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Bitcoin ETFs Clear SEC Hurdle: What it Means for Your Investment Portfolio

Written January 31, 2024January 31, 2024 by John Heneghan

On Your Marks, Set

In our January 11, 2024, special report, we conveyed that the Securities and Exchange Commission (SEC) approved 11 spot bitcoin exchange-traded funds (ETFs). This landmark decision lowered the barricades for institutionalized capital flows into Bitcoin. The SEC approvals come after a lengthy legal battle by several industry leaders, such as Coinbase and Grayscale, against the SEC that had lasted for more than a decade since Tyler and Cameron Winklevoss first proposed a spot bitcoin ETF in 2013.

Bitcoin was the top-performing asset class in 2023 and gained 155% for the year according to CNBC. Bitcoin ETFs clearing the SEC approval hurdle in early January created an exciting track event. After the SEC fired the starter gun, it was off to the races for the investment athletes to gather the most bitcoin ETF assets under management (AUM). The track stars included large Clydesdale-like contestants, like AUM-behemoths Fidelity Investments and BlackRock, as well as newer, challenger managers, like ARK 21Shares led by Cathie Woods of ARK Invest, a leading investor in disruptive technologies, and Bitwise, the largest crypto index fund manager in America.

Below is a table of the eleven approved bitcoin ETFs with symbols and reported fund management fees with teaser fee waivers and post-fee waivers in parenthesis:

Please note that as depicted above Grayscale Bitcoin Trust (GBTC) with almost $25 billion in bitcoin holdings was converted from a trust to an ETF (GBTC.P) on January 11 after the SEC approved U.S.-listed bitcoin ETFs. GBTC had been trying to convert to an ETF since 2016 and ultimately had to litigate with the SEC to obtain a court decision affirming that the SEC’s disapproval of Grayscale’s previous bitcoin ETF filings were “arbitrary and capricious.” While regulatory approval was litigated, GBTC traded at a discount to its underlying bitcoin holdings that reached as wide as 50% in December 2022, following the collapse of crypto exchange FTX. GBTC was the investment vehicle used by Servant to provide client portfolios with small, yet meaningful exposure to bitcoin (generally purchased at discounts to net asset value or NAV). Allocations ranged between 0.5% to 2.0% of portfolio value, depending on investor risk tolerance.

First 10 Days of Trading

As depicted in the next table below, there have been net inflows of $745 million to all eleven bitcoin ETFs in the 10 trading days through January 25, 2024, with $4.8 billion flowing out of GBTC and $5.5 billion flowing into the other 10 bitcoin ETF (excluding GBTC). The two hulking runners have gotten off to an early lead in asset gathering with BlackRock iShares Bitcoin Trust raising $2.1 billion and Fidelity’s Bitcoin Fund garnering $1.8 billion. Ark21 and Bitwise were tied for the bronze medal in this race at $550 million in cash inflows.

Data courtesy of James Seyffart

You may be asking yourself “Why the net outflows from GBTC?” Well, there are two principal reasons that I believe represent episodic selling. We remain bullish on bitcoin for the long-term as we discuss further below. First, GBTC was an asset held by FTX. The liquidator of this bankrupt entity patiently awaited GBTC conversion to an ETF when the discount to NAV would be its narrowest to begin selling its GBTC interests. There are reports that FTX’s liquidator has sold as much as $1 billion of GBTC in the past 10 days.

Secondly, many GBTC investors may have been selling GBTC in these 10 days and purchasing another ETF with a substantially lower management fee. Although GBTC lowered its fee by 0.5% from 2.0% to 1.5% with its conversion to an ETF, its fees remain substantially higher than the other 10 ETFs. Fees for the other 10 ETFs range from 0.2% to 0.9% (without fee waivers), leading investors to switch to more investor-friendly racers.

Despite the 10 other ETFs being large purchasers of bitcoin, this GBTC selling pressure as well as FTX liquidators potentially hedging price risk on its holdings in bitcoin futures markets put downward pressure on the trading price of bitcoin. It is rumored that FTX’s liquidation of GBTC may now be complete. Meanwhile, other investors’ rotation out of GBTC to other bitcoin ETFs with lower fees may also be slowing, possibly resulting in more favorable supply-demand characteristics. For example, on January 26^th, GBTC aggregate outflows slowed to their lowest since conversion at $255 million, down from an average daily outflow of roughly $500 million. Some believe the news of GBTC’s slowing outflows propelled Bitcoin’s 4.7% appreciation on January 26, 2024.

Bitcoin Supply-Demand Outlook

We remain bullish on Bitcoin in the near and longer term. First, the next bitcoin halving will occur when the number of bitcoin blocks reaches 840,000 which is expected sometime in April 2024. The reward per block will decrease from 6.25 bitcoin to 3.125 bitcoin at that time. This halving of the block reward (proof of work, newly mined bitcoin) occurs roughly every four years. This next halving will be the fourth. The average daily block reward will be cut in half from 900 bitcoin per day to 450 bitcoin per day or an annual supply cut from 328,500 bitcoin to 164,500 bitcoin. This compares to average net bitcoin purchases by the ETFs of roughly 1,200 Bitcoin per day or 438,000 Bitcoin per annum. After the next halving, demand is estimated to exceed supply by 2.7 times.

In addition to blockchain rewards for mining Bitcoin, miners/nodes on the blockchain network also earn transaction fees. As block rewards decrease, there is an expectation that transaction fees will increase. The Bitcoin blockchain is not designed to work on a FIFO (“first in, first out”) basis but rather an HFFO (“Highest fee, first out”) basis. In other words, market participants can pay for more timely transaction processing. The chart below from ChartsBTC graphically summarizes these foregoing concepts.

Secondly, most of the ETF buying to date has come from self-managed retail and institutional investor accounts. Fidelity, BlackRock, ARK21, and Bitwise haven’t yet had time to marshal their resources and call on their relationship networks of registered investment advisors, family offices, endowments, pensions, corporate treasury departments, and sovereign wealth funds. I spoke with our Fidelity custodial representatives last Friday and they indicated that Fidelity had just gotten started on internally educating their salesforce and distribution teams.

ETF Bitcoin Rotation in Client Portfolios

Servant Financial intends to rotate client allocations out of GBTC and into Fidelity Bitcoin Trust (FBTC) over the next few weeks. Liquidity is critical in this volatile asset class, so the choice came down to Fidelity and BlackRock. Fidelity is by far the more seasoned Bitcoin pacer. Further, Fidelity has the distinction of being the only ETF sponsor able to custody the bitcoin themselves. On the other hand, BlackRock is a late starter to this Bitcoin track and field event.

Fidelity Investments began researching bitcoin and blockchain technology in 2014, resulting in the creation of a dedicated business for this innovative asset class, called Fidelity Digital Assets. Bitcoin and digital assets are an important part of Fidelity’s business strategy consistent with their stated belief that further digitization of investments will alter the future of capital markets, digital payments, and value storage.

Fidelity has been running this Bitcoin endurance race for nine long years already. Fidelity has witnessed firsthand Bitcoin’s transition from a niche technology to the threshold of becoming a mainstream asset. We expect that Fidelity will continue to build products that support the rapidly evolving digital asset ecosystem, enable broader adoption, and educate investment advisors and investors on this emerging asset class. Below is Fidelity’s Bitcoin and digital asset timeline.

It’s a Marathon, Not a Sprint

I’d like to think Satoshi Nakamoto was into long-distance running much like Fidelity Investments. His vision for a trustless form of electronic cash articulated in his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” certainly had a long-term focus as it stretched out the network incentive architecture beyond 2048. Satoshi’s strategic vision was to build the most secure and efficient network of computing power the world has ever known. Such a network would make the double-spending problem (fraudulent Bitcoin creation) prohibitively more expensive with each successive halving. Miners/nodes are incentivized through block rewards and transaction fees to participate in the Bitcoin blockchain network (compensation for mining/computational work). The economic desire for bitcoin miners to operate profitably, the step down of the block reward every four years/halving, and the inherent transition to transaction fee-based compensation to network participants (reflective of the market value of the network/transaction service) creates a virtuous cycle of increased security, efficiency, and value of the bitcoin blockchain network over time.

Nirvana for bitcoin miners is frictionless mining or near zero cost of mining. This can be achieved by continuously driving up the efficiency of the computing power (Moore’s law) and driving down the cost of energy by utilizing zero cost/stranded energy sources (methane typically flamed in oil and gas production, excess renewable energy (wind, solar, hydro, geothermal) not always needed by the electricity grid and biomass). The value of this distributed Bitcoin network can generally be thought of under two methods a) cost method – the cost to build and maintain the security and integrity of the network and b) fair value method – the aggregate net present value of the cash flow of miners/nodes for transaction and blockchain network services.

Since bitcoin represents an implicit ownership claim on this distributed blockchain network, we expect to HODL (hold on for dear life) to client bitcoin ETF allocations, content in Satoshi’s intelligent design of a distributed blockchain ledger. It’s a bit of a Promised Land of computing with perfect knowledge and consensus in the truth, everlasting rest and peace with security from attack, distributed and independent yet in communion and interconnected with neighboring nodes, and contentment and joy from separation from the corruption of fiat money.

Summer Road Trip

Written June 1, 2023 by Ailie Carlene Elmore , John Heneghan

The summer season has officially begun and following in the footsteps of the Griswold family, you’ve decided to take a typically American road trip. But instead of a final destination of Walley World, your destination is a more durable investment portfolio as you suspect the wheels may come off the US economy this summer. Fasten your seat belts, get out your road map, and drive along as we explore some of the key points of interest (POI) for the U.S. economy this summer.

First POI: National Debt Ceiling

One POI that could cause you to reduce your cruising speed this summer could be the National Debt Ceiling. The media and public have been in a veritable frenzy over the past month about the National Debt Ceiling as the legislative and executive branches of government have until June 5th to reach a compromise on raising the national debt limit. The U.S. Government reached its $31.4 trillion debt limit in January however the Treasury Department has been using “extraordinary measures” and accounting tricks to avoid a technical default. The U.S. Treasury Department recently warned that if the ceiling were not raised by June 5^th, the U.S. Government could default on its payment obligations to debt holders.

About $6.8 trillion of this debt is owed to other federal agencies such as the Social Security Trust Fund, the Federal Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds, and the Military Retirement Fund. The remainder is held by the public. Among these public debtholders are U.S. banks, investors, the Federal Reserve, state and local governments, mutual funds, pension funds, and several foreign governments. Almost half of U.S. debt is held in trusts for retirement, meaning if the U.S. government ever defaulted, it could have far-reaching impacts on current and future retirees. Much like you, these retired workers are likely looking to hit the road in their RVs this summer. Some sharp-eyed retirees may have foreseen this speed bump ahead and begun rethinking their travel plans. Many have pulled over into the relative safety and comfort of a rest area; tired and frustrated that their retirement income lies in the hands of politicians jockeying to ride shotgun beside the Commander in Chief.

Source: The Balance Money

In addition to military leadership, the Commander in Chief holds primary responsibility for the conduct of U.S. foreign policy. Stiffing your foreign lenders would be a steering error with potentially fatal consequences. Japan, China, and the United Kingdom lead the line of geopolitical traffic cops, collectively holding over $2 trillion of U.S. debt. Japan and China’s large holdings of U.S. debt help support the value of the dollar as the global reserve currency and finance U.S. purchases of their relatively cheaper goods. The U.S. economy is one of the key global economies as most foreign countries have some trading relationship with the United States. In addition, the U.S. dollar dominates global exchange markets, representing 90% of trading volume. A U.S. default on its national debt would cause a major economic pileup and delays in global economic activity transmitted through the U.S. dollar-based global financial system. The U.S. maintained its AAA or equivalent credit rating by the major reporting agencies until the last debt ceiling crisis in 2013, when Standard and Poors downgraded the U.S. to an AA+ credit rating, citing political brinkmanship over raising the Federal debt ceiling.

Source: The Balance Money

Thankfully, legislators have reached a proposed deal that would lift the federal debt limit; however, the proposed legislation will do little to reduce the government spending that sped up during the COVID-19 pandemic. The package would suspend the borrowing limit until January 2025 along with limiting military spending growth to 3% and imposing limits on nonmilitary spending. Some other features of the deal include some cutting of funding for the Internal Revenue Service and a tightening of work requirements for the Supplemental Nutrition Assistance Program. The deal still needs to be approved by both the House and Senate before going to the Commander in Chief for his signature. At this juncture, it seems likely that these two backseat drivers will reach agreement soon enough to apply the brakes and avoid a catastrophic Thelma & Louis ending.

Second POI: Revisiting Cryptocurrencies

Next stop on our summer road trip, is a place we have visited before, cryptocurrencies. At the end of 2022, we discussed some of our key investment themes for 2023 with crypto assets making the list. Cryptocurrencies, such as Bitcoin and Ethereum, were on everyone’s POI list last summer. However, the epic failure and fraud of one of the largest digital currency exchanges, FTX, halted many people’s crypto ride prematurely. The price of Bitcoin fell 65% last year but has it started to make a comeback? The short answer is yes however it has not yet reached its all-time high of 2020. Bitcoin is up 67% year to date with Ethereum following suit, rising almost 59% year to date. While crypto assets are increasing in popularity again after their self-inflicted pileup last year, many remain skeptical about whether alternative currencies are the safest route on the investment highway. Similar to old Route 66 that runs from Chicago, Illinois to Santa Monica, California, digital currencies have had several bumps, potholes, and dead ends across its history. Still, Route 66 remains a viable, albeit alternative pathway. It has not been abandoned by more adventuresome travelers. Inflationary pressures and a long history of fiat-based monetary accidents have venturous investors exploring these digital assets for diversification benefits as uncertainty looms around the U.S. economy and recession odds grow with the length of days. We expect to see more sensible government regulation in this space over time. The stakes have been raised with SEC cracking down on the popular trading and exchange platform, Coinbase, in April. Congressional leaders from both sides of the aisle have been working on providing legislative clarity where the SEC has left a regulatory vacuum. Cryptocurrencies may not be on everyone’s destination list this summer; however, we will be keeping a watchful eye on their route this summer. The incessant drumbeat of global de-dollarization and circumventions of U.S. hegemony by U.S. allies and foes alike will be good fodder for economists’ ghoulish tales around summer campfires.

Third Stop: Energy Prices

From the air conditioning in your home to the gas tank filled up for that summer road trip, energy prices remain a stipulation in summer travel plans. Last year, energy prices, impeded many people’s ability to take that summer vacation or forced them to turn down the thermostats in their homes as the Russian-Ukrainian conflict put price pressure on oil and natural gas. Europe felt the brunt of spiking energy prices as its largest supplier of natural gas, Russia, shut off its pipes to countries supporting Ukraine in its war efforts. As a result, prices skyrocketed which sent shockwaves to energy consumers around the world. Thankfully, Europe pushed its populous to conserve energy, and, coupled with a mild Winter, the European Union was able to escape a possible pileup widely predicted this past winter. Energy prices have largely stabilized along with the apparent stalemate in the Russia-Ukraine War with oil prices falling 7% and natural gas prices falling 42% since January 1^st making your summer travel a bit cheaper going into the warmer months.

Fourth POI: Hospitality Industry

Our final stop is a look at the hospitality industry: the epicenter of summer travel season. The hospitality industry which includes hotels, bars, and restaurants took a major hit during the pandemic as restrictions and public fear kept many people locked down. However, the CDC recently lifted its Public Health Emergency as COVID-19 has become less virulent and more manageable from a public health perspective. This news couldn’t have been better timed for the hospitality industry as this summer is projected to be full of travel for Americans. A study conducted by Deloitte found that 50% of Americans plan to take trips this summer that include hotel or rental home stays along with many reporting they will be traveling internationally this year. As a result, bars, hotels, and restaurants are among the economy’s fastest-growing employers according to the Wall Street Journal. This hiring frenzy comes on the heels of increased consumer spending in April even though recessionary fears persist. Overall, much like this author, Americans seem to be making room in their budgets for that epic 2023 summer road trip making the hospitality industry one sector to watch this year.

“When all else fails, take a vacation.” – Betty Williams

Hopefully, we’ve whetted your appetite for a summer road trip. Let’s face it, our elected officials and central bankers are driving erratically and should get off the road. Thankfully they’ll be on summer break soon, probably just as soon as they raise the debt ceiling.

There is an old Wall Street adage, “Sell in May and go away” that ties in well with this summer road trip theme. Of note, we’ve tactically reduced Servant Financial model portfolios to the lower end of their risk tolerance range earlier this month to keep your summer road trip on track and carefree. Although we cannot prevent government or Fed-induced market accidents from occurring, we can limit the portfolio damage. With the S&P 500 trading at 4,200 and a rich 24 times last twelve-month price-earnings ratio (PE) and 19 times forward PE, selling in May and focusing on your summer vacation seems like a very sensible thing to do.

Riding the Bitcoin Rocket

Written July 29, 2022 by Will Slattery

What is Bitcoin?

Over the past few years it is more than likely you have either directly encountered Bitcoin or heard of it, and this is for good reason. As cryptocurrencies are still so new and foreign to most people, reluctance and skepticism are a natural hurdle. Just as many people thought the internet was a waste of time during its inception, Bitcoin is bound to face similar issues. However, popular financial figures such as Elon Musk and Anthony Scaramucci have sung cryptocurrencies’ praises for its innovative blockchain technology. Bitcoin has the potential to significantly disrupt current financial systems such as our current fiat money system while revolutionizing data collection and financial transaction systems.

In 2008, a person using the name Satoshi Nakamoto published a white paper on a public online mailing list. The paper, titled Bitcoin: A Peer-to-Peer Electronic Cash System stated the objectives of the currency as well as the actual code for how to make it possible. As the name suggests, the main objective of Bitcoin is to create a decentralized digital currency that is fully peer-to-peer, not requiring any regulators, banks to be a mediator, or middlemen for transactions. Additionally, Bitcoin avoids rapid fiat currency inflationary episodes like we are seeing currently because the number of bitcoin to be mined has been fixed at 21 million. All of these are made possible through the computer code for blockchain which Satoshi provides in the same paper.

Blockchain Technology

Blockchain is the technology that makes Bitcoin and all cryptocurrencies possible. While it is an extremely complicated system altogether, it can be summarized in a fairly digestible way. Blockchain is essentially a linear public ledger of all transactions, using encryption and decryption as a means of verifying transactions. As Bitcoin transactions are made, they are publicly broadcasted to all computers in the blockchain network and grouped into blocks. These blocks must then be decrypted by the network of computers in the system. Once one of these computers solves the block, the ledger is permanently updated with that block being the newest block on the end of the chain. This process continues indefinitely, constantly adding verified blocks full of transactions. This process eliminates the risk of double spending while remaining decentralized. Double-spending occurs when a single digital token can be spent more than once through duplication or falsification of the blockchain record. The information for all of these blocks as well as the individual transactions within them are all public and can be viewed at any time. While the crypto wallet public key is displayed for transactions, no information is linked to the key that could compromise anonymity.

Mining and Supply

There is only a single way new Bitcoins are created. That is through the process of mining. Calling it mining is slightly misleading as in reality mining is an essential process that maintains the blockchain network. Miners are the computers connected to the blockchain network which complete the decryption process to verify and post blocks. Whichever computer eventually solves the encryption by providing the correct 64-digit hexadecimal value is rewarded a set number of new Bitcoins. This is the only way new Bitcoins are added to the system.

About every four years or 210,000 blocks verified, the Bitcoin reward for solving a block is halved. This rate was established at inception to limit the supply growth and cap the total number of Bitcoins that will ever exist at 21 million. In addition to this, the blockchain system adjusts the difficulty of its encryptions to the amount of mining power in the network to maintain this rate. This is how Bitcoin handles inflation. These countermeasures to inflating the supply are hard-coded into the blockchain. Unlike the U.S. fiat dollar system where money can be arbitrarily created whenever needed by the government, Bitcoin has a fixed total supply and rate of adding to the supply that is not controlled by an irresponsible third party. Today, the reward for solving a single block is 6.25 BTC which currently, would be valued at around $144,000.

While a $144,000 payout for running a computer sounds attractive, the odds of actually being the one to solve the encryption is estimated to be about 1 in 22 trillion. Mining technology is becoming more productive every year with inventions like ASICs (Application-Specific-Integrated-Circuit) which are computers designed for the sole purpose of mining Bitcoin. However, even with one of these top-of-the-line computers, odds of solving the encryption are terrible as there are many other individuals and companies running mining operations at a scale that no individual can afford. This issue has led to the creation of mining pools. These are pools of individuals all agreeing to share in the profits of their combined computing power. With thousands of times the computing power, the chances of being the one to solve and be rewarded Bitcoin go up significantly. These profits are then divided up amongst individuals in the pool by how much computing power they offered to the pool.

Bitcoin Today

Fourteen years later, it is hard to imagine Satoshi had any idea that his creation would become such a big deal with some countries even using Bitcoin as legal tender. While the coin came from extremely humble beginnings, with a value as low as $0.09 per Bitcoin in 2010, it has hit astonishing highs of nearly $69,000 per Bitcoin just last year. Bitcoin’s price has fallen considerably from this point, today being worth just under $23,000 per coin. This decline is largely from a recent crypto panic caused by the crashing of multiple extremely over-leveraged crypto companies. Despite this recent dip, Bitcoin still shows immense promise for all of the reasons listed above. Even for those skeptical about Bitcoin, the blockchain technology surrounding it has taken off in every sector from food and supply chain to insurance and banking. American Express, Facebook, Walt Disney, and Berkshire Hathaway have all invested in the technology. As the fiat money system becomes more and more problematic and the importance of data collection grows, individuals and countries will be looking to Bitcoin and blockchain technologies for guidance.

Investing in Bitcoin

If you are considering putting money in Bitcoin there is a lot to consider. Crypto wallets can be intimidating and are only for direct investment in crypto assets. Instead, we will be focusing on investment opportunities that are tradeable like typical stocks but still provide exposure to the crypto markets. These come in a wide variety and may have different approaches to how they offer crypto exposure. For our purposes, we will cover three of these opportunities.

The first fund has been in the news for the past couple of months. Grayscale Bitcoin Trust (ticker: GBTC) is a closed-end fund holding purely bitcoin assets. Unlike actual bitcoin, GBTC can be held in a tradional investment brokerage account or an IRA (individual retirement account). Grayscale currently has assets under management of around $15 billion, making it the largest Bitcoin fund in the world. The fund provides the opportunity for people to gain exposure to the direct price changes in Bitcoin. Grayscale has plans to convert to an exchanged-traded-fund (ETF) which would allow them to use the creation and redemption technique of an ETF to stabilize the value to the net asset value (NAV). Currently, Grayscale’s inability to use this stabilizing technique has led to GBTC trading at nearly a 30% discount from the NAV of the underlying Bitcoin. In June, the SEC denied Grayscale’s application to convert to an ETF, citing concerns of potential manipulation. Grayscale is now suing the SEC over the decision following previous inconsistent approvals from the SEC for a Bitcoin futures ETF. If Grayscale ends up receiving approval for conversion, the current 30% discount will become a 30% profit for investors as the price will return close to NAV.

The next few investment opportunities take on more of a “pick and shovel” approach to investing in Bitcoin and crypto. This means investing in the tools that make this sector possible, such as computer chips and ASICs and the mining companies, rather than the crypto assets themselves as they can admittedly be volatile. The first of these is Fidelity Crypto Industry and Digital Payment ETF (Ticker: FDIG). This ETF holds assets across Fidelity’s entire Crypto Industry and Digital Payment Index, closely tracking the performance of the crypto sector rather than the potentially volatile prices of the cryptos themselves. Currently, FDIG holds assets under management of about $13 million with a NAV of $16.71. The second company we have an eye on takes a similar pick and shovel approach to invest in crypto. Bitwise Crypto Industry Innovators ETF (Ticker: BITQ) is another ETF holding shares of companies innovating in and supporting the crypto industry. Specifically, only companies that generate at least half of their revenues from crypto business activities. BITQ currently has assets under management of $72 million and a NAV of $8.10. These could be good options for those who are interested or have faith in crypto but want to take a more diversified approach on the sector.

An investment in GBTC, FDIG or BITQ can be as volatile as owning bitcoin or any other crypto. We recommend only modest allocations to the crypto space of 1% to 5% within an investment portfolio because of the higher risk and speculative aspects of this nascent industry/technology. Servant Financial client portfolio models include GBTC and were recently rebalanced to purchase more given the market correction in the crypto sector along with traditional stock and bond markets. More risk tolerant client models also hold Hut 8 Mining (NASDAQ: HUT) and these models were also rebalanced. We typically do not invest in ETFs that do not have more than $100 million in assets under management so we will continue to monitor FDIG and BITQ.

Looking Forward

Crypto is still only in its beginning phase. With the application and acceptance of Bitcoin and other cryptos increasing each year, demand is expected to increase significantly. Broader acceptance and application of the technology is expected to lead to improved regulation of these currencies which will serve to increase adoption and overall understanding of cryptos as well as the benefits they have to offer. Bitcoin and crypto will continue to establish themselves as major disruptive forces to the current financial system. Bitcoin and crypto can potentially disintermediate traditional financial institutions much like what the internet and e-commerce did to traditional retailers, like book stores. As innovators such as Steve Jobs, Nikola Tesla, and Jeff Bezos will tell you, being on the right side of change can reap financial benefits and societal advancements.

Through the Looking Glass – Investment Themes to Watch in 2022

Written January 25, 2022 by Ailie Carlene Elmore

The world has been riding the COVID-19 rollercoaster for the past two years. Similar to Alice’s adventures in Through the Looking Glass, the twists and turns of the pandemic have been reflected in our everyday life and the investment world. Financial markets have experienced extreme highs and lows as the market digested economic data and expectations about COVID-19 cases and incoming variants. Even the map of S&P 500 levels mimics a roller coaster you might see at your favorite theme park. Despite the economic and social volatility over the past two years, the S&P 500 returned more than 26% in 2021.

Graph of S&P 500 levels January 2020 – December 2021

So where will Alice go next in the looking glass? Specifically, what should investors be reflecting on as we look towards 2022? With this in mind, we have identified a few opportunities as well as some things to watch in the investing world in the upcoming year. More details will be provided on these topics in the upcoming months however investors should be aware of these opportunities and market risks as we start the year.

Inflation

One of the greatest market concerns early on in 2022 is rising inflation levels. From food in the grocery stores to gas at the station, the price of everything is going up. The U.S. Labor Department recently reported that consumer prices rose 7% in December 2021 from the price level in December 2020. This comes after November 2021 consumer prices rose 6.8%. A Wall Street Journal survey showed that respondents believe inflation levels will come down gradually in 2022 as a Federal Reserve interest rate hike is expected in early 2022 in response to inflation well above its 2% target and a low unemployment rate of 3.9%. Survey respondents also are projecting economic growth to slow in 2022 to a 3.3% increase in GDP which is significantly lower than their October expectations of 4.2%. As a result of these economic drivers, investors are flocking to real assets such as farmland, commodities, and precious metals. Commodities, including energy, and precious metals are the top-performing sectors so far in 2022. Nationally, farmland experienced a 7% increase in values in 2021, and agricultural commodities and farmland are projected to continue rising in 2022. If you are interested in investing in farmland coupled with tax benefits, learn more on Promised Land’s website.

Wall Street Journal Survey Report

The Next Gold Rush

The rise in inflation expectations also has some investors seeking protection in physical assets such as Gold. Gold is another asset that has been known to offer investors inflation hedging potential however the volatility in the COVID-19 pandemic caused great volatility in the gold market in 2022. Based on our Q4 data, gold was down close to 4% year to date in 2021 but was up 5% in the fourth quarter of 2022, demonstrating increased interest in the asset class with rising inflation concerns. Some investors think gold will start to shine in 2022 as the market digests negative real yields in the face of potential runaway inflation numbers. Analysts from Australian Bank, ANZ, expect gold prices to rally in the first half of 2022 but will come back down later in the year after the expected interest rate hike from the Federal Reserve. Meanwhile, another historical catalyst for gold, geopolitical risks, are on the rise in Ukraine and Russia, Taiwan and China, and domestically due to COVID-19 policies. While the jury is still out on whether the next gold rush will emerge, it is an investment theme we are keeping our eye on going into 2022.

Image from the Gold Rush of 1849. Will we see history repeating itself in 2022?

Cryptocurrency

While the economic results of the COVID-19 pandemic have some investors looking backward to seek inflation protection, others are wondering if a cryptocurrency investment has a portfolio role in the investing looking glass. Crypto has had a varied history and is known to be one of the most volatile assets. However, its use as an alternative store of value and currency (“digital gold”) has been attractive for some investors seeking shelter from potential Federal Reserve money printing and other monetary policies supportive of risk assets. The cryptocurrency market has started 2022 on poor footing with Bitcoin falling more than 7% on January 21^st. This comes after global concerns from emerging regulations on cryptocurrencies in Russia, one of the largest crypto-mining markets. Will this rocky start send Bitcoin tumbling down into a digital mineshaft? Goldman Sachs remains optimistic about Bitcoin’s potential, citing that it thinks the price could double in the next five years, stealing some of gold’s luster in the process. The crypto story will continue to unfold in 2022 and we will be keeping watch with “laser eyes.”

Environmental, Social, and Governance (ESG) Investing

Every day, more and more investors want their investments to not only grow in profitability but also spark positive change in the world around them. The demand for environmental, social, and governance (ESG) investing grew substantially in 2020 with a record 140% increase in investment funds going towards ESG investments. In 2021, investor demand grew further with companies across the planet trying to meet investor preferences through sustainable business practices and policy actions to reduce their carbon footprint. Northern Trust Corporation’s ESG index fund (Ticker: ESG) which invests in large-cap companies promoting sustainability and social governance is up more than 14% from January 2021 to January 2022, with its outlook looking strong. Its $186 million assets under management include a diverse mix of industries such as technology, health care, and renewable energy. As young millennial investors enter the stock market, many believe impact investing will be at the forefront of their minds and their pocketbooks. ESG investing is paving the way for new roads in the market such as carbon investing, green bonds, and clean energy development. We plan to discuss this topic further in the coming months and provide opportunities to put your dollars to work for a more sustainable planet.

Grow your wallet and your planet with ESG Investing

The Looking Glass

“It’s a great huge game of chess that’s being played – all over the world- if this is the world at all you know” – Lewis Carroll in Through the Looking Glass. These words of Carroll from more than 150 years ago still hold in life, especially in the geopolitical and investing realms. From inflation and interest rate concerns to safe-haven capital flows to gold and ethically directed demand for ESG investments, investors must actively survey the chessboard and potentially modify the strategy to win the game. 2022 is sure to challenge us tactically with blockades, decoying, and double attacks. Servant Financial will use a stable, yet flexible looking glass by investing your capital with integrity, compassion, and experience. Follow us as we reflect on these and other topics in the coming year.