Portfolio Dynamics - January 2024

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

In this January 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 SOL.

Most of Bitcoin's negative price action can be explained by stronger macro data, such as reduced chances of rate cuts in coming meetings and, hence, a stronger dollar have all contributed from a steady decline in the BTC price. Relatively flat funding rates, volumes and open interest suggest most of the downwards price action is from spot, rather than derivatives. Sell the news after the spot BTC ETF approval, as well as billions of dollars of outflows from major providers such as Grayscale's GBTC due to ETF reshuffling as well as FTX selling their estate holdings, are also major factors. Now that outflows have steadied, expect less selling pressure.

Market structure is very similar to BTCs: a relatively muted derivatives picture. Sentiment may have also dampened after investors realised that a spot ETF approval could be in the latter half of 2024, if not 2025. Spot Ethereum ETF Delays will continue to happen sporadically over the next few months, with the next important date being May 23rd. The next major catalyst of ETH is Q1/Q2 2024 with the Proto-danksharding upgrade, however, considering post-merge price action, there is potential for it to be net negative.

Solana has underperformed YTD since ~5.5x increase in price between October-December 2023, currently sitting at levels not seen since the eve of the 3 Arrows Capital collapse in May 2022. Negative price action can be related to selling off after a large run, as volumes have ticked up, long liquidations have outweighed short liquidations and open interested have steadily reduced. Consistent chain developments will not likely support price action as correlations to BTC and ETH will likely prevail.

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.

Jaunary 2024 was perhaps the most significant development in the ETP market ever, with the approval of spot-based Bitcoin ETFs in the US. This led to US$1.5bn of inflows, but this masks US$7.2bn of inflows from newly issues funds in the US, although this was offset by a substantial US$5.6bn of outflows from the incumbent Grayscale. Data suggests outflows from Grayscale are beginning to subside as the daily total continues to subside. We believe that much of the price falls, despite these positive flows, was due to Bitcoin seed capital being acquired prior to 11th January.

Inflows were dominated by Bitcoin which saw US$1.4bn over January, representing 96% of total flows. Understandably, these flows were focussed on the US, while European ETPs suffered a little as investors reallocated fund to the US.

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 bonds remains stubbornly high at 35%, a real concern for investors who rely on the historic diversification between the two asset classes to help deliver adequate risk adjusted returns. This is leading to a hunt for an alternative asset that deals with this problem although in recent years neaither gold of real estate have delivered diversification. Bitcoin is increasingly being used as a tool to help diversify and currently more than doubles the sharpe ratio when looking at data since 2015.

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