency investors.

Beginning with the downfall of stablecoins Terra USD and Luna, and culminating in the collapse of the world’s second-largest crypto exchange — Bahamas-based FTX Trading Ltd. — the asset class took a battering.

In December, even the Japanese dog who became the face of digital currency Dogecoin seemed to have fallen victim to the crypto curse when her owner took to Instagram to ask for prayers after the sick shiba inu stopped eating or drinking.

Fortunately, the dog’s condition had improved by the turn of the year. Bitcoin and ether have experienced their own dramatic recoveries, though the price of each on Feb. 1 was still less than half of their late-2021 highs.

Meanwhile, bitcoin lost its lustre as a gold-like hedge against stock market risk as it fell last year in step with growth stocks.

Still, Alex Tapscott, managing director of the digital asset group with Ninepoint Partners LP in Toronto, sees positive signs for bitcoin’s long-term prospects, pointing to its previous rebounds and persistent accumulation rates among smaller investors.

“For a lot of people, the collapse of FTX was proof that maybe this industry is not quite ready for prime time,” Tapscott said. “My view at the investment level is unchanged, although maybe the time horizon has been pushed out a couple more years than originally expected.”

In addition, bitcoin’s recent stock-
matching volatility reminded Tapscott of the bumpiness in the price of gold during the early 1970s, when ties between the U.S. dollar and the gold standard were cut for good.

Although painful, the volatility of the past year should come as no surprise to those with cryptocurrency holdings, according to Vlad Tasevski, chief operating officer with Purpose Investments Inc. in Toronto.

“Anyone who is invested should, in the very short and medium term, be able to absorb large losses,” Tasevski said. “That’s the nature of the asset class.”

Data from National Bank Financial Inc. suggests that crypto ETF holders have taken the crash in stride. The bank reported that crypto ETFs saw a net outflow of just $118 million for all of 2022 — a small fraction of the drop in crypto ETF assets from the November 2021 peak of $7.5 billion to $1.7 billion at the end of last year.

According to C.V. Rao, an equities analyst with MFS Investment Management in Boston, investors approaching digital assets such as bitcoin need to separate the two key crypto business cases.

“First, you have cryptocurrencies as cash, and that’s where the trouble lies,” Rao said.

The second revolves around the security and transparency of cryptocurrencies’ underlying blockchain technology, which, Rao said, has the potential to revolutionize financial transactions between counterparties.

“That side of the use case I am still very positive on,” Rao said, adding that development may be stymied because of the taint associated with the cash-side turmoil.

“If you’re a CEO or CIO going before your board and proposing some use of the blockchain, it looks like a high-risk endeavour,” Rao said. “We have to clear out all the debris before we move down the road, but you don’t want to throw away the good with the bad.”

A more robust regulatory regime will help build back trust in the long term. But in the meantime, Tapscott said, crypto enthusiasts should be looking at mainstream companies that have shown a willingness to embrace blockchain technology in their operations and corporate partnerships, including firms such as Nike Inc. and Microsoft Corp.

“Very little of their value is ascribed to what they’re doing in Web3 and crypto, but over time, I think it’s going to grow,” Tapscott said. “As an investor looking at this industry, you can look at the individual assets, but you can also look at the kinds of businesses that stand to benefit from these tools becoming more widely used.”