Many cryptocurrency-focused exchange-traded funds (ETFs) have had a great start to 2023, making sharp gains that diversified stock funds rarely see. Since the beginning of the year, the Valkyrie Bitcoin Miners ETF (WGMI) has done the best, with a return of 101 percent. However, many other funds have also done well, with between 40% and 80% gains.
Most of these ETFs are still well below the radar for long-term investors. They were hit hard by last year’s “crypto winter” and the broader sell-off in technology stocks, but the rally’s start shows that the niche sector can bounce back because of its inherent volatility. Some technology funds, like the Ark Innovation ETF, have also seen a partial recovery, though less dramatically (ARKK). So far this year, it has gone up by 25%, putting it on track for what could be its best monthly return ever. This is after it dropped by 75% between 2021 and 2022.
Kenneth Lamont, a senior fund analyst at Morningstar for passive strategies, said, “If you believed the Ark story two years ago, you could buy technology now.” For example, bitcoin jumped 38% to $22,900 on January 27 after trading in a narrow range for a long time after falling from an all-time high of nearly $70,000 in November 2021. Solana, which is a smaller digital token, has gone up by 145%.
There are signs that inflation may have peaked, especially in the US. This could allow global interest rates to peak at lower levels and open the door to more “risky” investment strategies. “These ETFs had some of the worst returns in 2022, if not the worst,” said Todd Rosenbluth, head of research at VettaFi. “Because bitcoin and other cryptocurrencies have also made a strong comeback, these ETFs could do the same.”
Lamont said, “This is why people put money into crypto; many people who invest in crypto see it as a high-stakes form of gambling, It’s risky, but it could pay off big.” According to data from Morningstar Direct, WGMI was the best-performing unleveraged equity ETF in the world in the first few weeks of 2023.
However, it is still down by two-thirds since its launch in February 2022. Its biggest investments are in cryptocurrency miners Bitfarms, Marathon Digital Holdings, and Digihost Technology. Since the beginning of January, their share prices have gone up by between 148% and 279 percent. The VanEck Digital Assets Mining ETF (DAM) is almost there. Cryptocurrency miners Riot Platforms and CleanSpark, as well as a Chinese company that makes computer parts, Canaan, have helped it reach a 77% gain. But DAM only trades at the same level it was in early November. It is still down 76.8% from its high point in March 2022.
The big gains haven’t just been in crypto mining ETFs. For example, the VanEck Digital Transformation ETF (DAPP) is up 66.8%. Its holdings include Block, a payments company started by Twitter co-founder Jack Dorsey, and the crypto exchange Coinbase Global. Also up more than 60% are the Global X Blockchain ETF (BKCH), the Bitwise Crypto Industry Innovators ETF (BITQ), and the iShares Blockchain and Tech ETF (IBLC). Lamont said thematic funds were known for having returns like a “whipsaw.”
“Cannabis has had some crazy swings in the past, and when things started to pick up again after COVID, some ETFs had triple-digit returns in less than a year,” he said. According to data from Morningstar, the Invesco Solar ETF (TAN) rose by 305 percent between April and December 2020. This is perhaps the most dramatic example of how thematic funds can make huge gains when the market turns.
Despite last year’s losses, investors have mostly stuck with crypto-related equity ETFs and those in the technology sector. This shows some resilience. Last year, thematic funds were hit very hard, according to Lamont. He said, “75% of them have an explicit growth bias, and they were hit very hard; yet, there wasn’t a rush for the door, which I found interesting.”