- Bitcoin is down 40% from its November record high price as the crypto market struggles at the start of 2022.
- UBS remained bearish towards volatile digital currencies in its latest research report.
- But the bank suggested three routes for investing in blockchain at a lower risk level.
The world’s largest asset manager has maintained its bearish stance on crypto, as digital currencies continue to struggle at the start of 2022.
“Direct exposure to cryptos is highly speculative,” chief investment officer Mark Haefele wrote in the Swiss bank’s latest research report. “The latest fall has undermined most common defenses for the asset class.”
Haefele has never endorsed investing in crypto due to its highly speculative nature. That’s in contrast to more bullish Wall Street banks – including Goldman Sachs, which recently set bitcoin a $100,000 long-term price target.
But UBS did highlight three ways to invest in crypto technology without exposing a portfolio to heightened risk. Insider breaks down all the details from the $2.6 trillion bank’s latest crypto report.
Crypto’s downfall
Bitcoin and ethereum are down 22% and 29%, respectively this year. For Haefele, that slump has weakened common arguments in favor of investing in crypto.
First, he said that the fact that the cryptocurrencies and stock markets are struggling at the same time - with the S&P 500 down 4% in 2022 - demonstrates that digital currencies don't act as a diversifier for equity portfolios. Right now, bitcoin is around 80% correlated to the S&P 500, indicating that it is more likely to move in near-perfect lockstep with the index.
"While cryptos' correlation with stocks has typically been low, they have failed to provide an effective hedge when needed most," Haefele said. "When the S&P fell 5.2% for its worst January since 2009, Bitcoin lost 17% and Ethereum 27%."
Secondly, Haefele argued that the current sell-off shows that crypto is no longer an effective hedge against inflation, which hit a 40-year high in December 2022.
"We are finding it increasingly harder to see cryptos as a form of 'digital gold' that offers such protection," he said. "They continued to slide despite the recent data showing that US inflation had risen at its fastest pace in almost four decades."
Investing strategies
"Direct exposure to cryptos is highly speculative," Haefele added. "But that does not mean that the technology underlying digital assets holds no promise for investors."
UBS estimated that blockchain tech will boost global GDP by $1 trillion over the next decade, with applications in industries including financial services, healthcare, and luxury goods. Haefele charted three routes to investing in the sector.
Investing in blockchain enablers and platform operators is one way to gain exposure, he said. Haefele advised targeting sectors that will benefit from widespread adoption, such as semiconductor manufacturers and software developers.
"As the technology is increasingly used over the next five to 10 years, we see opportunities from the introduction of new product services and categories, possible savings from the use of technology, potentially lower prices, and an overall improvement in business efficiency," he said.
Insider recently published a list of 28 semiconductor stocks that Wall Street analysts are recommending as buys.
Fintech and DeFi companies also offer a route into blockchain, according to Haefele. He said crypto-native firms often enjoy a first-mover advantage when underlying technologies develop.
"Investing in [blockchain]-based businesses now is akin to investing in tech platforms a decade ago," Haefele said. "With COVID-19 accelerating the broader digitalization of the world, fintech companies could spur a similar wave of disruption."
Two of the most prominent fintech funds that investors can invest in are the Global X Fintech ETF (FINX) and the Ark Fintech Innovation ETF (ARKF).
Lastly, retail investors with a higher risk tolerance could buy individual coins and tokens, according to Haefele. These assets offer direct exposure - but significant volatility.
"These assets could see substantial upside if the applications eventually achieve broader adoption for primary use cases that serve an essential economic need and hence allows for sustainable creation of revenues and profits in fiat currencies," Haefele said. "But the volatility of bitcoin and other cryptoassets has been trending sideways at a high level for many years."