To begin with, take crypto exchange data. The sheer volume of data and data sources is immense. There are many crypto exchanges globally that operate 24-hrs a day, 365 days a year, each in a unique way. And there also are few to no standards or oversight of digital asset exchange data.
Some of the biggest exchanges are only a few years old, or defunct, and offer a different selection of coins. Some aren’t even operated by a company but are publicly available software designed to facilitate the buying and selling of crypto in an automated fashion. These exchanges are part of crypto’s Decentralized Finance (“DeFi'') ecosystem and are responsible for crypto trading volume alongside more traditional crypto exchanges.
As a result, the return history for crypto is hardly straightforward. On a given day, Bitcoin can trade on over 500 exchanges.1 So, it is difficult, if not impossible, to say what the actual price of Bitcoin was on any particular day.
Given these challenges, a key question is: How are capital allocators expected to analyze crypto in the context of a larger portfolio?
Reference Rates Provide Aggregated Data to Evaluate Crypto
At Venn, we aim to simplify crypto returns via reference rates provided through a partnership with Coin Metrics. Reference rates are created by aggregating different crypto pricing across various exchanges into one return stream for each coin. As a result, we can provide a representative time-series. This single time series of performance data can then be used to evaluate risk and return properties for a single coin.
Circling back to our discussion about the price of Bitcoin, maybe all (or many) of the exchange prices are, in a sense, correct in that they each reflect their own prices for Bitcoin on that day. One just needs a method to get consolidated and representative prices.
We believe using reference rates to create crypto return streams can help capital allocators analyze digital assets using their existing playbooks. That is to say, they might not need a deep understanding of crypto as a technology.
Using just returns, allocators can identify contribution from sources of risk, whether it be a portfolio sleeve, manager, or an individual coin. Additionally, an allocator can evaluate the tail risk of Bitcoin or Ethereum, or perhaps evaluate portfolio correlations to identify how diversifying digital assets can really be alongside their alternative sleeve. They can also conduct head-to-head crypto manager due diligence.
To many allocators, these are familiar workflows that we believe they should feel confident conducting with crypto.
Are Returns the Only Means for Crypto Analysis?
Returns aren’t the only way to analyze crypto. Many allocators are looking for crypto fundamentals that mirror the data they’re accustomed to using in equities markets. However, in the case of crypto, “on-chain” fundamental data points are still unfamiliar to many and are being organically fleshed out.
Available on-chain data points may correspond to supply and demand for the crypto’s network, active and new “addresses,” revenue metrics, among other business and usage data. However, for allocators who are new to crypto, understanding the nuances and impact of fundamental analysis like this may be too time-consuming or overwhelming and is not necessary to get started.
Especially for experienced allocators who just happen to be new to crypto, familiar and informative returns-based analysis can be a simpler way forward. One could also outsource the fundamental research to crypto fund managers, relying on them to conduct deeper fundamental analysis. This would then turn the workflow back into a familiar one of manager due diligence.
Aggregated Return Streams for a Returns-Based Platform
As we mentioned earlier, Venn is able to put reference rates in the hands of allocators via a strategic alliance with Coin Metrics. Coin Metrics is an open-source project built to empower investors to make more informed crypto-related financial decisions. The firm is considered to be a provider of transparent, independent, and manipulation-resistant rates and among the most reliable in the industry. We therefore believe it is the best one suited to power Venn analysis.
Coin Metric’s accessible crypto data with Venn, a platform that can easily incorporate digital assets across all of its workflows, we think, is a powerful combination.
References
1 Source: Data provided courtesy of Coin Metrics for purposes of this article.
This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features. Such statements merely reflect our current plans. They are not intended to indicate when or how particular features will be offered or at what price. These planned or future development efforts may change without notice. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.
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