Should cryptocurrency be regulated? This is an important question to ask, as chances are that globally and in the U.S., regulators are working on a potential framework that will do just that. The reasons are plenty, but the main one in favor of crypto regulation is its innovation of being decentralized.
In a centralized financial system, the main benefit of cryptocurrencies being decentralized seems a very radical idea, at least for regulators. For the President Joe Biden Administration, one key person that seems to be in strong favor of the cryptocurrency regulation is Janet Yellen, the new U.S. treasury secretary.
Recently Janet Yellen said some interesting things about crypto regulation. “I think it important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system,” she said. “At the same time, we know they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security interests and the integrity of the U.S. and international financial systems.”
Cryptocurrency regulation is not an easy task. Regulators aim at taxing capital gains from cryptocurrencies and target anonymity in the trades of cryptos. But somehow, restrained cryptocurrency regulation may make it both safer and less volatile.
To the extent an excessive regulation takes place for cryptocurrencies, then the most negative impact is likely to be selling pressure on its market price. Less demand for cryptocurrency due to its regulation will probably send crypto prices lower — at least temporarily, until market participants weigh on the new trading conditions.
- Siren Nasdaq NexGen Economy ETF (NASDAQ:BLCN)
- Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK)
- Grayscale Bitcoin Trust (BTC) (OTCMKTS:GBTC)
- Ebang International Holdings Inc. (NASDAQ:EBON)
- Bit Digital, Inc. (NASDAQ:BTBT)
Crypto Stocks at Risk: Siren Nasdaq NexGen Economy ETF (BLCN)
The Siren Nasdaq NexGen Economy ETF invests in companies related to blockchain technologies. Some of its top 10 holdings include Baidu (NASDAQ:BIDU), Canaan (NASDAQ:CAN), and Square (NYSE:SQ). Baidu has a blockchain project called Xuperchain, Square has both invested in and accepted bitcoin, and Canaan is focused in part on crypto mining machines.
The net assets are about $211 million and the net expense ratio is 0.68%, or $68 per $10,000 invested annually.
Blockchain and cryptocurrency regulation is expected to have an impact on all these companies offering products and services connected to the next generation of the blockchain economy. Any selloff in cryptocurrency could lower the investment returns of this ETF.
The one-year return of this ETF is about 60%.
Amplify Transformational Data Sharing ETF (BLOK)
According to Amplify’s data on this fund, “BLOK is an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies.”
This means that it is a highly concentrated ETF with a focus on the future of the blockchain economy.
Some of the top 10 holdings include MicroStrategy (NASDAQ:MSTR), Marathon Patent (NASDAQ:MARA), and PayPal (NASDAQ:PYPL). The net assets are about $530 million and the net expense ratio is 0.7%. The largest industry allocation is in the software and services sector with a weight of 41.3% and the second sector with the largest weight is diversified financials.
The majority of assets are allocated in North America with a weight of 56.8% followed by the Asia Pacific with a weight of 36.8%. The one-year performance is 104%.
Grayscale Bitcoin Trust (BTC) (GBTC)
If you believe in the future of major cryptos, this investment vehicle invests solely and passively in Bitcoin and claims to be “A bold opportunity in the era of digital gold.”
This trust is an investment vehicle that already complies with financial regulation, and it is the “first digital currency investment vehicle to attain the status of an SEC reporting company.” The trust invests in Bitcoin, and it mentions that is suitable for tax-advantaged accounts.
The risk here though should a selloff in Bitcoin occurs due to regulation is greater as there is no diversification at all. Either the trust will perform well in the future should Bitcoin price increase or have a poor performance in the event Bitcoin stabilizes or decline significantly.
The annual fee is 2% and the assets under management are close to $23 billion. The one-year performance is 192%.
Ebang is a Chinese company that offers Bitcoin mining machines and also telecommunication products. As the company says on its website, “In terms of hashrate sales in 2019, we were the leading Bitcoin miner manufacturer in the global market.” The company added, “We are also one of the earliest bitcoin miner foundries in China with proprietary ASIC chips developed independently.” Some companies are involved with Bitcoin, but Ebang is deep in the area.
Bitcoin mining is profitable as long Bitcoin price moved higher, which drives demand for Ebang’s products. If Bitcoin plunges due to regulation, Ebang may witness a decline in its sales both to enterprises and individual buyers.
The one-year performance of the stock is almost 0%, while on a year-to-date basis the stock is down almost 21%.
Bit Digital (BTBT)
Another stock in the Bitcoin mining business, Bit Digital, is based in New York. According to its website, “It commenced bitcoin mining in early 2020 and currently operates 2,253.5 PH/S of Bitcoin Hash Rate across the entire Bitcoin network, making it the one of the largest bitcoin mining companies listed on NASDAQ.”
The same investment thesis for EBON stock applies here. Any selling pressure on Bitcoin could hurt Bit Digital’s sales.
Lower sales mean lower profitability and weaker free cash flows, which define the valuation of the stock. BTBT stock has performed very well in 2020 as it has a one-year performance of over 4,300%. Still, in 2021 the stock has declined almost 25%.
For BTBT and EBON stocks, the price of Bitcoin in the future is trivial to their valuation and stock performance as well.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.