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Why Cryptoassets and why mimic an Index?
Why Cryptoassets and why mimic an Index?
Insaaph Capital | Oracle avatar
Written by Insaaph Capital | Oracle
Updated over a week ago

Crypto markets have grown tremendously since the first crypto asset, Bitcoin, was launched in 2009 by a pseudonymous software developer, or group of software developers, under the name “Satoshi Nakamoto.” Since then the number of cryptoassets has increased dramatically. Cryptoassets are traded on trading venues around the world, as well as in over-the-counter and peer-to-peer markets. Cryptoassets can be converted to fiat currencies or into other digital assets at rates

determined by supply and demand on these markets. Derivative investment products, including futures, options, and swaps contracts, are also available that allow investors to build sophisticated investment and trading strategies focused around the most prominent cryptoassets. The number and diversity of market participants and companies operating in the cryptoasset space has also increased dramatically over the past years.

As at 30 November ’21 the total market cap for the crypto market was recorded at US$ 2.6 trn. The total market has grown from US$ 775 bn on the 1 January ’21, a growth over the period of 243%. The Decentralised Finance (DeFi) market, a sub-industry of the crypto market, which (the DeFi market) includes the Lending, Decentralised Exchanges, Payments and Asset Management verticals, has grown from US$ 23.96 bn on the 1 January ’21 to US$ 108.46 bn as at 30 November ’21, a 352% growth over the period. The growth of the crypto market (excluding DeFi), albeit still largely speculative, is tremendous especially when considering that crypto was formally introduced to the world with the introduction of Bitcoin as recently as 2009.

It is no secret cryptoasset prices are extremely volatile, especially on news about regulatory crackdowns, environmental concerns and heightened tax scrutiny. This volatility and the sheer number of cryptoassets available means that investors need to weigh up a plethora of complicated data to inform their investment decisions re: asset selection. The weighing of this data is material when one considers that the average monthly difference in returns between the top and bottom performing large-cap cryptoasset can be as high as 300%, and that during the 60%+ drawdown in the price of Bitcoin in December 2017 and January 2018, three of the Top 10 cryptoassets posted positive returns, with one rising 69%. This meaningful variability in performance represents additional risk for less sophisticated investors. These investors stand to benefit from diversification in their cryptoassets portfolios. Diversification the likes offered by the CONSILIENCE 10|10 index like product is considered by many to be the only free lunch when investing. It reiterates the point that rather than concentrating on a single asset, investors can gain higher risk-adjusted returns by purchasing multiple assets with different patterns of return.

Another alternative way look at diversification is by looking at the correlation of different cryptoassets to one another. Figure 1 and Figure 2 present correlation calculations for eight cryptoassets. The data is telling: The returns of individual coins do not appear to be correlated. Whilst correlation varies depending with time frame, the results do support the underlying thesis that there is value in diversifying your crypto portfolio.

Figure 1: Cryptoasset Correlation Calculations – Daily

Figure 2: Cryptoasset Correlation Calculations – Weekly

As such, there is a strong diversification benefit to be found in holding a portfolio of cryptoassets compared to holding any individual asset alone.

CoinMarketCap, 2021 - ‘Total Cryptocurrency Market Cap

DeFi Pulse, 2021 – ‘Total Value Locked (USD) in DeFi

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