How to identify future cryptocurrency winners — active selection vs managed strategies?
With cryptocurrencies reaching an important inflection point in 2020, the question of which tokens to invest into is now ever more critical.
Cryptocurrencies have hit the headlines in recent times through major ecommerce players accepting it as a means of payments, and corporate treasuries like MicroStrategy using Bitcoin as a reserve asset. However, it is the accelerating adoption of Bitcoin and other leading cryptocurrencies by renowned global asset managers in order to diversify and access alternative sources of returns and profits that is actually more significant.
Now that cryptocurrencies are an established asset class, understanding how to access them in general, and in which tokens to invest in specifically, becomes a critical challenge. Not all digital assets are the same, either in terms of their use-cases, technologies or supply models. The following chart provides an illustrative example of how to classify digital assets according to their primary use cases.
There are three main strategies to gain exposure to this diverse set of opportunities, each with its own specific advantages and challenges:
- The first strategy is the one that many early investors implicitly followed, namely actively selecting and directly investing in individual tokens. While providing a high level of excitement, this strategy requires a steep learning curve and a significant amount of effort to identify, analyse and monitor tokens — and also to make sure the investments are traded and custodised in a secure and trusted manner.
- The second strategy follows the opposite approach of investing into passively managed products based on certain indices that track metrics such as market capitalization, for example. By relying on traditional “wrappers” to access digital assets, the trading and custody setup is delegated to the product provider. Key questions to be analysed by the investor include the transparency and adequacy of the index methodology, the trustworthiness of the product issuer, and the liquidity and cost-efficiency of the investment product.
- The third strategy combines elements of the previously mentioned two approaches — actively managed exposure to digital assets. While both active token selection and passive investing yield a direct exposure to the digital asset megatrend, skill-based investment strategies may provide a less correlated access to digital assets, and hence interesting diversification benefits. The challenges with this alternative are to separate the sheep from the goats of active managers and to pick the right alpha strategy in the portfolio context.
For investors interested in diversified and fully rules based exposure to digital assets, the Sygnum Platform Winners Index ETP is listed on the Swiss stock exchange, and provides a unique, diversified, liquid, cost-efficient and collateralized investment opportunity. It is the first index to only track base-layer cryptocurrencies in a systematic, rules-based manner according to three areas of positive network effects with the potential to drive exponential growth:
1. Accelerating adoption by investors in global financial markets
2. Rising numbers of developers working to support and expand the protocol
3. Growing numbers of real-world applications the protocol is being used for
Only tokens that have significant ecosystems with accelerating network effects in all three dimensions are eligible for inclusion in the index, and are weighted accordingly. The outcome is a portfolio of up to ten attractive tokens that currently includes established protocols like Bitcoin and Ethereum, as well as rising stars such as Cardano, Polkadot, and more.
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