Portfolio dynamics - October 2023

Welcome to Portfolio Dynamics, your monthly investor update & guide to crypto.

In this October edition, our team reviews a curated selection of headlining coins within our ETP offer that are making waves in the market, as well as providing a comprehensive view of flows within digital asset investment products to get a grasp of investors’ sentiment. Lastly, we review the performance of a balanced investment portfolio containing stocks, bonds and 4% bitcoin—a recipe that pursues to prove its success over the years.

Let’s dive in!

Headlining Coins

This month, we look at the recent trends in BTC, SOL and ETH.

Bitcoin

Over the past week, market participants have digested more relatively soft macro-economic data, with weekly initial jobless claims coming in low and in-line with consensus expectations, as well as undershot ISM and ADP Payrolls data. A less hawkish Powell from the Fed meeting as rate hikes were paused, alongside lower yields across the board provided support for Bitcoin. Funding rates flipped and rose, and open interest ticked up after a large amount of liquidition from the initial price pop.

Solana

Altcoins have been the primary beneficiary of Bitcoin's spike. Solana outperformance has some credibility to the rally with with a recent tick up in TVL, fees and revenues mostly lead from significant increases in liquid staking traction, namely Jito. Otherwise, the 94% decline from peak to trough makes it an attractive proposition regardless of fundamentals. Funding rates, open interest increasing with volume reaching almost US$8bn with a long/short ratio over 0.96 suggesting a strong bullish bias.

Ethereum

Ethereum continues to trundle along with no narrative or protocol developments to spur it in either direction. Volume, open interest, liquidations and funding rates remain muted and price action continues underperform as the ETH-BTC ratio declines to lower lows YTD. Protocol activity has caused net issuance to trend lower (albeit still inflationary) as higher gas persists, and bullish L2 activity continues, however, both factors are not price drivers in the face of weakening macro and muted derivative markets.

Investors Activity - Monthly Fund Flows

What were investors' moves this month in the market? In Fund Flows, we break down the capital flows in digital asset investment products, including CoinShares Exchange-Traded-Products, providing you with the prevailing market sentiment.

Digital asset investment products saw inflows of US$326m, the largest single week of inflows since July 2022. Bitcoin saw 90% of the inflows at US$296m, although recent prices rise also prompted inflows of US$15m into short-Bitcoin investment products. For the month of October, Bitcoin saw inflows totalling US$408, while the ETP industry as a whole saw nearly US$0.5bn in total.

The improving optimism also prompted significant inflows of US$67m into Solana for the month, seeing assets under management rise 850% since the beginning of the year, while some other altcoins saw inflows this optimism did not include Ethereum which saw another US$6m of outflows.

Portfolio Review

Conventional wisdom is that bitcoin has had great returns but it does that by adding substantial risk (volatility) to a traditional equity/bond portfolio.

However, our research has found that:

• Small weightings of bitcoin have an outsized positive impact on risk-adjusted returns and diversification relative to other alternative assets.

• Bitcoin’s lack of correlation to other assets make it a useful alternative asset that can help reduce exposure to economic cycles.

• Quarterly adjustments (rebalancing) of Bitcoin, back to the original weight in the portfolio can help limit volatility and enhance returns.

Adding bitcoin to a portfolio in October improved the Sharpe ratio more than usual due to its unique diversifying characteristics, with the sharpe ratio improvement rising from 0.64 the prior month to 0.66 above the benchmark. This was primarily due to bonds and equities correlation rising to 40%, almost an historical record, beaten only by a period of high correlation during covid. The US debt worries and how the FED controls interest rates are the primary reason for this and is a likely reason why the digital asset ETP industry has seen such strong inflows recently.

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