ETFs, Regulation and Cardano: Morningstar


  • Top Morningstar strategist Amy Arnott said traditional investors need a crypto ETF.
  • She discussed regulatory risk and cash flow generation in a recent interview with Insider.
  • She tipped cardano’s ada to join bitcoin and ether as a mainstream cryptocurrency.

Regulators around the world are homing in on cryptocurrency trading, tackling anything from how exchanges can function, to how digital assets are taxed.

Would-be investors are clamoring for the kind of relatively safe products that would give them access to cryptocurrencies, but without having to stomach their huge volatility – and potential for losses. 

For US investors at least, that kind of product is still a way off. But it’s exactly what the crypto industry needs to graduate to the financial-market mainstream, according to Amy Arnott, a portfolio strategist at Morningstar that focuses on cryptocurrencies. 

“What I would really like to see is a diversified crypto

index fund
in the form of an ETF,” Amy Arnott, a portfolio strategist at Morningstar, told Insider. “The SEC still hasn’t approved any ETFs in the United States which makes it very difficult for mainstream investors to gain exposure to cryptocurrencies.” 

“It seems like there’s a lot of internal debate at the SEC about whether they should go ahead with this – it’s an important trend and a lot of investors need to have access to it, but they do need to protect investors,” she added.

A crypto ETF could reduce some of that volatility and attract more traditional investors with a lower risk profile. An ETF tracks an index, security, or commodity, allowing investors to buy into a particular financial theme.

In June, SEC commissioner Hester Peirce said a crypto ETF was long overdue.

“With each passing day, the rationale that we have used in the past for not approving seems to grow weaker,” Peirce told CNBC.

Since the start of the year, bitcoin’s price has fluctuated from below $30,000 to a high of almost $65,000 and a low of $31,576, and ether has moved from around $1,300 to closer to $2,800, before crashing below $1,800.

However, the SEC has continued to reject ETF proposals, meaning investors that want to buy into cryptocurrency have no choice but to deal with the volatility of individual coins.

As well as the SEC blocking a crypto ETF, the Chinese government banned bitcoin mining in parts of the country in June, leading to the digital currency falling below $30,000 for the first time in five months.

“Regulatory risk is a big issue – that’s been the driving factor behind a lot of the volatility over the past few months,” Arnott said. “If governments around the world clamp down on crypto in general, or bitcoin and ether specifically, that would be a large negative.”

Arnott also said that it is difficult to determine a suitable price for many cryptocurrencies as they are not cash generating assets, and this can contribute to volatility.

Ether has an in-built price to an extent, because it is used to power decentralized finance transactions and to support NFTs. This has led to some analysts referring to the cryptocurrency as ‘digital oil’ or ‘digital gas’.

“The fact that ether is used as a utility should provide some sort of price floor, but I’m not sure what that should be,” Arnott added. “A lot of people talk about a network effect where these currencies become more valuable as they are used more and there are more interdependencies and connections.”

Lastly, Arnott backed cardano, the open-source cryptocurrency created by ethereum co-founder Charles Hoskinson, as a promising altcoin that could join bitcoin and ether to form a “big three” of mainstream cryptocurrencies.

Like ether, cardano expects to implement decentralized finance services in 2021, and the platform will soon be able to host smart contracts. In 2021, its token ada soared from $0.18 to $1.16 – a 544% increase.

“Cardano is similar to ethereum, in that it’s a protocol that has a lot of potential technical applications,” Arnott said. “There’s a lot of enthusiasm about cardano, and also various stablecoins.”

“The interesting thing that’s happened over the past year or so is that institutional investors have been far more willing to adopt cryptocurrencies and look at them as an investment asset. As that trend continues we’ll see other cryptocurrencies become more mainstream,” she added.

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