The Case for Crypto Stocks as Exposure to Crypto Assets

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The crypto markets are arguably one of the most volatile asset classes on the market today. Despite their volatility, or perhaps because of it, investors continue to flock to the space to make money and invest in the promising future of digital transactions. With so many options available to gain exposure to crypto assets, Bitwise makes a very compelling argument in a white paper about the potential that investing in crypto stocks can offer as a less volatile option yet capable of exploiting gains. that space knows.

Bitcoin is the most popular cryptocurrency on the market, as well as the most established, and yet it continues to experience giant price swings. In the past five years alone, as the cryptocurrency has grown over 80 times its value, it has also experienced 10 withdrawals above 20%. Additionally, since there are currently no bitcoin ETFs available in the United States, investors are relegated to other means when seeking exposure to bitcoin.

An analysis of the correlation

For investors who focus on seeking returns similar to cryptoassets, crypto stocks can often offer very similar correlations. Bitwise has tracked the correlation between the 10 largest pure-play crypto stocks that are publicly traded (MicroStrategy, Galaxy Digital Holdings, and Riot Blockchain to name a few) against its own Bitwise 10 Large Cap Crypto index. , which contains the 10 largest free floating market cap crypto assets, with bitcoin accounting for more than half of the index’s allocation at time of printing.

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Correlations between the most popular crypto stocks and crypto assets ranged, on average, between 0.50 (which is considered moderate) and 0.75 (which is considered significant). MicroStrategy had the highest correlation at 0.74, which is not surprising since most of its market capitalization is derived from bitcoin on its balance sheets while Silvergate, a traditional bank that has unrelated commercial branches. crypto, had the lowest correlation at 0.43.

Track beta and leveraged returns

When looking at investing in crypto markets from a leverage perspective, different subsectors of crypto stocks relate to price cycles differently due to the different ways they are exposed to. crypto. The same 10 crypto private equity firms have been tracked against the slope of the regression of a crypto stock’s returns relative to the larger crypto market, also known as beta.

Coinbase, which was only introduced to the markets in April, had a beta of 0.41, while Argo Blockchains’ beta was 1.52. This makes sense when you consider how these companies are gaining visibility, as some sub-sectors directly determine the prices of cryptocurrencies, while others harness the transactional power of crypto-asset trading.

Crypto miners tend to have significant operating leverage on crypto prices and as a result their stock prices tend to exacerbate crypto price cycles, wrote David Lawant, Matt Hougan and Juan Leon, the authors of the article. Of the six crypto mining companies included in the analysis, five had betas above 1.00, reflecting the leveraged exposure, and the sixth, Hut 8, was approaching the 1 mark. , 00 to 0.97.

MicroStrategy, for which market cap is directly reflected in its bitcoin holdings and price is derived from bitcoin exposure, unsurprisingly has a beta of 0.98, also close to 1.00.

Investing in crypto exchanges is where the levers tend to deviate most often, as these companies are heavily dependent on transaction volume for their income, and not on the prices of the cryptocurrencies and crypto-assets they they negotiate. Drops in the price of these assets, such as a bitcoin withdrawal, can often lead to spikes in trading volume, and the value of exchanges therefore does not reflect or depend on the value of the crypto-assets they trade. Coinbase, although only tracked since its IPO in April, has the lowest beta at 0.41. It is important to note that exchanges also take advantage of other factors and services that make up their income, such as custody, loans, staking, etc.

Downward volatility spread

The main argument that advisers and critics often make about investing in crypto is that it exposes investors to significant downside volatility. With popular cryptocurrencies such as bitcoin having withdrawn more than half of their value on multiple occasions, and this kind of volatility is expected to continue in the space, direct exposure can indeed be risky.

Crypto stocks are also prone to higher volatility due to their exposure in an inherently volatile space, but Bitwise found some early indicators that investing in crypto stocks could experience different (and less) volatility over periods of correction. short term than real cryptoassets.

From the introduction of the Bitwise Crypto Innovators 30 index in May until the end of August, the crypto stocks it contains have fallen by only 20% at most, while the Bitwise 10 Large Cap Crypto index has been went from 50.87% of its high to its low. same period. While this is still a narrow follow-up window, it is still a promising find.

While crypto stocks are often leveraged for the price cycles of crypto-assets such as bitcoin, in the short term there are often different potential leverage factors at play for crypto stocks. During the collapse in the price of bitcoin that was exacerbated by the shutdown of crypto mining in China, bitcoin miners, which are primarily located in North America, were able to increase their market share. Likewise, many exchanges have seen their prices rise with the increase in trading volume driven by falling crypto-asset prices. Additionally, some companies in the crypto equity markets do not depend on crypto for their income at all and may take a more defensive stance in times of volatility.

Overall, while more data and research is needed regarding these findings, they hold promise for investors looking for crypto exposure. Early indicators suggest that crypto stocks offer investors a compelling way to gain exposure to the crypto economy, with significant correlations to the prices of cryptoassets, exploited in different ways relative to those prices, and early indications. defensive behavior during steep declines, the authors wrote.

For more news, information, and strategy, visit Crypto Channel.

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