The team at GW & Wade, like many of you, has been focusing on the war in Ukraine and the unnecessary loss of lives. While we continue to monitor the markets, we have not lost sight of the developments in a particular segment of the market, the ever-changing digital marketplace of Cryptocurrencies.

Cryptocurrencies continue to be volatile as recent events have the potential to both disrupt cryptocurrencies and accelerate their use (and misuse). With the Ukraine war heading into its second month, cryptocurrencies could see a boost from crypto-based fundraising efforts to support Ukraine’s fight against Russia and Russia's use of them to evade sanctions. In addition, President Biden’s recent executive order and the proliferation of the tokens themselves could cause volatility.

On March 9th, President Biden issued an executive order calling on the government to examine the risks and benefits of digital assets and their underlying technology. Additionally, the US government is considering issuing a digital coin backed by the Federal Reserve, known as a Central Bank Digital Currency (CBDC), but that is expected to be approached later in the year as the Fed is still researching the issue. We also believe that the volatility of existing cryptocurrencies’ market prices will continue until it becomes clear how the US and the rest of the world’s governments will regulate and tax the space.

The Kleenex of Cryptocurrencies

Bitcoin (BTC), both the cryptocurrency and the blockchain ledger, has long been the name brand in this market. As the first cryptocurrency, BTC represented nearly 85% of the total cryptocurrency market in February 2017. However, shortly thereafter, in March 2017, the rise of Ethereum (ETH), which quickly captured a 17% market share, and Ripple (XRP) (9% market share) resulted in BTC dropping to about 40% of the total cryptocurrency market. Nearly five years later (with, of course, a fair amount of volatility and price appreciation in between), we are still in that same range. As of February 20, 2022, BTC represents 42% of the total cryptocurrency market and ETH is at an 18% share.

While BTC and ETH have remained market staples, new cryptos have entered the conversation. Cardano, Solana, Terra, and Dogecoin have all emerged in the past five years to be in the top 10 of cryptocurrencies by market share. XRP remains in the top 10, but its market cap has fallen to less than 2%, while the coin is worth $0.60 after reaching an all-time high of $3.80 in December 2017.

While BTC has continued to build momentum and move mainstream, there are still a number of downside risks to the asset, including the uncertainty around the coin’s utility and its inefficient use of natural resources¹. However, there is no doubt that a significant number of investors and some of the largest and most well-respected financial services companies in the U.S. are continuing to use and espouse BTC (and other digital assets) as a potential diversifier (though this has not been the case recently), a venture-like investment, and/or a long-term store of value.

Companies Investing in the Blockchain Technology

While the utility of cryptocurrencies remains speculative, the potentially disruptive nature of blockchain technology - as a means to reduce costs and fraud, minimize reporting errors, and store large amounts of data and automate transactions in a highly secure, digital environment - continues. Many of the world’s largest companies (Microsoft, IBM, Credit Suisse, Boeing and Walmart to name a few) are researching or using blockchain technology in this manner. These companies, and many smaller ones, are using Ethereum and other platform-based blockchains (such as Solana, Cardano, and the Hyperledger Fabric) for a variety of interesting projects.

The Rise of DeFi, the Metaverse, Web3, and Non-Fungible Tokens (NFTs)

You have likely heard of some or all of the above terms and maybe you wondered what they are and how they could impact your finances, daily life or the greater economy. While these are all unique concepts, they are very interrelated.

• DeFi: Short for Decentralized Finance, DeFi is an emerging technology that replaces customary brokerages/exchanges/intermediaries with smart contracts executed on blockchain technology. The key is the system is decentralized and not reliant on a specific bank or corporation.
• The Metaverse: Named after Neal Stephenson's 1992 sci-fi novel "Snow Crash," the metaverse is a convergence of our physical and virtual worlds where users will interact in a shared digital reality using their personal avatar. Interactions will lend themselves to a fully functioning economy where the concept of digital ownership becomes a reality. While the notion of the metaverse is still more of a vision than a reality, it is becoming evident through certain popular videogames (e.g., Fortnite, Roblox, Decentraland). In the future, the metaverse could be the host to our daily lives, providing a forum for both our professional and social lives.
• Web3: Though similar to the Metaverse, Web3 is more about ownership and control of one's own digital content (i.e., the internet). Similar to how the metaverse has started to emerge, Web3 has begun to take form via decentralized web browsers. These are browsers that are built on blockchain technology and allow users to control what data and assets are includable. In the future, Web3 may influence how we manage data, the governance of the dataset and how we economically transact.
• Non-Fungible Tokens (NFTs): NFTs are an example of the intersection of the above three concepts. NFTs are unique units of data, secured by the blockchain, that allow users to own, sell and control their own digital content. The value of NFTs can be attributed to both token’s exclusivity and/or its functionality. For example, a piece of visual art created as an NFT has a code that indicates its authenticity, and it can also contain a code that pays the artist a royalty with each sale. Contrast that with a painting, which is sold by an artist to the first buyer, but the artist typically wouldn’t earn anything on subsequent sales.
  
  

More on Non-Fungible Tokens (NFTs)

An exciting development in the blockchain platform world has been the proliferation of NFTs over the past few years. “Cryptokitties” were first developed in late 2017 and are a combination of a video game and online art with ownership tracked as an NFT originally on the Ethereum blockchain and now on the Flow blockchain.

Also, on Flow, Dapper Labs, in participation with the NBA, created NBA Top Shots which are NFTs of short highlights of NBA plays. Owners can collect, buy, and sell these individually, serial-numbered NFTs with the rarest highlights of the most well-known players attracting the highest prices. While both of these NFTs are down from their all-time highs, their communities are still worth millions of dollars and thriving.

Two of the most popular NFTs are Bored Ape Yacht Club and CryptoPunks, with sales for the most recent seven days ending February 17, 2022 almost reaching $60 million and $40 million, respectively. Both provide owners with unique digital collectibles with proof of ownership stored on the Ethereum blockchain. The highest value Bored Ape (Bored Ape #8817 for those who are curious) sold for $3,400,000 in October 2021. The highest sale of a CryptoPunk was $11,700,000.

Many digital art collectibles are also establishing online communities for their like-minded owners. So not only does the NFT owner have their own digital piece of art, but they also have access to an online “gated community,” often with unique experiences or goods.

Do Cryptocurrencies Have a Place in your Portfolio?

When we first wrote about this topic, the theory was that blockchain technology had the potential to change the way large companies interact in a global environment. Four years later, we continue to see this phenomenon growing and expanding in utility. But we are also seeing individuals and small companies using blockchain technology and platform-based cryptos to create thriving communities. While the value of individual NFTs (just like individual cryptocurrencies) is likely to fluctuate widely over time, it’s hard to envision a world already so widely dominated by online social media platforms altogether abandoning NFTs. They, somewhat ironically and in juxtaposition to the currently divisive nature of “traditional” social media like Twitter and Facebook, are actually bringing us closer together.

While GW & Wade is not recommending cryptocurrencies or NFTs to be part of our clients’ portfolios because of volatility, their speculative nature, and as we have seen recently, correlation to equity markets, some of our clients have asked us for exposure to these assets. In those cases, always keeping in mind a client’s risk tolerance and objectives, we provide information and investment options reviewed by our investment committee, including companies who rely on or participate in blockchain technology in their business models or track a broad-based index of cryptocurrencies.

These assets are still in their early stages of development and utility. As they continue to mature, we will monitor developments, keeping in mind volatility and risk, and look for potential ways to intelligently access this market for our clients.

If you have questions regarding blockchain technology or cryptocurrencies, please contact us at any time.

¹ At the heart of BTC’s inefficiency is their proof-of-work mechanism to confirm and record transactions on their blockchain. Newer coins have largely replaced proof-of-work with the more energy-efficient proof-of-stake mechanism. It’s possible that BTC could transition (just as ETH has been doing), but that’s a long, arduous process for an established cryptocurrency.

Investment advisory services offered through GW & Wade, LLC.

The information provided above is the opinion of the author, general in nature and is not intended to represent specific investment or professional advice or recommendation to invest in any of the vehicles described above including cryptocurrencies and NFTs. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. Diversification and asset allocation do not ensure a profit or guarantee against loss. Past market performance is not a guarantee of future results.

Tax laws referenced and specific rates are subject to change.

In 2007, GW & Wade joined Focus Financial Partners as an indirect, wholly-owned subsidiary of Focus Financial Partners, LLC. Focus Financial Partners Inc. is the sole managing member of Focus Financial Partners, LLC and is a public company.

Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:

Laurie Wexler Gerber, Director of Marketing
GW & Wade, LLC
781-239-1188
lgerber@gwwade.com