Portfolio dynamics - July 2023

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

In this July 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

In this July edition of Portfolio Dynamics, we look at the recent behaviour of Bitcoin, Litecoin and Uniswap, following significant events across all three networks.

Bitcoin

Bitcoin remains range bound between ~$29-30K and continues to swing closely between support and resistance as volatility sits at levels not seen since the doldrums of 2017. In the short term, Bitcoin's futures basis (closely correlated to price), which is the difference in price between monthly settled futures traded on the CME and the spot price, is showing receding optimism from traders. The medium-long-term scenario is more bullish as network liveliness dropped below 60%, suggesting the strongest long-term holding behavior since Q4 2020.

BTC Market Capitalization: $565.4B (Glassnode, 04/08/2023)

Litecoin

Litecoin had its third Halving at block height #2,520,000. Similar to the network’s two prior occasions, it seem to be a 'buy the rumor, sell the news' with a large run-up in price in the months before, and a reversal in price action after, suggesting the 'supply shock' is priced in. This dynamic seems to have played out so far, with which we expect BTC/LTC trading pair to resume upwards now the event is over. With Litecoin’s little utility, the Halving is more of an event to create volatility and speculation. The halving event should not have any significant impact on Bitcoin.

LTC Market Capitalization: $6.0B (Glassnode, 04/08/2023)

Uniswap

With Uniswap's cross chain protocol launch behind us, and V4 deployment months away, Uniswap stands at the mercy of market forces with no strong positive directional catalyst. Volumes continue to dwindle, fee switch proposals have been put by the way-side, recent crypto exchange hacks are evident and worries over further regulatory crackdowns on exchanges and token could continue to weigh on price sentiment.

UNI Market Capitalization: $3.5B (Glassnode, 04/08/2023)

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 outflows for the last 3 consecutive weeks, in what we beleive is profitaking rather than a downturn in sentiment. The summer doldrums are in full force with weekly trading volumes in investment products 36% below the year-to-date average, but in the broader on-exchange market volumes have suffered more, down 62% relative to the YTD average.

Bitcoin has been the primary focus, having seen the largest weekly outflows since March, when US regulatory scrutiny began escalating. Short-bitcoin has seen 14 consecutive weeks of outflows, highlighting that the outflows in long bitcoin are more about profit taking rather than negative sentiment. Solana saw the largest inflows, totalling US$9.5m, the largest single week of inflows since March 2022.

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 return.

Looking at data since 2015, which include several significant drawdown periods of 74% and 83%, Bitcoin remains a much better diversifier than other alternative assets that could be considered, such as gold.

Recent volatility in the Bitcin price has led to a small reduction in the sharpe ratio (risk adjusted returns) but this has not affected its diversification mertits, where Bitcoin has diversified a portfolio by 7% (regulalry rebalancing) since 2015 compared to gold by only 0.2%. Allowing Bitcoin to drift in a portfolio (not rebalancing back to you original target weight) improves diversification and returns, but dramatically increases volatility.

Stay up to date with CoinShares

That's a wrap for this edition of Portfolio Dynamics.

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