This month marks Hashdex’s fifth anniversary. Since our 2018 founding, we’ve seen many ups and downs in the crypto markets, but one thing has remained consistent: Each year, the crypto ecosystem continues to make leaps in advancements that are making the long-term investment case for this asset class stronger over time.
Chris Glendening, Senior Director of Marketing, sat down with the Hashdex leadership team to reflect on the last five years and share more of our perspectives from our recently released 2023 Crypto Investment Outlook.
The wide-ranging discussion covered several topics, including our views on the impact 2022 will have on crypto investing, what we are seeing in Europe and the US, and best practices for asset managers in this space. The team also covered our main investment themes for this new year, discussing the evolving investment case for Bitcoin and Ethereum, developments in important segments like decentralized finance (DeFi) and digital culture (e.g., NFTs), and how the macro and regulatory landscape will impact the entire industry going forward. Following is a summarized version of the Q&A from the discussion.
Chris: Last year the industry suffered some significant setbacks as the failure of centralized entities like Celsius and FTX called the industry’s credibility into question. How should investors evaluate the impact of the bad behaviors that transpired in the past when considering future investments in crypto?
Marcelo Sampaio, CEO & Co-Founder: There really is no avoiding the damage caused by the failure of these centralized firms to the public’s perception of crypto. To those that do not follow this space closely, the headlines about fraud, self-enrichment, and deceptive practices made the entire industry seem as if it is broken.
But this is far from the truth. What can’t be lost in the bad news is that crypto had an unbelievably remarkable year. In fact, if you look at what happened in terms of institutional adoption and network development, 2022 was arguably the best year crypto has had in its history. Google, Disney, Apple, BlackRock, Fidelity, and many other large traditional businesses made significant long-term commitments to this space. And if you factor in Bitcoin’s improving investment case, Ethereum’s transition to Proof-of-Stake, and global regulators' recognition of the transformational potential of crypto, the year was far from a negative.
And if we look at 2023, especially considering the strong start to the year for crypto assets, there is much to look forward to but also much work to be done. Crypto continues to make giant leaps forward even during market drawdowns. And each up market that follows is a recognition of important industry developments, as interest and understanding of this space broadens. So I remain very bullish on 2023, even in a likely challenging economic backdrop.
Chris: Hashdex was able to avoid direct exposure to the major blow-ups last year, including the Terra/LUNA collapse and FTX. Bruno, can you talk a bit about the practices we have in place that helped us avoid these events?
Bruno Caratori, COO & Co-Founder: Since the genesis of Hashdex, a key pillar of our mission has been to bring to market products that adhere to the highest standards of regulatory compliance, risk management, security, operational controls, and governance practices. In the five years since our founding, we have pushed ourselves to excel at each of these disciplines and we believe this permeates across our products, our processes, our partners, and our team.
Hashdex was truly a pioneer by making security a guiding principle in the design of our crypto investment indices. All of our investment products are built to ensure the legitimacy of each included crypto asset and with features that are specifically designed to ensure security. Throughout our history we’ve partnered with institutions of the highest caliber in every step of the value chain, including index administrators, trading providers, fiduciary administrators, custodians, and regulatory compliance providers. Through this process, we’ve leaned on the expertise and robustness of players such as Nasdaq, Fidelity, Coinbase, BitGo, KPMG, Theorem, and others. But we've also helped them raise the standards for this industry. Along with our partners we developed security-first financial benchmarks, daily NAV striking, robust pricing methodologies, and we expanded the scope of digital assets supported by regulated institutional-grade custodians. We devised workflows with checks and balances and we've worked to properly implement features that are unique to crypto, such as staking, for our investors.
We expect that in 2023—and beyond—the crucial value of this mindset we've nourished for five years will become more ingrained in our industry, helping to push the entire ecosystem forward to the benefit of investors and users across the globe.
Chris: One of the most important parts of our jobs is communicating effectively to both our clients and those considering investing in crypto. Last year demonstrated just how important this type of communication is. Beta, what are we doing to ensure that investors feel confident and empowered to invest in this space?
Roberta Antunes, Chief of Growth: Crypto is complicated and I think when prices are only going up, many people are less concerned about the promise of the underlying technology and more about getting in for the ride. This is unfortunate but is also a reality of this asset class which has experienced such explosive growth. However, the current environment is providing an opportunity to help people understand just why crypto is such a transformative technological innovation, and why investing in these assets over the long term makes sense.
Blockchain technology has the potential to impact many different industries across the economy and will change how we process payments, access healthcare records, play online games, and many other aspects of our lives. Crypto assets, which are needed to ensure the verifiability and security of blockchains, will become more important as this disruption materializes. Moments like now, where crypto’s short-term price depreciation and recent scandals are making people question its value, are a great opportunity for us to keep investors informed about the most important crypto developments, helping them to separate these advancements from the noise. This is why we have always placed such a high emphasis on providing educational resources for our clients and investors in general. And after last year, this has never been more important. We want to make people less confused about crypto, and more excited about its potential not only as an incredibly disruptive innovation, but as an important investment component within their portfolios.
Chris: Hashdex had a big 2022, even in the face of macro and industry headwinds. We launched a first-of-its kind Bitcoin Futures ETF in the US, listed new ETPs in Europe, and expanded in Latin America. Bruno, what are we seeing in terms of demand from investors in these regions?
Bruno Sousa, Head of New Markets: Well, each region is different because of regulation and investor appetite for crypto assets, but there are some patterns emerging globally that we think are good signs of adoption over the long term.
One overarching theme is the growing maturity of the crypto ETF/ETP space. In early 2021, Hashdex launched the world's first crypto ETF, so this is a dear space to us. Our approach has always stood out from competitors in the listed crypto products segment: while the majority of ETFs/ETPs out there are focused on single assets—just wrappers for BTC, ETH, etc.—we've been true believers in the index approach to crypto investing since day one. We’ve had enormous success with several thematic investment products in Brazil, and this is our key focus for all the markets we're in. With these products, we give investors the ability to invest in crypto assets that are focused on DeFi, Web3, or other segments within the broader crypto ecosystem, and there's been an incredibly welcoming reception from both institutional and retail investors who understandably feel lost in trying to choose individual crypto projects appropriate for investment.
In 2022, we listed two ETPs on SIX, Deutsche Börse, Euronext Paris, and Euronext Amsterdam—the Hashdex Nasdaq Crypto Index Europe ETP (HASH) and the Hashdex Crypto Momentum Factor ETP (HAMO). The decision to list these products came from our direct conversations with numerous hedge funds, family offices, and other professional investors, who were eager for both a well-built, broad-market index product (HASH) and a systematic and factor-based crypto investment strategy they were familiar with (HAMO).
One thing we have learned is that our global presence is a great asset in terms of understanding investor demand. Being in different markets allows us to collect a diverse set of views on the market and test products in certain regions before deploying them in others.
Chris: Getting back to what we see happening in 2023. Samir, can you share some perspectives on the main investment themes we see driving crypto markets this year?
Samir Kerbage, Chief Product & Technology Officer: We identified seven themes in our 2023 outlook that crypto investors should pay attention to this year. We go into detail on these themes in our report, but in sum they are focused on the improving investment case for Bitcoin and Ethereum, emerging crypto sectors, and an improving regulatory and macro environment.
For Bitcoin and Ethereum, we believe 2023 will prove to be a year of continued improvement in fundamentals, including progress in the development of scaling solutions. Ethereum, of course, is coming off the heels of the most monumental upgrade in its history, The Merge. This is making the asset more attractive, in our opinion, both because of its shift to a far less energy intensive consensus mechanism, but also because of the scaling solutions that are going to make the network more usable and accessible to a greater audience.
We are also expecting continued growth in the DeFi1 and Digital Culture segments of crypto. DeFi will get more fully integrated into traditional finance and the most well-developed DeFi protocols will benefit from improving tokenomics2. In the Digital Culture segment, which includes NFTs and gaming, we are watching how partnerships between crypto companies and traditional industries may expand crypto to a broader audience, among other trends.
Finally, with regard to regulation and the macro environment, we think 2023 will look much different than 2022. The FTX situation will likely lead to more regulatory clarity for the industry, and even though it remains to be seen exactly what this “clarity” will look like, better defined regulatory parameters will give crypto businesses more credibility and a better understanding of the landscape in which they can operate. We’re also anticipating a more “ordinary” macroeconomic environment in this new year. What I mean by this is that 2022 was a unique situation for crypto given the combination of industry failures and extremely difficult macro landscape. Even as the Fed and other central bankers act to reign inflation in and recessionary conditions hang over risk assets in general, crypto assets won’t be as weighed down by macro conditions and may even recover more quickly than other risk assets as conditions improve. We’ve seen this already in January as crypto significantly outperformed the S&P 500, Nasdaq 100, and other indices.
Chris: Without getting into the game of price predictions, do you have thoughts on directionally where we’ll be at the end of this year?
Samir: The macro outlook is certainly not favorable for risk assets in the short term, but despite this we are anticipating that 2023 will mark the start of price recovery for crypto. The Nasdaq Crypto Index rose more than 37% in January,3 so this is already trending in this direction. In some ways the current environment reminds us of early 2019. November 2018 was the worst of the last cycle, with BTC trading around $6,000 and about 70% off its all time high. There was a “Hash War” going on that shook market confidence regarding Bitcoin’s sustainability, and the price fell to $3,000 in a matter of days. A recovery came in February 2019, taking BTC to $10,000, and a new all time high came about two years later. While history doesn’t repeat, bitcoin cycles do tend to rhyme given the human behaviors that drive the price of BTC.
It’s also worth noting that this time, it's not only Bitcoin that will lead adoption and interest from institutional investors. We're seeing the Ethereum ecosystem thrive after The Merge, and we believe we're entering the "Broadband Phase" of smart contract platforms. What I mean by this is that if you look at what was happening with the internet in the early 2000s, the broadband connection transformed the scalability and adoption of the internet, allowing useful applications to reach mass consumers. This is something we are exploring in more detail in a forthcoming research piece.
So the point here is that we believe that the worst is behind us and that the recovery phase of this cycle is starting. While we don’t want to make too much of January’s crypto price rally, I do think it’s a sign that interest in crypto assets remains strong and we move to a more ordinary macro backdrop, risk assets will be rewarded and crypto will benefit.
Chris: Samir mentioned regulation being a key theme in 2023 and nowhere is this more of an outstanding question than in the US. With the launch of the Hashdex Bitcoin Futures ETF in the US in 2022, this is obviously something we are paying very close attention to. Bruno, can you talk about the regulatory environment in the US relative to other markets? For instance, will we ever see a spot Bitcoin ETF?
Bruno S: Well on your second question, I think we will certainly see a spot Bitcoin ETF at some point, but the timing remains uncertain. I remember thinking back in 2015, in my previous life as a securities lawyer in a New York law firm involved in some Bitcoin ETF filings, that it would probably come out in a few months. Fast forward eight years, and this is still an issue, despite the numerous countries that have approved equivalent ETFs/ETPs.
In any case, and more broadly with regards to regulation, the US has certainly lagged behind on some fronts but I think there are several solid developments that show progress. On top of President Biden's executive order last year, the debacles from FTX and other firms have created extra urgency for regulators and lawmakers to establish clear guidelines for crypto firms and investors.
There are legislative efforts underway that should get more traction both because of FTX, but also because of the attention the incoming chair of the House Financial Services Committee has given the issue. In the background of the proposed bills in Congress, there is growing pressure on the SEC with respect to the segment as a whole, and the numerous enforcement actions the Commission has brought are not sufficient to provide stability and a clear framework to crypto investors and firms. As a result, we expect to see in 2023 the approval of federal legislation regulating crypto service providers, with powers concentrated on the CFTC (and some with the SEC), and a breath of fresh air for numerous crypto endeavors.
Chris: Beta, you spoke earlier about the importance of educating investors. But it seems like it's not just investors that are looking for more information about crypto. Crypto is somewhat unique as an investment class because there is such a lack of understanding about what it is, and isn’t, from the media and policymakers across the globe. What steps is Hashdex taking to help educate these audiences about the potential for this space?
Beta: Crypto is a young asset class with relatively few people or even media outlets providing the type of comprehensive, real-time information investors expect. Many of the important conversations about crypto happen informally on Twitter or other social media channels and validating sources can be difficult. The lack of access to credible information is a huge obstacle for investors and one of the reasons why we are working to become the reliable source for crypto investors.
We believe this is exactly what our industry needs, especially in these uncertain times. To that end, we have launched a number of education initiatives, including our monthly investor call and newsletter, weekly updates on market conditions, and regular insights into how events in the world of crypto will impact investors. All of these can be currently found at our Research Center on our website, and we’re in the process of creating more educational content around the impact of including a crypto allocation to investor portfolios.
Chris: What are the most frequent questions we receive from clients about investing in this space? Has this changed post-FTX?
Bruno C: There is a lot of confusion about crypto and the fraudulent behavior like we saw with FTX does not help make this a more understandable industry. Not surprisingly, the questions we get most often tend to be around security, that is, how do we keep assets safe from theft or hacks, as well as risk management.
We view our job as being the adults in the room who will do the work to 1) make sure any asset included in portfolios is worthy of investment and 2) ensure that all of the third parties that have any part in the investment process, whether that’s our custodians, exchanges, fund administrators, or others, are transparent, auditable, and as obsessive about risk management as we are. While we can’t control if the price of a crypto asset goes up or down, we can do everything in our power to make sure we have the systems in place to ensure assets are kept safe. We’ve formulated and implemented strict internal risk management criteria that allow us to mitigate the counterparty and operational risks inherent in a nascent asset class like crypto. The importance of this has of course risen to the surface in the wake of FTX, as many well-known players ended up being impacted to the detriment of their investors.
Chris: Hashdex celebrated its fifth anniversary this week. That seems like an eternity in crypto, but it’s safe to say our business, and this industry, is just getting started. Marcelo, are there lessons learned from the last five years that you think will apply to our industry in the next five?
Marcelo: Crypto was volatile when I first started investing in this space a decade ago, it was volatile when Hashdex was created in 2018, and it will continue to have many ups and downs as the space develops and matures. This really doesn’t bother us. In the past we’ve used the hashtag #InVolWeTrust not because we take these price swings lightly or dismiss the negative impact down markets can have, but rather because we have embraced the fact that volatility is necessary for crypto to get to the next level of acceptance and adoption.
I think it’s also important to remember that we all can get caught up in bull cycles, thinking they will never end, but they do. At the same time, in a crypto winter like we’re in now, it can be hard to see the sunlight peeking through the clouds. But one thing we’ve learned over and over again in this space is that the rain doesn’t last forever. Over time, the industry’s strengthening fundamentals, institutional interest, and disruption potential will all slowly push this space to be bigger, better, and ultimately more impactful to humanity as a whole. That is crypto’s promise and we could not be more excited to be on this journey with our investors for the next five years.
 Decentralized Finance
 The term tokenomics refers to the supply and demand characteristics of a crypto asset, including its utility, burn rate, distribution, and other factors.
 The Nasdaq Crypto Index rose 37.2% during the month of January 2023.
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