Dispatch #27 – 2021
August 20th, 2021
The focus story this week is the absolute and risk adjusted return enhancement from adding bitcoin to traditional 60:40 portfolios. We highlight the study by Econometric, a blockchain analysis firm, that illustrates the superior outcome over most historic time horizons if a portfolio added and kept a 5% weight by rebalancing monthly.
Full discussion lineup follows:
- 5% allocation to bitcoin improved historic returns notably
- Crypto skeptic academic viewpoint
- Another crypto software hack ($$350m) averted
- Crypto adoption +881% in the past year
- Inflation: Transitory items eased in July
- $2.4m spent lobbying in 2021 by crypto industry
- Former SEC Chain Jay Clayton joins crypto firm
- COIN SCHOOL – Back on summer holiday
The Dispatch will be off next week
Bitcoin improves portfolio returns
The Dispatch is fascinated by the absolute and risk adjusted return improvement from adding bitcoin to a traditional 60:40 investment portfolio. This Ecoinometric study does NOT try to find the optimum allocation to bitcoin. Rather, they have picked a 5% allocation with monthly rebalancing. This does NOT mean future return improvement will be the same as the past and it is not investment advice!
The excess nominal return during the study period is striking
This study by Ecoinometric assumes a 5% allocation to bitcoin with monthly rebalancing back to 5%. The capital is taken equally from the 60% equity and 40% bond allocation. Their Twitter account is worth following.
Ecoinometric does admit that we may not enjoy the extreme gains of bitcoin’s early years and, therefore, provides 12-month trailing returns. The bitcoin allocated portfolio provides better returns during most 12-month periods, as the chart below illustrates. At the worst points of prior bitcoin bear markets, the traditional portfolio return was better.
To gauge risk adjusted returns, the authors use the Sortino Ratio, which looks only at downside volatility. The more commonly used Sharpe ratio looks at both upside and downside volatility. On this measure, the 5% bitcoin allocated portfolio (red bar) had a much higher risk adjusted return over the period analyzed. The orange bar is for super bitcoin bulls as it replaces the 40% bond allocation entirely with bitcoin!
“How the crypto and meme bubble threaten ordinary investors”
Despite evidence of better returns, the headline above from this article by professor of wealth management Michael Finke highlights the mostly negative view on digital assets from the academic profession. Prof Finke refers to the US Dollar as “real” wealth, which is at odds with recent history: Since the start of Covid, the Federal Reserve has created $4 trillion more US$s. That does not mean the Fed suddenly created $4tn of real value even though financial assets have risen by trillions.
Sure, there will be many crypto currencies that are likely to lose value over the long term, but traditional academic literature puts all of crypto into the bubble bucket. The exponential growth of bitcoin over the past 12 years suggests that there’s a strong chance there’s something else underfoot. Furthermore, do not expect new thinking from traditional academics that have been taught the same Keysian economics for a century now. If private digital currencies like bitcoin are a new asset class, then Economics PhDs will be the last to embrace the new revolution/evolution.
Global crypto adoption +881% over the past 12 months
Despite academic misgivings, consumers adoption of digital assets continues to expand according to recent Chainalysis research report. Chainalysis is one of the top blockchain compliance firms, privately valued at $4.2bn, and best placed to understand user growth. It is encouraging that top-10 countries by users are almost entirely emerging markets nations with under-banked population, currency weakness and capital controls. The US stand out as the only OECD nation in the top ten, likely outsized institutional activity originating here, which generates high transaction value.
Chainalysis Global Crypto Adoption Index Ranking
Another crypto software flaw hack avoided by good Samaritan
A security researcher flagged a flaw in Sushiswap’s MISO dutch auction smart contract and saved (whitehack) a potential $350m hack. The MISO dutch auction functionality was only launched in May 2021. The takeaway is to avoid (at least be cautious) interacting with recently launched protocols or even the latest upgrades from very well-established protocols, as this example shows. Sushiswap is the #2 decentralized exchange behind Uniswap. Cointelegraph has more details of the incident.
Inflation eases as transitory items ebb. Shelter will determine long term trend
The Dispatch remains focused on inflation as it’ll be key to many asset returns. Let’s see what’s happened to the component in the July release. This chart from Guggenheim illustrates how the MoM inflation from transitory items dropped notably in July. The cumulative weights of the four items in the chart below is well below 10% of the CPI index. Shelter, aka house rents, is the largest at ~ 30% weight.
Source: Guggenheim via Twitter
The Dispatch anticipates inflation ebbing in the coming several months, but a pickup in 2022 as rents continues to catch up to surging home prices.
Crypto Lobbying hit $2.4m in 2021
Regular readers know that rising political participation by the crypto industry is a pet subject of The Dispatch. This trend will provide the key defense against government attacks or incumbent measures to undermine digital asset. This Open Secrets article provides concrete numbers on the rising influence of the industry. Crypto industry companies are highly profitable and they are using cashflows to lobby their interests. Furthermore, in the Dispatch’s biased view, there’s no other industry that has the passionate grassroots activism of the crypto community. This was in fully display during the Senate debate on the Infrastructure Bill. The doubled edged sword of lobbying shows up as the largest spender in 2021 was Ripple Labs, which is being prosecuted by the SEC for illegal securities issuance.
Former SEC Chair join crypto firm
Former SEC Chair Jay Clayton joining crypto custodian Fireblocks is further evidence of the growing clout. However, it’s ironic that Clayton, who was skeptical of crypto during his time at the SEC, is joining the industry. It also highlights the insidious monetization of government access by former bureaucrats and politicians.
COIN SCHOOL – Summer break!
Stay safe, enjoy the summer and do reach out if you have any questions or comments about the material in this Dispatch.
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