21Shares Unveils New Findings in Recent ‘State of Crypto’ Report
Leading cryptocurrency exchange-traded products issuer, 21Shares, has recently published the sixth edition of its insightful ‘State of Crypto’ report. The report represents an exhaustive overview of the cryptocurrency market’s prevailing trends over the preceding months and provides useful data on portfolio allocation optimization and portfolio strategies in different market scenarios.
Cryptocurrency and Risk-adjusted Returns
One of the chief takeaways from the report is the positive correlation between exposure to the top five cryptocurrencies, based on market cap, and improved risk-adjusted returns. The details revealed that just a 5% allocation of large-cap crypto into a portfolio could yield a better risk-reward ratio than a Bitcoin-only portfolio, as measured via the Sharpe ratio.
The Advantage of Quarterly Rebalancing
The report also emphasized the notable significance of rebalancing frequencies. Experimenting with different rebalancing timescales, 21Shares noted that quarterly rebalancing offered the best trade-off for investors. This periodicity allowed investors to enjoy more superior returns while effectively mitigating risks associated with aggressive trading.
Additional Findings from the Report
Aside from these notable observations, the report also presented several other significant conclusions:
Cryptocurrencies as Risk-on Assets
During the last eight years, Bitcoin has shown a relatively low correlation with the S&P 500 index. However, in a risk-off environment, Bitcoin’s correlation with the S&P 500 hit record high levels. This short-term reaction typically aligns with uncertain times when nearly all asset classes display increased correlation levels. Despite this, cryptocurrencies have remained relatively uncorrelated in the long term, reinforcing their status as one of the top-performing asset classes over the past ten years.
Improved Performance with Crypto Addition
Integrating a diverse range of cryptocurrencies into an investment portfolio has shown a marked improvement in the portfolio’s performance. Specifically, it was identified that crypto allocation across all rebalancing frequencies increased annualized returns from 9.1% to double digits ranging between 13.9% and 19.7%. Furthermore, the study depicted a substantial enhancement of the Sharpe ratio from 1.0 to 1.3 with this diversified crypto addition.
Rebalancing and Market Drawdowns
Undoubtedly, strategic rebalancing plays a crucial role in portfolio construction. It aids in streamlining volatility across significant asset classes, which is particularly important for cryptocurrencies given their high market fluctuation tendencies. The ‘State of Crypto’ report found out that quarterly rebalancing is arguably the most viable strategy to curb volatility while simultaneously maximizing the possibilities of seizing upside market movements.
Market Timing vs. Performance
Contrary to the widely held belief that market timing significantly influences crypto investing, the report suggested otherwise. As per the data gathered, the exact time that Bitcoin was added to a portfolio had a negligible impact on the portfolio’s performance. Instead, portfolios introducing Bitcoin saw their benchmark outperform 90% of the time in the initial year, and 100% of the time in the subsequent three years. This finding posits that the earlier investors introduce Bitcoin to their portfolio and leave it be, the better their portfolio is likely to perform.
Statement from 21Shares
In response to the revelations of the report, Elizer Ndinga, Director of Research at 21Shares, believes that the finance world is currently undergoing a paradigm shift fueled by macro trends and the emergence of several blockchain-based apps. He insists that despite the crypto market’s current volatility, research has consistently validated that portfolios with crypto assets consistently outperform those without. He asserts that the growing usage and adoption of cryptocurrencies, particularly within organizations and enterprises, is a testament to the resiliency and robust long-term performance of the asset class.
