Portfolio dynamics - September 2023

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

In this September 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 September edition of Portfolio Dynamics, we look at BTC, ETH and MATIC recent dynamics.

Bitcoin

A last-minute stop-gap deal by the US Federal government to prevent a shutdown helped bitcoin increase 8% respectively WoW. This strong performance comes mostly towards the end of the week as over $40m of short bitcoin liquidations forced the market higher. Whilst the government shutdown didn’t come to fruition, it is becoming increasingly clear that investors view bitcoin as a hedge against inadequate government policy due to its own hardened monetary policy as a global and stateless asset.

Ethereum

The majority of Ethereum's recent price movements can be attributed to market beta dynamics and short liquidations. The launch on the ETH ETFs shows shallow flows and low demand with only ~$2m of trading volume on the first day, which on a volume-adjusted basis compared to BITO which launched in peak bull-market conditions, was <2% of trading volume. Although the simultaneous launch of nine ETFs on the same day is unprecedented and disappointing, it could foreshadow the spot race, with ProShares potentially winning out.

Polygon

Polygon is experiencing subdued user activity and a decrease in market demand, paralleled by diminishing volumes and open interest. The recent uptick in price during the weekend can be attributed to favorable market beta dynamics and the resultant short liquidations across the market. Regrettably, the landscape for Polygon currently lacks a compelling narrative, particularly following the unsuccessful 2.0 upgrade proposal, which failed to serve as a catalyst for an upward trajectory.

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 last week for the first time in 6 weeks totalling US$21m. Earlier in the week it looked as if it would be another week of outflows, with the inflows coming late in the week (Friday) in what we believe is a reaction to a combination of positive price momentum, fears over US government debt prices and the recent quagmire over government funding.

Bitcoin outflows for the month total US$99m, but this has swung into inflows last week which totalled US$20m, denoting a potential change in sentiment. Solana continues to shine, with inflows of US$5m, marking its 27th week of inflows and just 4 weeks of outflows this year, highlighting it as the most loved altcoin this year.

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.

Investors are facing significant challenges in portfolios at the moment due to the near record high correlation between equiities and bonds, which now stands at 39%, well above the 22% between equities and bitcoin prices. With both equity and bond prices falling, the sharpe ratios for the stocks & bonds portfolio has fallen to just 0.42. Adding a 4% bitcoin position has consistently helped maintain a sharpe ratio above 1, demonstrating its diversification merits in the challenging time.

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