Crypto Investment Products on the Rise

Cryptocurrencies have been volatile, but enormously profitable investment since their inception in 2008, while the number of actively traded coins recently surpassed 3000. While Bitcoin and Ether dominance (see below) remains key to the stability of this market, the variety of coins underpins their importance to ordinary market participants, as well as firms, economists, and even certain governments.

Cryptocurrency investment products have seen their total assets under management (AUM) increase by 45.5% to proximities of the $75 billion mark in October, surpassing the previous all-time high of $58.7 billion in March of this year. Ethereum-sourced DeFi products boosted their AUMs to an all-time high of $15.9 billion in October after growing 30%. Investment products focusing on other crypto-instruments and their combinations saw their assets under management rise by 26.5% to $3.6 billion.

What makes crypto asset management a sustainable expansion phenomenon is the growing participation of non-alt institutional investors. Thus, the Houston Firefighters’ Relief and Retirement Fund, which has around $5.5 billion of assets under management, has invested $25 million into both bitcoin (BTC) and Ethereum’s ether (ETH).

Further growth of the crypto asset management industry largely depends on the attainability of decent and lasting efficient frontiers. For this purpose, it is worth studying various pertinent approaches. For example, Granger causality is a well-known statistical concept that is based on prediction. According to Granger causality, if a signal X1 “Granger-causes” (or “G-causes”) a signal X2, then past values of X1 should contain information that helps predict X2 above and beyond the information contained in past values of X2 alone.

Source: CoinMarketCap

Analysis of co-movements and Granger causality across frequencies deserves special attention in much of the contemporary theoretical and empirical research in crypto dynamics with regards to analysis on their individual contagions, volatility spillovers, predictability, bubbles, and crashes. These analyses have important implications on diversification benefits, hedging strategies, and portfolio risk assessment. Most study results demonstrate that the cryptocurrencies move together – largely codirectionally – and experience long-term memory, so trend patterns (but not necessarily amplitudes) prove to be recurrent. Portfolio managers and investors who engage across investment horizons (i.e., multi-prospect and/or high-frequency traders) can apply these findings for their strategic decisions.

The ultimate goal of building a crypto investment portfolio and considering investment products instead of individual coin buying or even trading – is, certainly, an ROI (return-on-investment) boost. Some skeptics assert that there is not much reason for doing so because the mutual correlations among the largest coins are prohibitively high. However, this type of criticism is usually voiced by theoreticians rather than practicing PMs. The latter restlessly seek efficient frontiers – be it traditional assets, where major stocks unveil more synchronism than major cryptos do – or new asset classes. After all, Markowitz’s portfolio theory is indiscriminate to all varieties of inputs!

Since the beginning of July, Bitcoin dominance has declined from 63.8% to 56.7%, while Ethereum’s share of the total crypto market capitalization has increased from 9.5% to 12.4%.

Source: CoinBase

Tables of cryptocurrencies correlations

Asset class correlations are important only insofar as they help analysts complete the equation of a balanced portfolio, one that can withstand economic cycles and market movements to produce consistent returns. Below is the most recent one:

Source: VRM

At a glance, the table shows, contrary to the above-mentioned skeptics’ beliefs, that building efficient frontier-based portfolios is not only feasible but also highly advisable. There are plenty of sub-half (less than 0.5) mutual correlations, let alone constantly emerging altcoins that can be added dynamically. Popular Monte Carlo Simulation strategy can be implemented via either ready-to-use Web resources or templates, or by running Excel books on advanced PC or laptops with reliable chip cooling equipment and with Excel’s Analysis Toolpack plugin installed.


In Search of Various Crypto Benchmarks

So far crypto PMs are only able to conduct either cross-correlation or multi-asset correlation studies. Unlike in the equities domain, they cannot compare the performances of coins against some kind of widely recognized and monitored crypto index. In my view, the fact that Bitcoin plays a dual role – as an individual asset and as a benchmark – limits the usability of such studies.

One apparent method of creation of a foolproof crypto index is by assigning market cap or tradable volume weights to member cryptos. As we mentioned above, currently Bitcoin dominance is hovering around 57%, while Ethereum dominance is recorded at around 12.5%. The total share of other member cryptos – Ripple, Solana, Cardano, Monero, Litecoin and Bitcoin Cash – will reach around 30% in this case, which is still a significant portion.

True, Bloomberg attempted to introduce such benchmarks with limited success. Thus, the Bloomberg Galaxy Crypto Indices were launched by Bloomberg Index Services Ltd and Galaxy Digital Capital Management. The Bloomberg Galaxy Crypto Index (BGCI) is a capped market capitalization-weighted index designed to measure the performance of the largest digital assets traded in USD. Eligible index members are diversified across different categories, including stores of value, mediums of exchange, smart contract protocols and privacy assets. The Bitcoin (BTC) and Ethereum (ETH) Indices are designed to measure the performance of a single digital asset traded in USD.

The Bloomberg Galaxy Defi Index (DEFI) is another similar benchmark designed as a capped market capitalization-weighted index specifically targeting DeFi members. The capabilities of the underlying protocols include market-making, lending, borrowing, and liquidity and yield aggregation.

Key Metrics of Crypto Asset Management

According to Finance.Yahoo, the global Crypto Asset Management market size is projected to grow from USD 480 million in 2021 to USD 1.2 billion by 2026 and will exceed $9 billion by 2030, at a compound annual growth rate (CAGR) of 21.5% during the forecast period. Therefore, one major attraction about Crypto Asset Management Service Industry is its growth rate. USD 400 million is still a very modest number versus projected growth targets, so the current environment offers thrilling prospects for its pilgrims. Many major technology players – including Metaco SA, Exodus Movement, Crypto Finance AG, Xapo, itBit, Ledger, Gemini, Altairian Capital, Digital Asset Custody Company, ICONOMI, Coinbase AM, BitGo, Vo1t & Koine Finance, and some others – have been looking into Crypto Asset Management Service as a way to increase their market share and reach towards consumers.

Sources: Crypto Asset Management Service Market, VRM Update

Final Word

Crypto assets have become a full-fledged new portfolio management class featuring elevated returns and a high level of independence from other, more traditional class, performances. As we see, not only crypto dedicated funds and various smaller private wealth managers have been adding them to a wide variety of growth-oriented baskets, but more traditional institutional funds are, slowly but surely, deciding to beef up their dull records by adding some gas in form of buying the most liquid coins in sizeable quantities. This makes us assured that the crypto AM industry will be growing both volumes and quality for many years and decades ahead.