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After a Big Year for Cryptocurrencies, What’s on the Horizon in 2022?

 

The year 2021 was marked by several major breakthroughs for cryptocurrencies.

For one, new crypto applications like non-fungible tokens (NFTs) gained ground, with sales of these digital assets setting new records at major auction houses. Secondly, Bitcoin made strides towards mainstream acceptance with major websites like Expedia and Microsoft accepting the coin as a means of exchange. Third, in September, El Salvador became the first country in the world to accept bitcoin as legal tender.

There are many more examples of how the market for cryptocurrencies has expanded just in the last year. With this uptick of activity, what’s ahead in 2022 for cryptocurrencies?

 

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and opinions of Erica Pimentel, Assistant Professor, Smith School of Business, Queen’s University, Ontario. Bertrand Malsch, Associate Professor of Accounting, Smith School of Business, Queen’s University, Ontario. Nathaniel Loh, Junior Fellow of the CPA Ontario Centre for Corporate Reporting and Professionalism, Queen’s University, Ontario

 

We believe there are three main areas where cryptocurrencies will gain steam in the next year: greater acceptance of Bitcoin as a means of payment, increased regulatory scrutiny and a rise in NFT activity.

The Embrace of Bitcoin

Understanding what motivates individuals to adopt Bitcoin has been a challenge for researchers. A recent study suggests five main factors contribute to someone’s likelihood of using Bitcoin:

• Trust in the system
• Online word of mouth
• Quality of the web platforms available for transactions
• Perceived riskiness of the investment
• Expectations about Bitcoin’s performance

Other studies have added more nuances to this argument by considering gender, age and educational level as equally important factors.

The conditions in the crypto space have made it increasingly likely that Bitcoin will become mainstream in the near future.

First, there’s increased activity in online communities like Twitter and Reddit, where even crypto novices can exchange information with seasoned investors to obtain word-of-mouth advice about price predictions and trading strategies.

Second, there has been an explosion of new crypto-exchanges — or trading platforms where one can exchange fiat currency for crypto — and major investments into the technological infrastructure of existing exchanges. These infrastructure investments have expanded access to crypto markets and also piqued the interest of institutional investors.

 

Institutional Involvement, Regulatory Scrutiny

The last year has seen institutional players like the European Investment Bank (EIB) — the lending arm of the European Union — take a stance on crypto.

In April, the EIB issued a 100-million-euro digital bond on the Ethereum blockchain. Goldman Sachs, Banco Santander and Société Générale were also involved in the issuance. Research has pointed to institutional adoption as a turning point for widespread crypto adoption, and it would appear we’re quickly heading there.

Altogether, the increased availability of points of sale that accept Bitcoin as a means of exchange and institutional investment in the space will likely lead to greater acceptance of Bitcoin as a method of payment in 2022.

After cryptocurrencies, decentralized finance (DeFi) is widely regarded as the next frontier in fintech. DeFi provides the opportunity to create decentralized systems that rely on distributed ledger technology to facilitate peer-to-peer loans, create new financial securities like stablecoins or even offer new models of corporate governance.

Regulators also appear to be increasingly paying attention. In November, the European Council — the body that defines the political priorities of the European Union — announced its position on the Markets in Crypto Assets (MiCA) framework, which will provide increased regulatory clarity over cryptoassets and DeFi.

In the same month, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency of the United States produced a joint statement announcing that they would produce a set of policy directives on crypto.

Researchers have pointed to a lack of regulation as a major barrier to mainstream crypto acceptance. Increased government oversight, coupled with the move by several countries to consider digital versions of their national currencies, are likely to result in a lot more regulatory activity in 2022.

 

A Rise in NFT Activity

The year 2021 brought a new wave of sales of NFTs. An NFT can offer proof of ownership of, for instance, digital art in the same way a physical canvas can offer proof of ownership of a Vincent Van Gogh painting.

Although NFTs began as a way to formalize ownership of digital art, they have since expanded to include other types of digital property, including digital real estate.

Sales of NFTs are setting new records — a recent one raised US$17.1 million at Sotheby’s. As a result, the auction house launched Metaverse, an NFT-only marketplace to facilitate sales of digital works.

As new NFT applications emerge, this space will likely continue to grow in 2022.

 

Buyer Beware

Despite these investment opportunities, we urge crypto investors to be skeptical of claims they read in online communities. At a minimum, crypto enthusiasts must do their due diligence before investing.

What is sure to emerge in 2022 are new frauds and schemes. Take, for instance, the SquidGame crypto that capitalized on the popular Netflix show but was a fraud. Or the fake Banksy NFT that sold for 244,000 British pounds.

Research on the behavior of retail investors has found some are highly susceptible to the “fear of missing out.”

Therefore, it may be difficult to turn down a tip from your hairstylist or your best friend’s cousin on the next hot crypto opportunity. However, crypto investors should educate themselves on the technology and the basics of financial markets if they want to prudently get involved.

Crypto, after all, remains speculative and is not for everyone.

 

Suggested Reading:

Can Wall Street Giants Put Crypto on the Menu?

Backed by the Full Faith and Credit of Blockchain

Making Sense of Non-Fungible Tokens – Living in a Digital World

NFT Fractional Ownership and Metaverse Museums

 

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Will the Markets Continue to March Higher in 2022?

 

A relentless bull market, Covid variants, supply-chain issues, and inflation are likely to each have a chapter of their own when the story of the market’s strength throughout 2021 is written. With all the concern during 2021 over whether stocks would stay strong, whether disease outbreaks would crush the economic recovery, and the risks of inflation, the outcome is quite positive. Had an investor built a diversified portfolio on January 1, then ignored it the rest of the year, there is a good chance it would have outperformed the historical averages of the major indexes.

 

 

For those who diversified away from equities and decided to play it “safe” in the bond market, many U.S. aggregate bond funds were negative on the year. High yield funds tended to return a paltry return relative to stocks.

 

 

Consumer Prices

Inflation started the year as a talking point and ended as the center of attention. The U.S. economy entered 2021, with consumer prices rising at a low 1.4% year-over-year. This was below the Federal Reserve’s long-run target of 2%. If inflation concerned the Fed at all early in the year, it believed it should be a little higher.

Later in the year, supply-chain-related shortages had made it from business news to mainstream news programming. Prices became a normal dinnertime topic after the Dollar Store raised all of their prices. The weakest supply chain links were reported to be at ports where containers with imported goods waited to be put on a truck for delivery to its U.S. destination. Both available drivers and trucks are still well below the current demand level.

Stimulus

Supply and delivery problems were half of the issues that worked their way into producer and consumer prices. Another stimulus bill out of Washington worth $1.9 trillion signed by the new administration (added to the previous $900 billion package, and the $2.1 trillion Cares Act passed the prior year) put an excessive amount of money into the economy.  The Fed was supporting borrowing by purchasing Treasury securities at nearly a $1 trillion annual rate, along with nearly $500 billion in agency mortgage-backed securities, which continues to keep mortgage rates well below current inflation. The high level of cash that was pumped into the markets to offset lockdowns and slowdowns, along with the inability to deliver goods on time worked its way into prices. Inflation now stands at the end of the year at close to 7%. This is a rate not seen since 1982.

 

Easy Money

Although not counted directly in the CPI-U basket of goods, larger homes increased in price 20% or more as people working from home now felt they wanted more space. Early in the year, Fed Chairman Powell called the surge in single-family home prices a “passing phenomenon.”

Along with housing, inexpensive money seemed to drive asset prices up on much more speculative assets.  This included collectible non-fungible tokens (NFTs). Few had even heard of an NFT at the start of 2021, but by year-end the stratosphere-level prices had many investors taking notice and many companies entering the space. Low cost of money inflates the value of assets. Cheap, abundant capital can justify all manner of additions to one’s life, from electric vehicles, to stationary computerized bicycles, to speculative cryptocurrencies.

A shortage of computer chips led to a shortage of stand-alone computers and auto and marine engines that rely on these chips. This helped drive up used car and boat prices as much as 10% in one month.

  

Take-Away

In 2022, one can only guess, much of what drove prices up (new money, supply problems) will diminish. It already seems that a stimulus package that only a couple of months ago had the votes to pass, may not be even close to the expected size first envisioned. With this in mind, money management and investment selection become even more important. One cannot just put their money in a diversified fund and expect it to ride the wave.

The Channelchek platform houses current equity research and well thought out articles that are added to daily. It is a great online source to discover actionable ideas and understand what industry experts are thinking.
Register at no cost now for Channelchek to help stimulate your investor knowledge in 2022.

 

Suggested Reading:

Why Small Cap Stocks May Outperform Large Caps in 2022

Market Index Inclusion and Spikes in a Stock’s Demand

Will there be Enthusiasm for Ark Invest’s ESG ETF?

ESG Ratings Could Miss Problematic Supply Chain Issues

 

Sources:

https://www.bls.gov/

https://apps.bea.gov/itable/index.cfm

www.koyfin.com

 

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Some DiDi Chuxing Stockholders Take an Unplanned Detour

 

DiDi Chuxing (DIDI) is back in the news and confusing investors once again. The ridesharing giant that announced plans to delist its shares on the NYSE in early December, after their IPO in June, just made another surprising announcement. According to an article in the Financial Times, December 27th was the date marking the end of the lockout period for employees to be able to sell their shares; this ban on liquidating employee-owned stock has now been extended.

For DiDi employees there was a scheduled 180-day window after the June 30, 2021, IPO during which they were not permitted to sell their holdings. The company that went public at $14 per share, announced on December 2
^nd that it planned to delist from the NYSE to catch another ride on the Hong Kong Exchange. Investors theorized the abrupt turn may have resulted from pressure from China’s cybersecurity “watchdog.” The employee ban is now ongoing without an end date indicating when this class of stockholders may cash out of the sinking stock.

 

 

This new set of rules marks another change of direction for the ride-hailing company. Employees have to date lost 56% of their value, or about $ 37 billion in market capitalization, since their initial public offering in New York last summer.

The company has also been prohibited from registering new users, while at the same time, Chinese cyberspace regulators ordered the app stores to remove 25 other related apps, including apps that register new drivers.

According to the Financial Times article, DiDi’s current and former employees will not be permitted to sell their shares until the listing on the Hong Kong Exchange is successful; there was nothing mentioned about when this might be.

 

Suggested Reading:

When Stocks Like DiDi Delist, What Happens to Shareholders?

Are ADRs Riskier than Stocks?

Publicly Traded Chinese Companies Duty to Shareholders

Will the ExxonMobil Accident Impact Fuel Costs?

 

Sources:

https://www.reuters.com/markets/us/didi-bars-employees-selling-shares-indefinitely-ft-2021-12-27/

https://www.ft.com/content/695b5519-983f-4e44-a9c0-7e1cf1eca525

https://www.youtube.com/watch?v=qx1io0VIYxw

 

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Small-Cap Stocks Could Enter the New Year with a Large Tailwind

 

As measured by the S&P 600, small-cap stocks are trading cheaper than they have since the early 2000s during the burst of the dot.com bubble – at least when compared to large-cap stocks. This could indicate that the investment trend to follow momentum rather than value is providing investors many overlooked opportunities in stocks with lower capitalizations.

The S&P Small-Cap 600 is an index that measures the small-cap segment of U.S. equities. When compared to the more often quoted S&P 500, which measures large-cap companies, the large-cap index stocks are on average far more expensive.  As proof, the S&P 600 price-to-earnings ratio, which was on par five years ago, is now 68% of the S&P 500. The last time the gap had been this wide was 20 years ago, as the tech bubble burst putting small companies out of favor.

 

Source: FactSet

 

As shown in the chart above, the S&P 600 index is now priced at 14.5 times expected earnings over the next year. The valuation is well below historical norms and 21.3 times the large-cap S&P 500 index, which includes FAANG stocks among others.

With smaller U.S. listed companies are priced at a steep discount to larger ones, the small-cap sector could still be considered inexpensive despite the rally they both experienced since April 2020. This disparity begs the question, “when will fund managers with full discretion look for better values?” The answer may be “soon.” It could occur after year-end window dressing subsides and equity managers are less prone to need to show the year’s biggest winners in their holdings.

The other question is, “when will the gap shrink to a more historical norm?” The answer may be, early in the first quarter of next year. The reason is this. Many fund managers are inclined toward holding stocks that have performed well during the year to show those holdings on their year-end statements. This “window dressing” is not at all uncommon in the fund management industry. Once these securities are reported on statements as part of a portfolio’s holdings (after 12/31), the fund manager may feel freer to invest using basic fundamentals and less on appearances.

 

Take-Away

The Price Earnings disparity between large-cap stocks and small-cap stocks (as measured by the S&P indexes) is glaring. The trend toward chasing stocks that have spiked up over the past 18 months, causing them to move even higher, will end one day. That day may be soon as the new year provides a clean slate for fund managers to prove themselves. The playbook that works next year will likely be different from the Covid related trading that worked this year. In the meantime, shares of companies that have done well will look appealing on a fund managers’ year-end holdings reports.

Channelchek is an investor resource for small and microcap stocks. No-cost registration allows users access to premium research and provides daily information straight to their inbox.

Sources:

https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart

https://www.ft.com/content/a894adff-7ca2-4fdc-bc85-c43bc2c53491

https://www.spglobal.com/spdji/en/indices/equity/sp-600/#overview

 

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Why Investors and Stock Pickers Watch Russell Index Addition Dates

 

A sudden rise in a stock’s price is almost always demand-related. This could occur if the company beats earnings estimates, announces a breakthrough product, is being considered for acquisition from a larger company, or public policy shifts in their favor. Another reason could be inclusion in a major stock market index.

There are investors that look to determine which companies may be added to an index and which may be removed. Although being right doesn’t always mean huge gains for them, the rewards on average make this a legitimate approach for stock picking. One of the more common family of indexes that investors watch is the FTSE Russell indexes. The reason is these are more transparent than others. Russell actually puts out a calendar each year and shares its methodology for including new companies on its website.

The annual rejiggering of the Russell indexes, known as the Russell Reconstitution, is in late Spring and attracts a lot of attention.  Subscribers to Channelchek can expect to receive our notification and analysis on the small-cap Russell 2000 index reconstitution.

 

Abbreviated History of Impactful Companies Added to the Russell after their IPO

Russell updates its indexes quarterly to include new public companies to best represent the market.

 

In addition to the annual index reconstitution, FTSE Russell also has a quarterly calendar where they look at IPOs that occurred during the quarter and weigh the outcomes against their methodology for inclusion in the broad Russell 3000 index. Once in the 3000, companies may be further segmented into other indexes. These inclusions can alter the demand for the stock both immediately, as fund managers seek to mimic an index and buy the stock, and then over time, as index investor demand for the index funds ebb and flow.

 

 

As a testament to just how impactful these additions may be, a recent example involves a company called Society Pass, Inc. (SOPA). Society Pass went public via an IPO in November. On December 20^th Russell added new IPOs in order to update the indexes to reflect current markets, and SOPA was added both to the Russell 3000 broad index and the Russell 2000. The average daily trading volume for SOPA leading up to the inclusion was 1.3M, on December 20^th, 167.5M shares changed hands. The impact is indicated above in the month-to-date graph (% change). The stock opened at $4.44, traded as high as $13.48, and closed at $11.26. 

 

Opportunity in IPO Additions

Over the last ten years, there have been almost 1500 IPO additions to the Russell Indexes, and the Russell 2000 Small-Cap Index has had the majority of these additions.

 

 

After the Addition

Inclusion in a major index generally results in a higher “base price” for the stock. Further price changes are then more closely tied to fundamentals like company performance.   However, the stock will experience the added transactions that have very little to do with the company and are instead index expectation related. In addition, there should be higher trade volumes and possibly an even higher level of demand because of the company’s increased visibility.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Peter Lynch Echoes Michael Burry’s Warning About Index Investments

The Russell Index Reconstitution, What to Know

Does the Russell Reconstitution Impact Small-Cap Performance During June?

Does Cathie Wood’s ESG Fund Have it Wrong?

 

Sources:

https://content.ftserussell.com/sites/default/files/final_ipo_additions_2021_4_qtr_r3000.pdf

https://www.sec.gov/fast-answers/answersindiceshtm.html

https://budgeting.thenest.com/mutual-funds-safe-against-bad-stock-crash-30572.html

https://content.ftserussell.com/sites/default/files/2021_09_russell_indexes_quarterly_ipo_update.pdf

 

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	Image credit: Liza Summers (Pexels)

Why Investors and Stock Pickers Watch Russell Index Addition Dates

 

A sudden rise in a stock’s price is almost always demand-related. This could occur if the company beats earnings estimates, announces a breakthrough product, is being considered for acquisition from a larger company, or public policy shifts in their favor. Another reason could be inclusion in a major stock market index.

There are investors that look to determine which companies may be added to an index and which may be removed. Although being right doesn’t always mean huge gains for them, the rewards on average make this a legitimate approach for stock picking. One of the more common family of indexes that investors watch is the FTSE Russell indexes. The reason is these are more transparent than others. Russell actually puts out a calendar each year and shares its methodology for including new companies on its website.

The annual rejiggering of the Russell indexes, known as the Russell Reconstitution, is in late Spring and attracts a lot of attention.  Subscribers to Channelchek can expect to receive our notification and analysis on the small-cap Russell 2000 index reconstitution.

 

Abbreviated History of Impactful Companies Added to the Russell after their IPO

Russell updates its indexes quarterly to include new public companies to best represent the market.

 

In addition to the annual index reconstitution, FTSE Russell also has a quarterly calendar where they look at IPOs that occurred during the quarter and weigh the outcomes against their methodology for inclusion in the broad Russell 3000 index. Once in the 3000, companies may be further segmented into other indexes. These inclusions can alter the demand for the stock both immediately, as fund managers seek to mimic an index and buy the stock, and then over time, as index investor demand for the index funds ebb and flow.

 

 

As a testament to just how impactful these additions may be, a recent example involves a company called Society Pass, Inc. (SOPA). Society Pass went public via an IPO in November. On December 20^th Russell added new IPOs in order to update the indexes to reflect current markets, and SOPA was added both to the Russell 3000 broad index and the Russell 2000. The average daily trading volume for SOPA leading up to the inclusion was 1.3M, on December 20^th, 167.5M shares changed hands. The impact is indicated above in the month-to-date graph (% change). The stock opened at $4.44, traded as high as $13.48, and closed at $11.26. 

 

Opportunity in IPO Additions

Over the last ten years, there have been almost 1500 IPO additions to the Russell Indexes, and the Russell 2000 Small-Cap Index has had the majority of these additions.

 

 

After the Addition

Inclusion in a major index generally results in a higher “base price” for the stock. Further price changes are then more closely tied to fundamentals like company performance.   However, the stock will experience the added transactions that have very little to do with the company and are instead index expectation related. In addition, there should be higher trade volumes and possibly an even higher level of demand because of the company’s increased visibility.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Peter Lynch Echoes Michael Burry’s Warning About Index Investments

The Russell Index Reconstitution, What to Know

Does the Russell Reconstitution Impact Small-Cap Performance During June?

Does Cathie Wood’s ESG Fund Have it Wrong?

 

Sources:

https://content.ftserussell.com/sites/default/files/final_ipo_additions_2021_4_qtr_r3000.pdf

https://www.sec.gov/fast-answers/answersindiceshtm.html

https://budgeting.thenest.com/mutual-funds-safe-against-bad-stock-crash-30572.html

https://content.ftserussell.com/sites/default/files/2021_09_russell_indexes_quarterly_ipo_update.pdf

 

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