Morningstar - Q3 2022 - 34

Spotlight: Cryptocurrencies
annualized, according to CoinGecko. Even
as bitcoin returned 103% on average each year,
its share of the market tumbled from
nearly 90% in December 2016 to less than
45% as of May 2022.
The cryptocurrency that has the second-largest
market share is ether, which goes with the
ethereum blockchain. Ether has experienced sharp
spikes and tumbles in its price as enthusiasts
speculated on a wide variety of applications
for smart contracts, from initial coin offerings and
CryptoKitties to decentralized finance and
the metaverse. Since January 2021, ether has
hovered consistently between 15% and
20% of the market.
Altcoins encompass all other cryptocurrencies.
They have reaped the benefits of renewed
interest in potential applications for blockchain
technology. Altcoins are a diverse and often
overlooked group. They typically specialize in
something. For example, terra (the cryptocurrency
that blew up in May) had a blockchain that
only created stablecoin tokens, while polkadot
ferries information or assets between other
blockchains. In the past, this specialization blunted
investor interest, but altcoins' swelling market
share has reshaped this grab bag into a force to
be reckoned with.
As the cryptocurrency market matures, we
expect altcoins to behave much more in line with
the narrow subsegments of the market to
which they belong. Diversity between altcoins
will become a key contributor to the behavior
of the asset class, breaking apart the historically
tight correlations we have observed between
bitcoin and other digital assets. This could
facilitate a future where investors value a
cryptocurrency such as polkadot based on how
often users need bridges between blockchains.
Today, however, cryptocurrencies behave
too similarly, and narrative-driven rallies have too
much influence to justify investing based
on convergence with fundamental valuations.
With Great Returns Come Great Volatility
Those narrative-driven rallies partly explain the
increased demand from investors. From
ether's historic 9,500% streak in 2017 to solana's
11,100% tear in 2021, much of the interest
in these assets has been a self-fulfilling prophecy.
Investors see astounding gains and enter
the market, resulting in further upward pressure
on prices.
But every breathtaking rally has ushered in an
equally punishing crash on the other end,
and cryptocurrencies lack a fundamental anchor
like the par value of a bond or a stock's
discounted cash flows. Ether lost almost 90%
of its value between December 2017 and December
2018, and solana shed more than 80% of its
value between November 2021 and May 2022.
XRP, still the eighth-largest cryptocurrency by
market capitalization (excluding stablecoins), has
yet to recoup the losses it sustained since 2018.
Surveyed in aggregate, the volatility of
cryptocurrencies has no parallels to any other
measurable asset classes. From January 2015,
when regular pricing data starts, through
May 2022, the MVIS CryptoCompare Digital Assets
100 Index posted a standard deviation well
over double that of the second most volatile index
we identified and more than 5 times as volatile
as the MSCI ACWI Index ( EXHIBIT 1 ). Incredibly,
this measure includes stablecoins, which often link
to a fixed peg. That means that unpegged
cryptocurrencies in aggregate likely fluctuate even
more than this figure suggests.
Even outside of its volatility, the cryptocurrency
market hasn't behaved like any other investments,
The Arrival of
Cryptocurrencies
Crypto Enters
the Mainstream
Tesla accepts cryptocurrency-denominated
transactions, then stops three months later.
NFTs gain meaningful adoption
in art and entertainment.
Bitcoin Market, the first crypto
exchange, is established.
Miner mints first bitcoin, and
first transaction occurs.
2008
2009
2010
Satoshi Nakamoto, a pseudonym,
distributes the white paper " Bitcoin:
A Peer-to-Peer Electronic Cash System "
to a cryptography mailing list.
2012
Vitalik Buterin publishes
the ethereum white paper.
Mt. Gox hacked for
850,000 bitcoins.
2014
Peercoin pioneers the first
proof-of-stake blockchain.
2015
The first ether token
gets minted.
Goldman Sachs drops plans
to open cryptocurrency
trading desk.
34
Price of bitcoin rallies
from $900 to $20,000.
2017
2018
Cryptocurrencies pass $1 trillion
in market capitalization.
El Salvador adopts bitcoin
as a legal tender.
Decentralized finance
services begin to allow
smart-contractenabled
crypto lending.
2021
Prices of
cryptocurrencies
collapse 50%.
2022
Morningstar - Q3 2022

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