Portfolio dynamics - August 2023

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

In this August 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 August edition of Portfolio Dynamics, we look at Bitcoin, Ethereum & Solana's recent dynamics.

Bitcoin

Traders found themselves challenged as they positioned their bets for upward price movement as the delta skew reached historical lows amid record low implied volatility. When the market abruptly reversed downward, volatility doubled back into historical ranges between 60-100% and extended the period in overbought territory. Grayscale's victory reversed sentiment and bolstered Bitcoin back into a neutral range for the first time in two weeks. RSIs currently stand at 44, and MACD has displayed a minor positive crossover, considering the 14-day SMA and signal length, respectively.

Ethereum

The market has similar dynamics to Bitcoin as represented by the RSI and MACD, but is slightly more bullish with a put-call ratio of 0.37. Both coins have neutral funding rates, albeit increasing from its depths of the flash-crash, but overall the market is still muted with consistently low volumes and open interest. We expect activity to pick back up as the summer doldrums comes to an end.

Solana

Amongst a 94% decline in token price, a steadfast community and die-hard developers introduced isolated fee markets and Jito-Solana to combat spam transactions and outages; and developed Firedancer as an independent validator client to enhance stability, performance and scalability of the blockchain - a major pain point throughout 2022. We think compressed NFTs and liquid staking are largely under-appreciated, albeit, currently under-utilised and an early development in the ecosystem, which could be a DeFi and NFT catalyst for the ecosystem.

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.

This August’s outflows now total US$315m in what has been an exceptionally low trading volume market. This negative sentiment we believe is due to the belief that a spot-based ETF for Bitcoin in the US is likely to take longer than many expect.

Bitcoin was the primary focus, seeing outflows this month totalling US$272m. Regardless, on a net basis flows remain positive for the year at US$245m. Many investors are continuing to sell their short positions, seeing US$12m outflows this month, with the last 18 week run of outflows representing 89% of total assets under management (AuM).

Ethereum was the only altcoin to see measurable outflows, totalling US$34m. While XRP and Solana saw inflows of US$2.6m and US$10m respectively.

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.

Sharpe ratios, that is risk adjusted returns, rose in August despite the poor relative performance of the asset class. This is due to its unusually low volatiilty for most of the month and its increasing decorrelation to equities and bonds. We also saw an increase improvement in Gold's sharpe ratio. This comes at a time of an increasing likliness that the US Federal Reserve is on the cusp of a no rate hike for September 2023, demarcating the end FEDs rate hiking cycle.

Stay up to date with CoinShares

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

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