Portfolio Dynamics - November 2023

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

In this November 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!

This month, we look at the recent trends in BTC, ETH and UNI.

The bitcoin price fell ~4% after Binance's $4.3bn settlement with the US Justice Department, albeit recovering its losses the next day and now reaching $41k. This drive higher is likely because of the clearing of bad actors in the industry, the Fed’s minutes suggesting hiking is complete and a near term catalyst of spot Bitcoin ETF approval. The recent widening of contango in the futures market, a rare occurence since 2018, suggests a very bullish sentiment with premiums well into double digits.

Consistently positive funding rates, the largest amounts of volume and leverage since April, and a 0.97 long/short ratio explains ETH's bullish sentiment and price action. Gas price has also steadily increased which puts further pressure on the deflationary nature of Ethereum and, therefore, the supply of Ethereum. As a result, the same amount of buying volume has more impact on the upward price movement.

UNI had its second largest amount of short liquidations since September combined with the highest volume and open interest since December 2022, which led to a 29% increase in price in two days. Further, although the user interface fee switch does not accrue value to the token, the $1.7m in cumulative fees directed towards Uniswap Labs, whilst potentially putting Uniswap in the limelight for lawsuits, means more capital to spend on developer acquisition and business development and partnerships — therefore, potentially building value over the longer term for the DEX and, therefore, the token.

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.

ETF anticipation fuel the largest surge in inflows since late 2021. Digital asset investment products saw inflows totalling $1217m last month, with 9 consecutive weeks of inflows totalling $1.7bn.

• Bitcoin saw inflows over $1bn last month, bringing year-to-date inflows to just over $1.6bn, while short-sellers continue to capitulate seeing outflows of US$14m last month while total AuM in short product have fallen by 60% from this March peak.

• Ethereum saw US$126m inflows last month, with the outflows now having fully corrects to a small net inflow position year-to-date, marking a decisive turn-around in previously weak sentiment.

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.

The correlation between equities and Bitcoin have now fallen to just 14%, well within its historical norms and down from the 72% peak. Meanwhile, the correlation between equities and bonds have risen to alarming levels at 42%, close to the record highs seen during COVID, preseting considerable challenges for investors looking to diversify. Consequently, risk adjusted returns of a portfolio with Bitcoin have risen substantially versus a portfolio without Bitcoin.

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