Bitcoin is enjoying a plenty of attention lately due to the rally in its price driven by its usage as frictionless payment solution and the catalyst: the ambitious plans of the Winklevoss brothers to launch the first bitcoin ETF. Friday, 10th March though was the day that SEC rejected the brothers’ ETF application, which could have been a ‘revolution’ for the digital currency in the investment space, like the first Gold ETF, due to the anticipated inflow of new institutional capital. The same day, after the ETF disapproval, the price of Bitcoin plunged to levels around $1000, which constituted an almost 18.5% decrease intraday. Bitcoin price recovered immediately and currently trades around $1230, proving that the drivers of demand for the digital currency are strong regardless of the launch of an ETF. We are living in the age of the machines, where investors are looking for fintech, artificial intelligence and machine learning supported products to source uncorrelated alpha for their investment portfolios. This perspective will examine the Bitcoin and CTA market to analyze its effect on investors’ portfolios.
There are hundreds of different cryptocurrencies, but only two managed so far to distinguish themselves and establish a market. Bitcoin is the most capitalized with current market capitalization being around $20bn. Ethereum, its only relevant peer so far, has a market cap of around $2bn. Bitcoin is the main player in the cryptocurrency spectrum and its growth is significant over the last 3 years. Since 2014, $15bn of new capital has boosted the growth of bitcoin as a new asset class. CTA AuM has risen by $22bn since 2014 and is currently at an all-time high of $340bn, proving that machine related strategies are here to stay while attracting new capital allocations.
After witnessing the diversification effects of Bitcoin and CTAs, we proceed, by investigating, if they can produce alpha. Regressing Bitcoin returns against S&P500 returns, we evidenced a statistical significant alpha at 5% significance level of 9.88% with a beta of 2.85, while CTAs exhibited zero alpha with nearly zero beta, which highlights the near absence of systematic risk. Bitcoin also outperformed BofA Merrill Lynch US Corp Master by 11.9% at a 95% confidence interval, with CTAs exhibiting zero alpha with a beta of 0.27. Using the 4-factor model, Bitcoin exhibited alpha of 8% at 10% significance level, contrary to CTAs, which exhibited zero alpha. Bitcoin constituted a good source of alpha over the examined period, and CTAs, despite failing to deliver performance, proved to be a good risk diversifier.
From a portfolio construction perspective, both Bitcoin and CTAs individually and combined, enhance risk-adjusted performance and can deliver uncorrelated alpha. As both markets are machine driven, liquidity is typically intraday or daily available, thus should contribute to an allocation decision of a limited part of the overall investment portfolio for long only equity and bond investors for return enhancement and diversification. Stone Mountain Capital is mandated from bitcoin managers pursuing long only, delta one, tracker, and actively managed and hedged cryptocurrency strategies and CTAs pursuing broadly diversified, equity, bond, energy, commodity, sector, country and volatility strategies.
This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries please contact Alexandros Kyparissis under email: firstname.lastname@example.org and Tel.: +44 7843 144007. For further information around our research and advisory services please contact Oliver Fochler under email: email@example.com and Tel.: +44 7922 436360. For information about our alternative investment solutions, please contact: firstname.lastname@example.org.
The views expressed in this article are those of the authors and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.
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