The Bitcoin halving earlier this month generated a lot of attention from both the crypto community and traditional investors in this emerging asset class.
Halvings are Bitcoin’s built-in, predictable mechanism for controlling the rate of supply growth. Historically, these events have preceded new all-time highs within 12-18 months, and we believe this will be the case again, although the price trajectory will be volatile with corrections from time to time. But given the attention surrounding halving, we’ve received a lot of questions from investors recently about how to value bitcoin and this asset class now that halving has passed.
We believe this is an opportune time for European investors to consider a broader allocation to the cryptoasset ecosystem through diversified index ETPs. The cryptoasset ecosystem remains a hotbed of innovation. Smart Contracts platforms like Ethereum are improving with both updates at network level such as Dencun and the rise of “Layer-2” solutions that effectively address current network limitations. The Total Value Locked (TVL), the total value locked (TVL), the total value of cryptoassets “locked” or “staked” in decentralized finance platforms or decentralized applications, exceeded 91 billion dollars at the end of April, an increase of 70% in 2024 and proof of the rapid growth of the sector.
Additionally, the combination of capable platforms used by more users, potentially lower interest rates, and continued innovation could accelerate exploration in decentralized finance (DeFi), tokenization, applications Web3 and the emerging digital culture segment (e.g. NFTs). We anticipate the emergence of revolutionary Web3 applications by 2025, likely to trigger the widespread adoption of blockchain technology.
While US investors can only access bitcoin spot within the familiar regulated envelope of ETFs; European investors have long had access to more diversified exposures via ETPs: not only to bitcoin, but also to many other cryptoassets including promising applications of the technology thanks to products that replicate institutional quality indices, such as Nasdaq Crypto Index EuropeTM (NCIETM).
Investing in a basket of cryptoassets diversification benefits which can lead to better results for the portfolio. The chart below shows the differences in the performance of a 60/40 portfolio with different levels of exposure to the Nasdaq Crypto Index Europe, which includes 11 cryptoassets subject to strict index eligibility criteria.
Performance of a 60/40 Portfolio with Different Allocations to the Nasdaq Crypto Index
The simulations range from 1er January 2020 to March 31, 2024. Cryptoassets are represented by the HDAI (until May 31, 2020) and NCI (since January 6, 2020) indices. Rebalanced every ten days. Simulated portfolio composition without NCI: 60% MSCI ACWI and 40% Bloomberg Barclays US Aggregate.
Allocating to this diversified basket of cryptoassets improves portfolio performance, but not only that. These higher simulated returns are accompanied by modest increases in volatility, leading to higher Sharpe Ratios as allocation to cryptoassets increases, as shown in the following table.
Risk-return characteristics of different crypto allocations
The simulations range from 1er January 2020 to March 31, 2024. Cryptoassets are represented by the HDAI (until May 31, 2020) and NCI (since January 6, 2020) indices. Rebalanced every ten days. Simulated portfolio composition without NCI: 60% MSCI ACWI and 40% Bloomberg Barclays US Aggregate.
Future outlook: Focus on the long term
This year’s developments, including halving, the introduction of Bitcoin ETFs in the United States and Hong Kong, as well as improvements to Blockchain networks, are helping to drive institutional adoption of digital assets. This trend is evident in the growing interest of sophisticated investors who are increasingly integrating cryptoassets into their long-term asset allocation strategies.
The asset class is over a decade old, what is most important in the long term is the development of the fundamentals that will drive the growth of cryptoassets. For most investors, we believe that a modest allocation to cryptoassets of between 1% and 5% can help ensure portfolio diversification without taking unnecessary risks. Our belief in the long-term potential of cryptoassets is stronger than ever, and we remain committed to helping investors navigate this dynamic market in the years to come.
