TLDR: Smart Beta Portfolio & Crypto Market Insights — February 2023
Smart Beta is a long-only cryptocurrency portfolio. It invests with our proprietary capital. The portfolio invests directly in a basket of the most liquid and secured cryptocurrencies. It seeks consistent outperformance over the broader market exposure through strategic tilting within our portfolio construction. The portfolio may hold cash, take a limited position opportunistically in thematic plays, and use options derivatives to achieve its investment and risk management objectives. All commentaries here are non-financial advice.
Quick February 2023 Recap
Cryptocurrency had a modest performance in February as we experienced significant volatility (peak-to-trough price swings of 18%~19%). Despite suffering a big drop earlier in the month, Bitcoin gained +0.07% and Ethereum gained +1.2% to close out in green for the month.
The total market cap is holding steady at $1 trillion (flat for the month). Among the 10 largest cryptocurrencies by market capitalization, Polygon (MATIC) was the best February performer with a +6.6% gain. Dogecoin (DOGE) was the worst performer with a -7.4% loss.
Despite the optimism in the first two months of 2023, we think rising interest rates will continue to be a headwind for crypto in the coming months, along with staked ETH being unlocked upon the “Shanghai upgrade” scheduled in March. Furthermore, the fallout of the troubles at crypto-friendly US bank Silvergate and the regulatory and legal backlash triggered by the FTX collapse has only begun to impact the market.
Smart Beta Portfolio
Despite holding 60% to 70% of our portfolio in cash, the Smart Beta Fund (SBLI) still managed a +1.6% gain in February, outperforming Bitcoin and Ethereum. In February, we added 5% in MATIC and 5% in Bitcoin to our existing positions earlier in the month (bringing up the total portfolio risk exposure to 40%). MATIC surged +5% since then, contributing to the fund’s performance.
Fundamental Outlook
We believe the industry’s long-term fundamentals are intact, as the underlying infrastructure is maturing and evolving consistently, alongside increasing investment capital and technological adoption by reputable market players.
Positive outcomes from last year’s crypto market calibration (e.g., collapse of Luna and FTX) are that the bad and risky market participants are being shaken out. Evolutionary events like these are the true driving force for more standardized regulatory practices in the industry.
This is one of the key reasons why high-net-worth investors and family offices continue to invest in the space. Institutional investors have also started diversifying their traditional assets and seeking more extensive exposure to digital-assets.
Our strategy for the coming months
We should keep watching economic data in March and keep a cautious approach during this period of high volatility. If prices dislocate, the fund will opportunistically add exposure at reasonable long-term values.
In the coming months, we expect volatility to remain high. Therefore, the Smart Beta fund will look out for attractive yield-enhancing opportunities that monetize on volatility should they arise. At the same time, it will also pay close attention to developing thematic opportunities (BTCfi, Defi, L2, China) that present good risk-reward potentials.
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