Crypto ETP issuer 21Shares AG (“21Shares”) has released its sixth issue of its State of Crypto Report. The report overviews industry happenings over the past few months and provides data on optimising portfolio allocation for various risk profiles and portfolio strategies based on crypto-native indicators, sourced from the blockchain.
The firm writes that the findings underscore that adding crypto assets, including bitcoin or the top five crypto assets based on market cap, to a portfolio can drastically improve risk-adjusted returns. Additionally, including 5 per cent large-cap crypto assets provides a better risk-return trade-off than a bitcoin-only portfolio, as measured by the Sharpe ratio.
When combining all return and risk measures across different rebalance frequencies with the trading cost estimation from annualised turnover ratio, rebalancing on a quarterly basis provides the best trade-off for investors, the firm writes.
Other key findings include:
● Crypto assets are risk-on assets: Over the last eight years, bitcoin has maintained a relatively low correlation with the S&P 500 (~0.15). In March 2020, during the COVID-19 induced market crash, the correlation of bitcoin and the S&P 500 was 0.53. In this risk- off environment, like any other asset except gold, bitcoin reached all-time high levels of correlation with the S&P 500 (0.69). In the short term, especially during distressed times, correlation levels across asset classes increase but longer term, crypto is uncorrelated and continues to be one of the best performing asset classes of the past decade.
● Rebalancing mitigates market drawdowns: Rebalancing is critical for portfolio construction to smooth out swings across major asset classes — especially for crypto assets including bitcoin and Ethereum or a basket — and harvesting the long-term premium leads to diversification benefits. Quarterly rebalancing provides the best outcome.
● Performance does not always correlate with timing: While many investors argue that timing matters in crypto investing, the data says otherwise: regardless of when bitcoin was added to a portfolio, 90 per cent of the time, the strategy outperformed the benchmark in the first year, and 100 per cent of the time, the strategy exceeded it in the next three years.
“Between the macro trends driving the market and the emergence of new blockchain-based applications, our financial system as we know it is experiencing a paradigm shift,” says Eliézer Ndinga, director of research at 21Shares. “Even with the current volatility of the crypto market, our research empirically shows that portfolios with crypto assets outperform traditional portfolios. We’re continuing to see more use-cases for crypto and greater adoption — particularly from companies and institutions — who have come to realise how strongly the asset class performs long term despite ups and downs.”