Diversification Part I: Performance
As crypto markets mature, we see increasing value in focusing on broadly diversified portfolios of tokens.
If the last two years prove to be a template for the pace and diversity of innovation going forward, then a diversified portfolio should provide better risk / return metrics.
Backtested results indicate that a more broadly diversified portfolio (Top 75, 100) offers better value than a minimally diversified portfolio (Top 10).
We view the crypto landscape as an ‘expanding cone’ of investible assets, with an increasing number of credible projects across different use cases.
Broadly diversified, equal-weight portfolios provide an efficient way to capture the power law dynamics of token returns.
Intro
Diversification is a long-established practice in traditional investing and the core tenet of modern portfolio theory. The well-accepted logic goes that an investor can reduce portfolio risk by investing in combinations of assets that are not perfectly positively correlated. This applies to combinations of different asset classes, as well as simply different assets within the same class (i.e. public equity of different companies). While the application of diversification has permeated nearly every aspect of investment in traditional assets, the application within the digital asset realm has been limited. “Diversified” product offerings largely consist of no more than the top 10 (or fewer) cryptocurrencies, with some as basic as just a value-weighted mix of Ethereum and Bitcoin.
To some extent, the lack of truly diversified projects has been due to the technical difficulty of gaining liquid exposure to a wide variety of tokens in any meaningful size. Indeed, in 2019 and before, the number of “investible” projects considering market cap and trading volume was quite limited.
Exhibit 1: Baskets of tokens have lower volatility than their median constituent
However, there has also been a perception that all tokens are correlated, especially as you move into smaller projects. This is an assumption we challenge. A simple comparison of the median standard deviation of daily returns among the Top 100 tokens, vs the standard deviation of the daily returns of a basket of these tokens (see Exhibit 1) shows that the combined baskets have lower volatility than the individual token. This lays the groundwork for our closer examination of diversified strategies in cryptocurrencies.
Furthermore, the universe of investible cryptocurrencies continues to expand. Like the universe of public equities, there now exist thousands of different cryptocurrencies. The rapid diminishment of barriers to entry for creating new tokens has certainly contributed a significant number of questionable coins to the crypto ecosystem, casting some level of suspicion across the universe of smaller projects. However, there continue to be hundreds of serious projects, positing real solutions and use cases within the blockchain space, spinning up and growing around native cryptocurrencies.
We view the universe of investible digital assets as an expanding cone, emanating from Bitcoin, but growing to encompass a much wider, more diverse array of tokens. In keeping, we see growing value to investing in broader baskets of tokens. We believe looking towards the Top X tokens, rather than just the Top 10, will do the best job of capturing new innovations in blockchain, and riding the respective waves of emerging themes and new markets. We see the world of cryptocurrencies becoming more like the world of public equities, with a growing number of serious tokens addressing different use cases.
Exhibit 2: BTC and ETH have lost dominance
One simple way of showing progress on this so far is the market cap dominance of BTC and ETH. Over time, BTC’s share of overall crypto market cap has fallen from ~70% at its peak, to under 40% today. Some of this has been thanks to the growth of Ethereum, but even the combined market cap of BTC and ETH has fallen from a peak of over 80% to just over 50% today. Compared to the world of public equities this is still quite significant dominance, but the trend clearly shows the growing importance of other tokens.
We also believe that crypto markets will become more efficient over time, helping to keep obvious scams or worthless projects from breaching the Top X category and infiltrating the basket. On the other hand, we also see this as an opportunity to apply semi-active “quantamental” management to diversified baskets, to help mitigate some downside risk - although that enhancement falls outside the scope of our analysis for now.
As we discuss throughout this report, we believe that the crypto market is significantly different today than it was just three years ago. The rigor and differentiation of many projects in the crypto ecosystem today mean that a diversified portfolio has the best chance of providing attractive risk-adjusted returns. The performance of tested baskets in 2021 demonstrates this: the baskets of the Top 75, 100, etc. tokens meaningfully outperformed a blend of BTC/ETH and the Top 10. Prior to this, the narrative was much more wedded to the development of Ethereum, while BTC continued to attract speculative investment as well as long-term holders. Arguably, the quality of crypto projects has improved over time, and a basket of the Top 50-100 tokens today likely captures more serious enterprises than it did in 2019 or even 2020.
Ultimately, a positive outlook on diversification is a view that the use cases of blockchains and cryptocurrencies will continue to grow and mature, and that, much like the public equity markets, the crypto space will see the emergence of many successful projects in different categories. In any other more mature segment of the investment world, diversifying a portfolio is almost a foregone conclusion, and few (if any) spaces are defined by just a handful of winners over a long period of time. We believe that blockchain technology will find more and more traction in real-world applications, while also creating entirely new systems and solutions. As such, it seems inevitable that a variety of cryptocurrencies will be necessary to support them and thereby accrue value.
Prevailing Opinion on Diversification in Cryptocurrencies
There seems to be a perceived wisdom in the crypto space that the vast majority of tokens, outside say the Top 10 or so, are generally un-investible (or at least littered with junk), and that diversifying into these projects is more of a risk than a benefit. It is much more common to see Bitcoin or ETH maximalists, or fanatics for specific individual projects, than it is to see supporters of more diversified strategies. Even when diversified strategies are floated, they often boil down to a mix of BTC and ETH, generally value weighted.
Coming into this project, we find it hard to believe that such minimal (or no) diversification is the best strategy to pursue going forward. In a space experiencing as much growth and real technical progress as blockchain, it seems a risky bet that value will continue to accrue only to the top handful of coins. There now exist thousands of projects in the space, many of which are backed by serious teams and have tokens with decent liquidity. While Bitcoin and Ethereum are likely to continue appreciating alongside other tokens, it seems improbable that these two coins continue to dominate value capture as much as they have in the past. As we illustrated with the concept of an expanding cone, the investible universe of quality projects will increase over time and build upon the success of Bitcoin and Ethereum.
And to be clear, these other projects show a genuine diversity of use-cases, from alternative L1s, L2s, DeFi, gaming, metaverse, infrastructure, and many more. The broader cryptocurrency space is not, as some might believe, a monolith of Bitcoin competitors. There are many projects using blockchain technology working to solve a range of real-world problems or improve on existing solutions. These are often far removed from the original idea of a digital, decentralized, global currency. Our aim in this paper is not to proselytize on the power of blockchains solving every world problem, but recognizing the flexibility and usefulness of blockchain technology is central to acknowledging the potential value in a broader range of cryptocurrencies.
Skepticism around diversification does not just exist in informal Twitter-sphere opinion though. There is also academic research that suggests diversifying across cryptocurrencies has minimal benefit with regards to risk management. A recent piece by the Chicago Fed suggests that cryptocurrencies are all highly interconnected, making it difficult to construct a diversified portfolio with improved risk/return metrics vs a single cryptocurrency. While we do not question the statistical analysis of the piece, we question its value in helping make forward looking decisions. For one, the analysis ultimately surveys only 33 tokens and is unclear about how these are chosen. Two of these tokens are also stablecoins, which probably don’t have a place in such a comparison of otherwise risky assets. While the count of tokens is perhaps fine from a statistical view point, it is unsatisfying from an asset manager’s point of view when examining how to take a market consisting of thousands of tokens and deliver the best risk-adjusted returns to clients. Furthermore, the time period analyzed for the set of 33 tokens spans only January 2021 to May 2022 - a short time period in and of itself, but also a time period skewed by the COVID-19 pandemic and the ensuing flood of liquidity unleashed by global central banks and stimulus by global governments. This period saw some of the highest correlations among all assets globally, as money rather indiscriminately flowed into increasingly risky asset classes in search of returns or yield.
The study also does not follow traditional portfolio risk analytics in reaching its conclusion. Regardless of the power of the statistical methods employed, institutional asset managers typically invest vs a benchmark or in pursuit of certain risk-adjusted return metrics, such as Sharpe ratios. In these more standard metrics, our analysis does point to potential in diversifying, as we will discuss in detail in this piece. The Chicago Fed’s approach is certainly a relevant analysis, but ultimately investors are paid to take a forward-looking view and the study is explicitly just historical in nature, without taking into account the quickly evolving nature of blockchain technology and cryptocurrencies. We take the view that, over time, diversification will play, and has already started to play, as important a role in cryptocurrencies as it does in nearly every other modern financial market.
Methodology and Important Considerations and Limitations
Before jumping into any study of crypto performance, it’s very important to remember that studying the “long-run” performance of diversified baskets of cryptocurrencies is fundamentally confounded by the young age of the market. While public equities can be rigorously back-tested with decades of price data, the universe of cryptocurrencies has only really expanded meaningfully in the past few years, and accurate historical data remains difficult to come by at a large scale. We start our analysis by looking at the relative performance of baskets of the top “X” coins by market cap, which reveals interesting trends. While our period of study is ultimately longer than the period examined by the Chicago Fed, we do still recognize the explanatory power is handicapped by the short time period. Similarly, other studies should be taken with the same context.
Methodology
Throughout this report, we employ the following methodology to construct the time series which underpin our analysis. To start, we take the Top X tokens, per coinmarketcap.com, at quarterly intervals, filtering for those that have at least $1mm volume in the preceding 24 hours. At the beginning of each quarter, allocations are equally weighted across tokens, but the weightings within this basket will naturally drift over time as individual token performances vary throughout the quarter. To construct a return series, we simply back out the implied daily returns from the daily value of the aggregated token basket. At the start of each new quarter, we redefine the basket constituents based on the updated market cap data and reset the weightings back to equal weight. We extend our studies back to 2019, prior to which data is limited and constructing baskets of diversified tokens is severely limited by available liquidity.
We also explicitly exclude stablecoins and “wrapped” tokens. Interestingly, many indices of Top “X” tokens include these. From the perspective of this analysis however, if we want to look at the benefit to risk-adjusted returns of risky assets by holding a range of different, but still risky, assets, then we should not include structurally fixed-value holdings (even though, as we know, not all stable coins have proven “stable”). We would liken that to saying that you can reduce the risk of stocks by investing in Treasurys or cash. This gets into the realm of how to construct efficient portfolios by investing in entirely different asset classes - a very important and interesting realm of study, but not the purpose of this analysis. Presumably, an investor in cryptocurrency is interested in the asset class precisely due to the upside potential of such risky assets. As such, we focus on tokens with no pegs or promise of stability.
A Look to The Past
Historical Risk/Reward Metrics
Starting very simply, we show in Exhibit 3 the cumulative returns of different baskets of tokens in each year historically. We see that in 2019 and 2020, a basket of evenly allocated BTC and ETH outperformed evenly weighted baskets of the Top 10 to 200 coins. However, in 2021 the most diverse baskets massively outperformed BTC/ETH, as well as the Top 10 basket.
Exhibit 3: Basket Returns of Dollar Invested at Beginning of Year through Year-End
Normalizing by volatility, we see similar trends. Again, 2021 stands out as a turning point, where the larger baskets achieved highly attractive sharpe ratios, with the Top 75 appearing to be the point where incremental returns diminished. Over time, we see somewhat of a convergence to the BTC/ETH portfolio in terms of returns and volatility: In 2019 and 2020, the Top 10, 100, and 200 posted subpar returns, but also had slightly lower volatility (though not enough to make for a better sharpe ratio than BTC/ETH). In the next year, 2021, volatility for the larger baskets was somewhat higher, but outperformance was dramatic, and Sharpe ratios were similar across the buckets. And in 2022 ytd, returns and volatility have both evened out across the baskets vs BTC/ETH.
Exhibit 4: Risk Adjusted Returns by Basket
We also examine risk in a few different ways but reach similar conclusions. The Sortino ratio of the baskets follows generally the same pattern as the Sharpe ratio, with downside deviations between the baskets generally quite similar. The Treynor ratio (calculated using beta to BTC) also shows broadly similar trends.
Exhibit 5: Further Risk Adjustments
These results need to be taken in some historical context, however. Particularly as markets in 2020 and 2021 were massively skewed by fiscal and monetary stimulus that governments and central banks used to combat the impact of the COVID-19 epidemic. But it was not just easy money that was at play, as these years also brought significant fundamental changes to the world of crypto, albeit likely sped along by the massive wave of liquidity that saw billions of VC money pumped into crypto projects. The success of Ethereum’s smart contract platform in particular became very evident in 2020, especially with the rise and fall of DeFi summer, which nonetheless showcased the huge potential in the space. Competition rose in 2021, with alt-L1s gaining traction, alongside new and innovative projects to capitalize on the promise of all these new blockchains.
While some might still maintain that 2021 was an outlier year driven purely by reckless investment into any and all coins due to free-money stimulus, a re-cut of the time periods shows that this is not the case. We recut the time periods to group Q4 2020 and Q1 2021 together, mainly because BTC and ETH ripped in Q420, followed by a catchup of the Top 100 in the next quarter. Thematically, we can think about this rally as part of the same move, which happens to be captured in quarters split across two years. This arguably skews the results when you cut the data by year only. If we instead group as 1Q20-3Q20, 4Q20-1Q21, and 2Q21-4Q1, the diversified portfolios outperform across all 3 time periods.
Exhibit 6: Adjusted Periods in 2020-2021*
*4Q20-1Q21 excluded in row two to remove axis distortion
*4Q20-1Q21 excluded in row two to remove axis distortion
The narrative took a decided turn in 2022, with liquidity across markets drying up as central banks tightened monetary policy and governments ceased the flow of blank checks. Additionally, the high-profile failures of the TerraUSD stablecoin (and LUNA), Celsius Network, Three Arrows Capital, Voyager Digital, and most recently FTX, justifiably increased caution among investors in cryptocurrencies. Such caution would also be seen in the dramatic slowdown in VC funding for blockchain startups, which further inspired the notion of a “Crypto Winter” setting in.
The bear market has impacted cryptocurrencies negatively across the board, with ETH/BTC falling ~75% in 2022, while the broader baskets fell 85-90%. Going forward, we expect the market to increasingly learn from past mistakes. Easy money and the VC boom in crypto likely fueled many projects that simply did not have product-market-fit or good execution. While difficult to bear, the regular wash out of such projects is an essential part of the development of any market, and serves to strengthen the long-term ecosystem.
Turning back to the numbers, what does stand out to us is that diversifying to simply the Top 10 tokens neither significantly improved returns or reduced risk vs just value-weight BTC/ETH or the Top 100 basket. In fact, the outperformance of BTC/ETH did not carry over into the Top 10 in 2019 or 2020, while the outperformance of the broader baskets in 2021 was also lacking in the Top 10. Interestingly, broadening out to the Top 200 basket does not introduce meaningful upside to risk metrics either, with returns and volatility relatively similar to the Top 100 basket. The Top 75 basket emerges as somewhat of a sweet spot, where returns are still significantly higher than the next smaller basket (Top 50) while maintaining similar volatility.
Beta
Another stat to consider for a broadly diversified basket of cryptocurrencies is the relative volatility to other markets, as measured most popularly by beta. In Exhibit 7 below, we first show the TTM beta of the Top X coin baskets to the 50/50 mix of BTC/ETH. The Top 10 basket has notably always hovered around a beta of ~1.0x to BTC/ETH, while the larger baskets have historically had a much lower beta. However, in the last year, the betas of the different baskets have generally converged to ~1.0x vs BTC/ETH.
Meanwhile, when compared to the NASDAQ, the correlated move of risk markets in 2020 flattened the beta to near 1 for the year following the COVID dive in early 2020, after which beta has slowly risen again and converged to around ~1.5x. On this point, it is not surprising that a market like cryptocurrencies exhibits a higher beta to an equity index like the NASDAQ, given its relative infancy to even the fast-paced world of tech stocks. What is more interesting to us is that the Top 100 and Top 200 tokens, a space perceived to be full of incredible risk and outright scams, actually still trades relatively in line with the big tokens, and has historically even been much less correlated, although the bear market has brought movement more closely in line. Still, over the past few months, the baskets of Top 10-200 tokens have slowly been becoming less correlated with BTC/ETH. We think this trend can persist as some of the excess capital, amply provided by fast and loose post-COVID monetary and fiscal policy, leaves the space. Cryptocurrencies are ultimately quite diverse - with tokens providing vastly different use cases across different sectors. Some will find more success than others, and the market, as it becomes more efficient, should price in different trajectories over time.
Exhibit 7: Historical Trailing 12- and 3-Month Betas
Sector Contributions
Despite what some outsiders may be led to believe, the cryptocurrency space is fundamentally quite diverse, with blockchain technology underpinning a wide variety of use-cases - from “DeFi” to payments, to gaming, and more. As explored in the narratives above, these different categories of tokens can go through their own cycles and in turn impact the performance of the broader baskets. We next look into the performance of these categories and how the variations impacted returns for the basket of Top 100 tokens.
Exhibit 8: Top 100 Coins by Category
First, the makeup of the top 100 tokens over time (Exhibit 8) helps illustrate some broader trends, such as the rise in alternative L1s, the rise of DeFi tokens, and the shrinking of smart contract payment platforms. However, over time the composition is relatively stable, and the prominence of a category like DeFi somewhat lagged the actual boom in activity within the space (which started in 2020).
The returns data itself shows considerably more variation than simply the breakdown of the number of coins in each category. Each year has seen a quite high standard deviation of returns across categories, and the data for 2021-Present shows a standard deviation of 252%, even after excluding the outlier Meme category. Furthermore, breaking up the Sharpe ratio by category shows that while the Top 100 has had a Sharpe of 1.38 since 2021, the individual categories had Sharpe ratios of 0.73 to over 40.
Exhibit 9: Returns and Sharpe Ratios by Category, Year
Looking at the results by category also makes it tempting to conclude that the Meme, Metaverse, and Gaming token categories are potential sectors to focus on. But one should also overlay these returns with the relative proportion of the Top 100 each represents.
Below we show the weighted contribution of each category to the quarter’s total return, making it clearer that the larger categories like Currencies, Layer 1s, DeFi, and Infrastructure still end up contributing more to overall returns than standout categories like Meme tokens, of which there are only ~2 on average in the Top 100. A strategy purely focused on such small categories would likely not be scalable in any meaningful way, or even display any logical economic underpinnings.
Exhibit 10: Contribution to Overall Return (Weighted Category Returns)
Overall, performance by category is clearly varied, which lends further credence to the idea of diversification. There is not a clear category of token that outperformed in all environments - illustrating the different waves of innovation and performance in crypto markets over the past few years. Even as crypto markets mature, calling the outperformance of specific categories remains akin to timing the markets - a notoriously difficult (and some say impossible) task.
Decile Returns
Finally, we were curious about the relative return contribution of winners vs losers in a broad basket. To do this, we look at return contributions by decile using the quarter-end returns of each token. In the context of the Top 100, this would mean looking at the 10 best performers together, followed by the next 10, down to the worst 10. We show results in Exhibit 11 below.
Exhibit 11: Returns by Decile Within Top 100
Interestingly, the average contribution of the top performers is significantly higher than the average losses of the bottom performers, albeit with more volatility. Since 2019, the median performance contribution of the top 10 best performing tokens in a quarter was +15%, while the bottom 10 tokens only took away 5% of the return. However, the standard deviation of returns across quarters was much higher for the top performers than for the bottom performers. For our team, this suggests that diversifying a portfolio in hopes of capturing the next top projects in any given quarter is worth the risk of simultaneously capturing some of the poorer performers.
The Power Law
This also introduces the concept of the power law and how it applies to returns in the token space. The concentration of returns in the top decile of performers aligns with the idea of a power law distribution (Exhibit 12), where the average of a set of outcomes is heavily skewed by a small number of outliers. Such distributions are characterized by a prominent tail and a high standard deviation; much in contrast to a normal distribution.
We investigate this further by looking at token returns since 2019 across a very broad group of tokens that exclude wrapped and stable coins and had a minimum market cap of ~$1mm in 2019 (but are otherwise unfiltered for any quality considerations). While the average return across this set is >2x, that figure belies the fact that over 70% of the tokens lost money, while it was only ~30% of tokens that contributed to the positive return for the basket (Exhibit 12).
Exhibit 12: Token Returns Have a Power Law Distribution
We are not alone in thinking about power laws and investment returns. In 2019, Abraham Othman, Head of Data Science at AngelList, published a detailed report on the distribution of returns for early-stage venture investments (see here for the full report). The takeaway was that, at the seed stage, an investment approach that broadly indexes into a every credible deal achieves superior returns. While not a perfect analogy, we see the token space as similar to seed stage venture – where business models are unproven, paths to revenue are unclear, and profits are far in the future, but the disruptive potential is massive. As such, it follows that a broadly diversified strategy, such as those explored in this piece, could produce superior returns.
In later pieces, we will explore how we can continue to capture the benefits of broad diversification, while intelligently and efficiently trying to bring down the tail of money-losing investments (and increase the likelihood of capturing the big winners) using systematic quality factors. We go into much more depth on the beginnings of our factor exploration in Part III of this series.
A Look to the Future
Although the historical evidence for diversification is mixed, we see significant potential in the future for a strategy evenly invested across the Top 50+ tokens. Crypto is evolving quickly, and we see the future looking more like recent periods than 2019 in terms of how returns might look for a diversified strategy. That is, even a bear market in 2022 still saw risk/reward in line with BTC and ETH, meaning a diversified strategy does not just outperform in a bull market and give it all up in a bear. As every strategist likes to note, past results are not indicative of future performance, but in this case we are reminded that the saying cuts both ways. We believe a diversified strategy will provide more attractive returns in the future than simply holding ETH and BTC, or going on a hunt for the next individual token that pumps.
Broadly speaking, the past few years have been formative on a very fundamental level for the blockchain and cryptocurrency space. Unsurprisingly, the tokens that emerged as the dominant forces in the industry, Bitcoin and Ethereum, saw the greatest accrual of value - outperforming the baskets of smaller coins. Tokens pitched as alternative stores of value or pure currencies (in competition with, or a fork of, Bitcoin) have largely waned in popularity. Meanwhile, Ethereum has emerged as the dominant smart contract standard, necessitating others pivot to establishing compatibility with the system (via EVMs), or otherwise augmenting the functionality of the platform.
Looking ahead, we see innovation and the creation of value coming from a multitude of smaller projects providing real utility in different ways for specific use cases. In the words of our introduction, this is our “expanding cone” theory of investing in liquid tokens. One must remember that although the “crypto winter” has dampened some of the hype around blockchain and cryptocurrency, the industry is still in its relative infancy, and holds revolutionary potential across a multitude of facets in our world today. Adoption is still low, particularly with regards to the mainstream user, and crypto native firms continue to attract top talent and investment.
Dismissing the potential of emerging projects now would be akin to dismissing the entire software services industry merely because Microsoft dominates the operating system space. Competitors to Ethereum will still form and find their useful niches, while other platforms grow and prosper with Ethereum as their backbone. The last two years gave us a glimpse into how alternative classes of tokens could generate real value and outperform the major players, and we envision a future that looks more like that than 2019.
The challenge, of course, is in “picking” the winners - a task which many established financial markets have shown to be incredibly difficult over the long-run. As outlined above, some of the biggest winners over the last few years have been major, non-consensus surprises, and systematically investing in broader baskets of tokens would have added these projects closer to the start of their ascent than their end. Just as diversification and indexing has grown in popularity in the public equity space, we see the growth in these asset management trends as integral to the crypto space as well.
While liquidity remains an issue to contend with, we believe past results do show that diversification among only the Top 10 cryptocurrencies is not a significant improvement to purely pursuing a 50/50 BTC/ETH portfolio. As the crypto space grows, the Top 10 will likely further diminish in their descriptive power of the broader space. The Top 50-100 seems to be a sweet spot where emerging winners with decent liquidity are captured. Additionally, as the crypto investor base evolves and becomes more sophisticated, scams,pumps and unsustainable tokenomic structures will be spotted more quickly, and become less likely to breach the Top 100.
Conclusion
In keeping with our metaphor of an expanding cone of credible crypto projects in which to invest, we see broadly diversified strategies as essential to investing in the liquid token space. However, the analysis conducted for this report is only the start of a longer journey into the benefits of diversification in liquid token strategies. After all, blindly piling money into a list of coins based on market cap alone does not an investment strategy make - even the broadest of equity indices have inclusion criteria. Still, we are encouraged by the results so far, and see significant opportunities to refine and develop investment strategies based around the concept of diversification. With as much progress occurring in the blockchain world as there is, holding theTop 5-10 tokens is simply not good enough to consider oneself diversified in crypto.
Past the numbers though lurks a more existential question that begs to be addressed: Do, or can, tokens have actual value? That is - what actually does, or should, drive the fair value of a token? For now the answer for many successful tokens has been just “supply and demand”, relying on what some may call the “greater fool” theory. We prefer to be less cynical, and do see the value of a token as a function of its underlying utility, and the demand for said utility. However, this warrants an entirely separate report, for which we point to Part II of this series: “Why Crypto?”.
Appendix
Alternative Methodologies Assessed
The methodology employed in the piece relies on quarterly rebalancing of the portfolios, along with quarterly updates of constituents. We believe the primary benefits of this method are simplicity and a reduction in the frequency of trades needed to rebalance / reconstitute the portfolios. Alternatively, we looked a results in a few different ways, but saw no meaningful change in the narrative laid out above:
In addition to looking at realized returns, we looked at average daily returns in a period and annualized the figure, to get a sense of what “average” performance might look like going forward. We include these metrics in the summary statistics below for comparison.
We also assessed monthly rebalancing and reconstitution of the portfolio. This would add more trading, but is more in-line with other index-following strategies. Ultimately, we decided to continue with the quarterly frequency to reduce turnover and trading in a market where liquidity for some of the smaller tokens could still be limited.
We also looked at theoretical returns for a portfolio rebalanced to equal-weight on a daily basis, although this again did not change the narrative much, it would add significant complexity to potential execution.
Summary Statistics
Cumulative Periodic Metrics
Annual Metrics
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