Security Tokens are a Hedge to Covid-19 and the US Equity Markets
"The Worst Tragedy Since the Spanish Flu."
"Millions are Left Without a Job and Nowhere to Look."
"Weddings, Graduations, Birthdays, Funerals, All Put on Hold."
These are just a few headlines from the past few months resulting from the Covid-19 global pandemic. In all of the fear and uncertainty, it's easy to get caught up in a negative thought pattern. I am here to say there is light at the end of the tunnel. See, in every negative situation, there is always a positive one. Through my research, I have discovered something that investment fund managers, investors, or anyone monetarily involved in the capital markets strives to find — uncorrelated assets. Let's not waste time and dive right in!
Everything in this report is for research purposes only. Nothing in this report should be taken as financial advice or as an inducement to purchase or sell any security. Nothing in this market report should be used as legal advice. Always do your own research before making any decisions regarding financial transactions of securities.
"Are security tokens really a hedge against Covid-19 and the US equity markets?"
Read on and see!
For example purposes, let’s look at two investors in the market. Both investors have allocated $1 Million USD to either equities and/or security tokens at the start of 2020.
Investor 1: $1 Million invested in US equities
Investor 2: $750,000 invested in US equities and $250,000 invested in a security token fund. In other words, 75% of Investor 2’s portfolio is in equities and 25% is in a security token fund
This hypothetical security token fund is an investment fund that equally allocates all 14 of our security tokens listed on our platform. The security tokens included are as follows:
For research purposes, I decided to exclude 22X due to only having one trading day since the start of the year.
January-April Returns by Asset (Highest-lowest):
Lesure St, Detroit, MI: +3.64% *
Audubon Rd, Detroit, MI: +2.66%
Fullerton Ave, Detroit, MI: +1.60%
Marlowe St, Detroit, MI: +1.11%
Appoline St, Detroit, MI: +.31%*
Patton St, Detroit, MI: -3.67%*
*Indicates trading data from March-Present
**Indicates only 3 total trading days since the start of the year
Average returns by month:
Average return: +2.35%
After analyzing the data, it is clear to me that in today’s investment climate, security tokens are a hedge against Covid-19. Don’t believe me? Let’s look at how the three major indices performed this year thus far:
Indices Average Returns January-April
Dow Jones Industrial Average: (15.67%)
Average Return: (9.5%)
The aggregate return for the security token fund from January-April is a POSITIVE 2.35%! The fund performed almost 12% better than the average of the three major US indices!
On the contrary, if you invested in a fund that tracked the three major US indices: Dow Jones, S&P 500, and the NASDAQ, you would be down approximately -9.5%. Astonishing… Numbers don’t lie.
Let’s go back to the two investors used in this example and observe how their portfolios would have performed:
As a reminder, Investor 1 invested $1 Million into the US equity markets. As of April 30th, their portfolio would be worth $905,000 and earned a negative return of -9.5%.
On the other hand, Investor 2 diversified a little more and only invested 75% of the $1 Million in US equities and the rest into the security token fund. As of April 30th, their portfolio would be worth $678,750 in equities and $255,875 in the security token fund — a return of -6.54%.
Investor 1 portfolio value: $905,000
- Return -9.50%
Investor 2 portfolio value: $934,625
- Return: -6.54%
Final Results: Investor 2, who invested 25% of their portfolio in security tokens, would have performed almost 3% better than Investor 1.
As these new investment opportunities emerge, it might be too early to draw any conclusions, but the early data indicates it might be something worth investigating.
So, let’s investigate!
I decided to conduct a more in-depth analysis on a quantitative level. I calculated the correlation coefficient for all of the security tokens to discover if there was a correlation with any of the major US indices.
For educational purposes: The correlation coefficient is a numerical measure that displays a statistical relationship between two variables. For example, if the correlation coefficient is a positive 1, this means that both variables are moving in a linear fashion. On the contrary, if the correlation coefficient is a -1, this means the two variables are moving in the exact opposite direction.
Data Retrieval Method: All data was retrieved from January through April. I compiled all of the data from stomarket.com for the security tokens and retrieved the Dow Jones, S&P 500, and NASDAQ historical data from investing.com. Of the 13 security tokens, 4 of them traded on OpenFinance, 7 of them on Uniswap, 1 on tZERO, and 1 other on Nxchange. OpenFinance, Uniswap, and Nxchange provide 24/7 trading, whereas, tZERO’s trading hours are aligned with the traditional markets. Due to some of the exchanges trading 24/7, these ATSs are able to trade on the weekends and holidays, which is something that the US markets don’t do. Therefore, when calculating the correlation coefficient, I ensured that I only included trading days that aligned with the indices and the tokens.
Looking at an aggregate view of all security tokens compared to the Dow Jones, S&P 500, and the NASDAQ, the correlation coefficient is .19 - indicating a weak positive correlation. To put this into perspective, Apple (AAPL), a commonly traded US equity, is highly correlated to the US markets with an average coefficient of .88.
Let’s begin with a bottom-up approach and compare each security token with each index to determine what kind of correlation relationship exists:
Dow Jones Correlation Data by Token
Overall Average: 0.18
- Blockchain Capital: 0.77
- tZERO: 0.72
- SPiCE VC: 0.51
- Mt Pelerin: 0.37
- Lesure St: 0.31
- Marlowe St: 0.31
- Audubon Rd: 0.20
- Patton St: 0.17
- Startupbootcamp: 0.13
- Lottery.com: 0.12
- Appoline St: -0.07
- Fullerton Ave: -0.20
- Protos: -0.99
Dow Jones Correlation Data by Marketplace
- tZERO: 0.72
- OpenFinance: 0.10
- Uniswap: 0.16
- Nxchange: 0.13
Quick takeaways:
- Blockchain Capital had the strongest positive correlation to the DOW Jones with a correlation coefficient of .˜77
- Protos, Fullerton Ave, and Appoline St all posted negative correlation coefficients. Protos has limited trading data, but Fullerton and Appoline have some of the most consistent trading out of all of the tokens
- RealT’s 6 properties posted a 0.12 correlation coefficient with two of them showing a negative correlation — this is a great sign of an uncorrelated asset
S&P 500 Correlation Data by Token
Overall Average: 0.19
- tZERO: 0.73
- Blockchain Capital: 0.72
- SPiCE VC: 0.49
- Mt Pelerin: 0.43
- Lesure St: 0.35
- Marlowe St: 0.34
- Audubon Rd: 0.24
- Patton St: 0.18
- Lottery.com: 0.12
- Startupbootcamp: 0.09
- Appoline St: -0.07
- Fullerton Ave: -0.17
- Protos: -0.99
S&P 500 Correlation Data by Marketplace
- tZERO: 0.73
- Uniswap: 0.18
- Nxchange: 0.09
- OpenFinance: 0.08
Quick takeaways:
- tZERO had the strongest positive correlation to the S&P 500 with a correlation coefficient of .˜73
- Protos, Fullerton Ave, and Appoline St were among the least correlated assets posting negative correlation coefficients
- RealT’s 6 properties posted a 0.14 correlation coefficient with two of them showing a negative correlation — another great sign of an uncorrelated asset
NASDAQ Correlation Data by Token
Overall Average: 0.20
- tZERO: 0.74
- Blockchain Capital: 0.56
- Mt Pelerin: 0.51
- SPiCE VC: 0.44
- Lesure St: 0.41
- Marlowe St: 0.41
- Audubon Rd: 0.31
- Patton St: 0.24
- Lottery.com: 0.07
- Startupbootcamp: -0.01
- Appoline st: -0.02
- Fullerton Ave: -0.12
- Protos: -0.97
NASDAQ Correlation Data by Marketplace
- tZERO: 0.74
- Uniswap: 0.25
- OpenFinance: 0.02
- Nxchange: -0.01
Quick takeaways:
- tZERO had the strongest positive correlation with the NASDAQ with a correlation coefficient of .˜74
- Protos, Fullerton Ave, and Appoline St were again among the least correlated assets posting negative correlation coefficients
- RealT’s 6 properties posted a 0.21 correlation coefficient with two of them showing a negative correlation
Main Takeaways from the Data:
- tZERO is the strongest positively correlated asset with an average correlation coefficient of ˜.72. This is speculative, but the fact that the traditional markets trade on the same days and hours, it could have something to do with the strong positive correlation. It will be interesting to see if this changes as tZERO appends new tokens to their platform.
- The RealT properties have a weak positive correlation of .16 with 2/6 of the properties posting a negative correlation. RealT properties are the safest, most secure investment in the security token world right now. The properties are all Section 8 housing — which means if the tenant can’t cover rent, they are backed by the government. Furthermore, the token holder has rights to an equity interest in the property as well as daily dividends automatically distributed via Smart Contracts — ensuring a consistent stream of cash for the token holder.
Let's go more in-depth on the RealT properties:
Out of all the 6 properties that traded, RealT properties were up .94% over the last 4 months — and that doesn’t include the daily dividends the token holders receive. If you included the dividends you would be up approximately 5%.
RealT's Correlation Coefficient Compared to the US Equity Markets:
DOW Jones: .12
S&P 500: .14
NASDAQ: .21
Aggregate Overall: .16 — This represents a weak positive relationship to the US equity markets
The data has spoken, it is clear that the first 4 months of 2020 indicate early signs that security tokens are a hedge against Covid-19 and the US equity markets. We need years of evidence to make a definitive claim, but it’s intriguing how they have performed thus far.
It will be vital for fund managers/investors/interested parties to be aware of all investment opportunities including security tokens, in order to maximize returns and downside protection. In times of uncertainty, diversifying is crucial to a successful investment portfolio.
No one knows for certain what will happen in the US markets or to security tokens, but what I can say is that alternative investments like security tokens are here to stay and are creating investment opportunities that we’ve never seen before. They bring potential to provide positive returns even when the world is in a midst of a crisis. The next few years are going to be exciting to witness marketplaces going live, new assets tokenizing, jurisdictions regulating, and more!
Thank you for reading my analysis on security tokens and the US equity markets. I am going to be continually analyzing this data over the coming months/years to observe any trends in the relationship between security tokens and the global capital markets.
Any questions/concerns/suggestions, please email me at Jonah@stomarket.com :)
