Consolidation is likely to be the name of the game this year in Canada’s cryptocurrency industry while the further maturing and mainstreaming of the sector should bode well for crypto stocks, according to independent investment bankers PI Financial who released a report earlier this month on the Canadian perspective on the cryptocurrency market where it recommended three names for investors.
The crypto space had a wild ride in 2021 with two huge spikes in currency prices along with follow-up declines as the market gained renewed interest from investors worldwide who are more then ever seeing crypto as a legitimate investment option. Bitcoin, the flagship brand of the space, ended the year up about 50 per cent but on a downward trend that has continued into the new year. Now down 12 per cent in January, a rising interest rate environment has been blamed for some of crypto’s recent woes.
But sector volatility doesn’t have to mean investors should stay away. That’s the message from PI Financial analyst Kris Thompson, who delivered an update to clients on the crypto sector on January 11 where he said that for your average investor, the fast-changing market is a tough one to follow as industry players and dynamics are evolving at a torrid pace.
“The crypto market is charging fast and following the sector is like drinking from a firehose in terms of the flow of daily data,” said Thompson.
“We continue to be constructive on the sector and recommend to investors that don’t want the headache of investing directly into coins to spread crypto exposure across a variety of vehicles such as stocks and ETFs,” he said.
Thompson said along with more consolidation and M&A activity, “extreme volatility” is likely to persist in cryptocurrencies until the sector further matures, something that the analyst said will require both regulatory acceptance and oversight of the space.
“In Canada, our investment thesis that consolidation among the broker/exchanges should occur around the regulated platforms has commenced with unlicensed WonderFi acquiring licensed platform BitBuy,” Thompson said.
“There are too many platforms in Canada and we expect many of them to merge in 2022 in order to pool resources to expand into other geographies and product sets,” he said. “Our macro view is that the cryptocurrency sector is gaining mainstream interest and is setting up for a material pricing rebound once the yield-curve tantrum runs its course.”
On the mining side, Thompson noted that the 2021 rally in the price of bitcoin spurred companies to raise billions to expand operations and buy more equipment, with the global hashrate (a measure of computational power) having now recovered to a new all-time high. Meanwhile, China’s crackdown on the sector has driven miners to other countries, with the United States now standing as the mining capital of the world with about 35 per cent of the global hashrate as of the third quarter 2021 (Canada pulled in about ten per cent over the same period).
As an example of the rising fortunes of cryptominers, Thompson pointed to digital asset company Marathon Digital’s order in December for 78,000 next-gen Bitmain Antminer S-19 XP mining machines for a record US$879 million.
“Our research indicates at least another 90 EH/s of hashrate is to be deployed by the end of 2022,” Thompson said. “As the hashrate doubles, so too must the price of bitcoin to generate the same level of revenue per miner. As the hashrate grows, the security of the blockchain grows.”
So far, Canada has been a trail-blazer in the crypto space, Thompson noted. Canada was the first to launch a cryptocurrency ETF early in 2021 and has had regulatory bodies grant a number of temporary broker-dealer and marketplace licenses to trading platforms.
As for particular companies, PI Financial has “Buy” ratings on broker-dealer and compliance software vendor BIGG Digital Assets, vertically integrated bitcoin mining vendor Luxxfolio Holdings and carbon-negative bitcoin mining vendor Sphere 3D Corp.
PI Financial’s Cryptocurrency Picks
BIGG Digital Assets (BIGG Digital Assets Stock Quote, Charts, News, Analysts, Financials CSE:BIGG)
- Rating: Buy
- Target: $2.00
- Projected return: 100.0 per cent (all returns are as of the report’s January 11 publication date)
Luxxfolio Holdings (Luxxfolio Stock Quote, Charts, News, Analysts, Financials CNDX:LUXX)
- Rating: Buy
- Target: $1.20
- Projected return: 189.2 per cent
Sphere 3D Corp (Sphere 3D Corp Stock Quote, Charts, News, Analysts, Financials NASDAQ:ANY)
- Rating: Buy
- Target: $10.00
- Projected return: 247.2 per cent