The high number of crypto assets provides immense investment opportunities. With an intelligent index solution, diversified participation in the opportunities is possible.
The year 2008 made financial history - in two senses. While the real estate crisis in the USA was putting the lights out on the US investment bank Lehman Brothers, Bitcoin was sending out its first sign of life. The pseudonym Satoshi Nakamoto - he is considered the inventor of Bitcoin - created an alternative to the crisis-prone and inflationary credit money systems with his technology and opened the door to a completely new industry.
Bitcoin, which is also often referred to as "digital gold" because of its digital scarcity, did not remain alone for long, however. Thousands of competing projects developed in its wake. The industry service CoinMarketCap currently counts more than 8600 crypto assets, which together have a market capitalisation of more than $2 trillion. Bitcoin accounts for about 40% of this, making it by far the most important crypto asset. One thing is certain: the idea that emerged about a decade ago has come of age. Proof of this is not only the high market capitalisation, but also the rise of decentralised finance (DeFi) and the increasing interest of institutional investors and governments.
In 2021, El Salvador became the first country in the world to introduce bitcoin as legal tender. In addition, individual cantons in Switzerland such as Zug already allow bitcoin transfers for government services. For capital market participants, the crypto industry has also become too big to ignore or to label it as a mere speculation object. Crypto assets have formed into an independent asset class. In Germany, for example, special funds can invest up to 20% of their assets in crypto assets.
Increased institutional interest can also be seen in the area of acquisitions and direct investments. While financial service providers such as PayPal and Mastercard have recently acquired start-ups, companies such as Square, MicroStrategy and Tesla are investing directly in crypto-assets and integrating them into their business model. Even central banks are now looking into introducing central bank digital currencies.
Private investors who want to get involved in crypto assets are spoilt for choice. To navigate the crypto jungle, adaptable solutions such as an index offer great advantages. They ensure a quick reaction to market changes, and new, relevant crypto assets can be taken into account promptly. In addition, the developments of the individual cryptos sometimes diverge significantly from each other.
For example, Solana, which has meanwhile moved up to fifth place in the crypto ranking, increased more than a hundredfold in 2021, Ethereum rose by more than 400%, while Bitcoin only increased in price by around two-thirds.
These examples show that investors should not put all their eggs in one basket, even in the crypto sector. In this case, broad-based market indices can help. These diversified investment solutions spread the risk over several crypto assets. In order to minimise the cluster risk, an excessive concentration on a single crypto asset is often excluded with a limit.
Backtesting shows the positive effect that crypto assets can have in a portfolio context. Two variants are shown below for this purpose. In the first case, a portfolio consisting of 95% equities and 5% Bitcoin competes against the internationally renowned MSCI Daily TR Net World Index. The result is clear: In the time frame from the beginning of 2015 to 30 September 2021, the index yielded an annual gain of 10.7%, while the portfolio enriched with Bitcoin returned a proud 16.4%.
In order to achieve this excess return, however, investors hardly had to take a higher risk; for both risk measures, volatility and maximum drawdown, the portfolios are almost exactly on par. A comparable picture emerges when adding a 5% share of Bitcoin to a multi-asset portfolio. Over the same period, this strategy generated an outperformance of 5.8 percentage points with a return of 13.6% per year. And here, too, the Sharpe ratio, i.e. risk-adjusted return, is convincing in the portfolio context. While it had a value of 0.94 for the pure multi-asset portfolio, it was significantly higher at 1.44 for the strategy. Basically, the higher the Sharpe ratio, the better.
Admittedly, historical developments cannot simply be extrapolated into the future. Nevertheless, the examples show that crypto assets have what it takes to enrich a portfolio. Another argument in favour of this type of investment is that cryptos are playing an increasingly important role in everyday (financial) life, as shown above.
In the long term, therefore, cryptos are likely to become widely accepted. In view of their active and diversified structure, market indices are a suitable financial vehicle for participating in the long-term opportunities of the innovation-laden crypto assets.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.
Investments in products referencing one or more cryptocurrencies or indices of cryptocurrencies are subject to increased volatility compared to investments in traditional assets and to specific risks which can negatively impact the value, tradability,liquidity and/or security of such investments. Potential Investors are encouraged to inform themselves about these specific risks when considering an investment in products referencing one or more cryptocurrencies or indices of cryptocurrencies. A summary of key risks relating to products referencing one or more cryptocurrencies or indices of cryptocurrencies can be found here.