09_Crypto Asset Management Flashcards
Asset Management
- managing assets by means of financial instruments with aim of increasing invested assets
Asset Class
- group of similar investment vehicles based on having a similar financial structure
- e.g. equities, fixed income, commodities, real estate, cryptocurrencies
Are Cryptocurrencies own asset clas?
2 arguments according to Dr. Borgards
Yes
- high adoption rates of 52% of US and EU institutional investors and 84% of EU high-net-worht individuals invested in digital assets
- largest digital asset investors are hedge funds, family offiices, VCs, HNWI and wealth managers
- 5th most popular type of investment behind stocks, mutual funds, real estate and bonds -> market cap of 1.1trn in 2022
Volatility of Cryptocurrencies
- nearly 5 times higher volatility than stocks
-> investors need a long-term investment horizon or an active asset amnager that makes use of volatility
Correlation of Crypto to other Asset Classes
- crypto has low correlation to other asset classes
- adding a low-correlated asset to a portfolio generally leads to a better risk-return profile
- crypto doesn’t have a statistically significant relationship to equity or fixed income risk factors
- since crypto institutionalization in 2021, correlation increases with risky assets
2 Narratives about valuation of cryptocurrency
Narrative 1
“Blockchain technology is disruptive as the internet in the 90ies.”
- represent decision of an asset manager to offer their clients crypto exposure
Narrative 2
“Cryptocurrencies offer excellent returns at high volatility.”
- represents daily business of a cryptocurrency asset manager, managing the ups and downs
- requires a fundamental valuation method and/or investment strategy
Valuation of Cryptocurrencies
-
Common valuation methods don’t apply to crypto
- e.g. DCF - and DDM-models, multiples comparison (P/E ratio, P/B ratio, EV/EBITDA) -
Cryptocurrencies have own valuation methods
- store of value (SOV), Metcalf’s Law, token velocity, network value to transactions ratio (NVT), INET, daily active addresses per user (DAA), market value to real value ratio (MVRV), stock to flow
- different cryptocurrencies require different valuation methods as they are differently designed, it is useful to aggregate different cryptocurrencies into sub-groups
Valuation method
Metcalfe’s Law
- the more user join network, the more connections, the more value
- fair value = n^2 (square of # of users)
Bitcoin Fair Value (Metcalfe) = Daily active addresses^2 / Circulating Supply
Properties of Crypto Asset class
- higher market cap growth than any other asset class
- low correlation to other aset classes
- good for portfolio diversification
- Institutional adoption due to professionalized infrastructure and upcoming regulation
- new value-creating ecosystem (web3)
- sepcific yield oppoertunities (e.g. staking, DeFi) that other asset classes do not have
- store of value in case of deflationary blockchains -> inflation hedge
- independence of central bank policies
How to get exposure to cryptocurrency
3 items
- Exposure via direct ownership
- Exposure via equity (companies with crypto on balance sheet)
- Exposure via fund (investment vehicles)
Physically Backed Crypto Exposure via Funds
Physically backed
1. Exchange traded product (ETP): actively or passively managed
- 1 - 3% fees
- many providers in EU & Canada
- made liquid on exchange via market makers
2. Other funds: actively / passively managed
- incl. hedge funds, VC funds
- market neutral strategies possible
- sometimes includes performance fee
- may not be open to outside capital
3. Trusts
- ofeten easiest regulatory wise
- participation via private placements
- premium/discounts may fluctuate
- e.g. grayscale
Synthetic Replication
Crypto Exposure via Funds
1. Tracker Certificate
2. Structure Products
- Tracks price of an asset without direct ownership (possible via derivatives)
- can get short exposure
- can design more complex product behaviour
Exposure via funds
2 items
- ‘physically backed’
- synthetic replication
Crypto Exposure via Direct Ownership
2 items
- self custody
- custodial ownership
Self custody
Crypto Exposure via direct ownership
1. Cold storage (offline)
- paper wallet
- hardware wallet
2. Hot storage (online)
- software wallet
Properties
- suitable for retail enthusiasts
- can move funds on blockchain
- can earn yields from staking & lending
- no cost
- great way to learn about crypto
- security of fudns depends on security of keys
