Analysts: Here's the biggest difference between crypto, cannabis markets

Emily McCormick - finance.yahoo.com Posted 5 years ago
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At first glance, cannabis and cryptocurrencies seem to have a lot in common.

Both are part of highly speculative markets subject to exuberant highs—and crushing lows. The legality and regulation of each languishes in a gray area. And with many investors, both assets have failed to completely shake their perception of being aligned with black market activity.

Yet according to Rob Wertheimer, founding partner of Melius Research, a clear dividing line separates the two.

“With cannabis, you know there’s a market,” Wertheimer said during an interview on Yahoo Finance’s Business of Cannabis special. “You just have to convert it to legal, right? And so there’s a much stronger foundation.”

Within the nascent cannabis industry, demand for its products is well-documented. In the U.S. — the global demand leader for cannabis — total legal demand is expected reach $25.7 billion by 2025, up from $10.3 billion in 2018, according to a report from analytics firm New Frontier Data.

Analysts from Wall Street firm Cowen have envisioned four key verticals for cannabis: Adult use, beauty and nutraceuticals, over the counter pain and sleep, and pharmaceuticals. Each segment carries major market promises, analysts say.

“The consumer branding potential is very, very large,” Wertheimer said. “It fits very naturally in a consumer staples space, and so people understand that.”

Full adult use legalization in Canada has already unlocked significant value for cannabis companies, which have expanded their product mixes to cater to a recreational consumer.

Also, major public cannabis companies including Tilray (TLRY), Canopy Growth Corporation (CGC) and Cronos (CRON) saw triple digit revenue increases over last year, in the wake of adult use legalization.

‘Booming market of low prices’

But the analogy between cannabis and cryptocurrencies deepens when considering the economics. Both are commodities with indefinite ceilings on supply.

Namely, naysayers have pointed to oversupply as something that undermines pricing power in their respective industries.

Oregon, a mature U.S. legal cannabis market, had more than 6.5 years’ worth of recreational oversupply at the beginning of this year, as legalization unleashed a production influx.

The result has been a “booming consumer market of low prices,” according to a report from the Oregon Liquor Control Commission, albeit one witnessing “a continued increase in demand.”

[More: These are the biggest threats to the cannabis industry: CEOs]

In a scathing critique of crypto late last year, UBS pointed out that for digital currencies, “supply can go up. It cannot go down. Demand for cryptocurrencies can go down,” wrote analyst Paul Donovan.

Cannabis and cryptocurrencies investing both remain polarizing. However, among mainstream investors, the gap between interest and aversion has narrowed significantly.

Of 392 financial advisors who participated in a 2019 Trends in Investing Survey, less than 1% were currently using or recommending cryptocurrencies in client portfolios.

Yet 25% reported having clients ask about investing in cryptocurrencies, according to the report conducted in April by the Journal of Financial Planning and the FPA Research and Practice Institute. Meanwhile, 55% of advisors in the survey said their clients had asked about investing in marijuana stocks.

And with wellness products comprising a growing segment of cannabis consumption, some analysts think it could make a case for itself in biotechnology.

“I think the analogy for cannabis is much more aptly made with biotech than with tech or crypto,” Cowen managing director Lisa Thomas told Yahoo Finance.

“What you hear consistently is people want to have standards and norms around product purity, quality, dosing, safety, all of those things,” she added. “And so, you know, the mantra – if the mantra before with cannabis was ‘legalize it,’ perhaps now it’s ‘regulate it.’”

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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