It may be winter, but crypto bears don't hibernate. However, is it possible to find opportunities even in this market?
One way to do this is to research cryptocurrencies that can outperform the first and largest of them all, bitcoin (BTC). But that is easier said than done. Trying to find a well capitalized cryptocurrency that doesn't see its price closely tied to bitcoin is hard to come by. However, it all depends on the time period used.
This column has been all about correlations and volatilities in the past few months and there is a reason why it is important. For portfolio managers looking to hedge their altcoin holdings, knowing the ratios of their assets to the most liquid of the lot gives them an idea of how large an offsetting position they will need to take. And it should also offer at least one data point on how to spot portfolio diversification opportunities.
Well, that's the hope anyway. However, the last month has been a rough one and some altcoins are not only hurt but crushed against their expected returns against bitcoin.
To determine what these expected returns were, we first had to determine the beta version of each cryptocurrency. It is a measure of how an asset moves (on average) when the overall market goes up or down. For those of you who have forgotten your "Introduction to Finance" business school course, one method of calculating the beta of an asset is to multiply its correlation to the market by the ratio of its volatility divided by the market volatility. In this case, the "market" is bitcoin.
After reaching the beta version, we can try to determine what we expect from the markets during a certain period.
So this is where we have to put a disclaimer: the methods you are about to see here are not necessarily endorsed by academia, Wall Street, or any asset manager with even a modicum of self-respect. These are pure back-of-the-envelope spreadsheet elements intended to illustrate a point, not to be coded into your templates. Please trade responsibly and seek professional assistance before taking any further steps.
Tl;dr No financial advice!
With that being said, this is what we did. We take 20 highly liquid, highly capitalized assets and multiply their betas by the bitcoin return from January 1 through January 26 to arrive at what we call "expected returns." A correct application of the classical capital asset pricing model (CAPM) would say multiplying the beta by the excess return (or in this case, the loss) of the market, which in this case is bitcoin minus the risk-free rate. , then adding the product at its own risk-free rate.
Have you read the disclaimer above? Good, because the risk-free rate in this situation, say, 90-day Treasury bills, is so small that it's close to zero. This is a rounding error at best when looking at only three and a half weeks of data.
What we found is that most of these cryptocurrencies except algorand, cardano and dogecoin have been terribly underperforming bitcoin and what they were supposed to do during such a downturn.
CoinBeta to BTCExpected return(Beta Returns x BTC)Actual Returns
(1 de enero - 26 de enero)Diferencia BTC-23%ETH1.23-28%-35%-7%XRP1.03-23%-28%-5%BCH0.99-22%-34%-12%ADA1.40 -32%-24%+7%XLM1.07-24%-29%-5%LTC1.18-27%-28%-2%EOS1.01-23%-29%-7%DASH1.13 -26 %-35%-10%XMR1.25-28%-42%-14%TRX0.92-21%-27%-6%ETC1.21-27%-31%-4%ZEC0.92-21%- 40%-19%ZRX1.26-28%-39%-11%BAT1.11-25%-37%-12%ENLACE1.35-30%-25%+5%XTZ1.21-27%-39% -11%BSV0.68-15%-27%-12%DOGE1.06-24%-18%+6%OXT1.05-24%-39%-16%ALGO1.27-29%-48% -19 %
As of Jan 26, 2022. Data Source: CoinDesk Indices
Holding on to altcoins for the past month was not only painful, it was excruciating.
As mentioned above, these are just the last three weeks. Go back a bit and the story is quite different. Altcoins have grown tremendously against bitcoin and ether over the last year. Not all, of course, but as a whole, valuations have risen for alts in 2021.
For some investors, the recent overselling relative to expectations is fleeting.
“Any signs of decoupling tend to be temporary, mainly because the market is still very sentiment driven, and sentiment tends to be universal across the entire coin spectrum,” said Richard Yan, co-founder of blockchain coin firm Vite Labs. and Blockchain host. Discussion podcast, CoinDesk told CoinDesk.
Yan predicts that "functional" alternatives will outperform bitcoin in the long run. He defines "functionals" as those that do things like provide an ecosystem or operating systems that "also have definitive value accretion mechanisms like staking or paying for gas for services, so they have more support ratings-wise." ".
“During a pullback, functional coins always end up higher than BTC in percentage change since the start of the bull market,” he added.
When we noted that the price of Solana's layer 1 blockchain wanted SOL token had halved since the start of the year, Yan was quick to point out that it was still several multiples above its March trading level. of 2021 against bitcoin, which has lost roughly a third of its value since then.
The key, however, is that the time frame is the "long term." If your portfolio depletes before then, the long term may be too far off. As John Maynard Keynes well said: “In the long run, we are all dead.
This can often also apply to wallets.