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Positioning Digital Assets in an Institutional Portfolio
In considering a long-term allocation to digital assets, the justification for taking such a risk must go past historical returns and the assumption that the past will resemble the future.
In this piece we contextualize the takeaways and potential issues with quantitative investment analysis techniques when applied to digital assets, and argue that the rationale for investing in digital assets should be rooted in a strong conviction in the usefulness of the underlying technology, and the uncorrelated determinants of its success vs established asset classes in the long run. Understanding both the quantitative and qualitative narratives surrounding digital assets builds a strong foundation for an investment in the asset class.
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Digital Assets in the Context of Nascent Markets in History
Digital Asset markets are in their infancy and are experiencing growing pains similar to those of the today’s major asset classes. To learn how early markets behave, we examine the rise of equities in 17th century Europe, the US stock market bubble of the 1920s, the evolution of emerging market investment in the 1980s, and, most recently, high-tech venture capital.
Nascent markets are messy. The promise of outsized financial gain causes lessons of the past to be quickly forgotten and prior mistakes readily made again.
Markets and investors must suffer through a mistake-laden maturation process. Setbacks and imperfections during this period are not an indictment of the underlying technology.
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Diversification: Part III
In Part I of this series, we highlighted the benefits of diversification in liquid token portfolios. Back-tested results indicate that a more broadly diversified portfolio (Top 75, 100) offers better absolute and risk-adjusted returns than a minimally diversified portfolio (Top 10).
In Part III of this series, we demonstrate further value can be captured in an equal-weight Top 100 portfolio via the additional application of systematic “quality” factors.
We liken the simple, unfiltered Top 100 portfolio to a block of marble, and let our systematic filters serve as chisels to unlock alpha hiding within.
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Diversification: Part II
In Part I of this series, we examined the return profiles of broad baskets (Top 50+) of cryptocurrencies vs a simple BTC/ETH or Top 10 strategy, showing that such diversified strategies have worked recently, and hold potential for the future.
We also acknowledged that this premise really hinges on a diverse range of cryptocurrencies having actual value. The huge amount of outright speculation in crypto may often overshadow the real long-term value being built by many blockchain projects, but we believe it exists.
In this piece we want to dig into this broad world of innovative projects, and discuss how we see the universe of investible projects growing (the “expanding cone” which we referenced in our prior piece).
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Diversification: Part I
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) could offer 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 case.
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