How to identify future cryptocurrency winners – active selection vs managed strategies?

How to identify future cryptocurrency winners – active selection vs managed strategies?

With cryptocurrencies reaching an important inflection point in 2020, the question of which tokens to invest into is now ever more critical.

Cryptocurrencies have hit the headlines in recent times through major ecommerce players accepting it as a means of payments, and corporate treasuries like MicroStrategy using Bitcoin as a reserve asset. However, it is the accelerating adoption of Bitcoin and other leading cryptocurrencies by renowned global asset managers in order to diversify and access alternative sources of returns and profits that is actually more significant.

Now that cryptocurrencies are an established asset class, understanding how to access them in general, and in which tokens to invest in specifically, becomes a critical challenge. Not all digital assets are the same, either in terms of their use-cases, technologies or supply models. The following chart provides an illustrative example of how to classify digital assets according to their primary use cases.

There are three main strategies to gain exposure to this diverse set of opportunities, each with its own specific advantages and challenges:

  • The first strategy is the one that many early investors implicitly followed, namely actively selecting and directly investing in individual tokens. While providing a high level of excitement, this strategy requires a steep learning curve and a significant amount of effort to identify, analyse and monitor tokens – and also to make sure the investments are traded and custodised in a secure and trusted manner.
  • The second strategy follows the opposite approach of investing into passively managed products based on certain indices that track metrics such as market capitalization, for example. By relying on traditional “wrappers” to access digital assets, the trading and custody setup is delegated to the product provider. Key questions to be analysed by the investor include the transparency and adequacy of the index methodology, the trustworthiness of the product issuer, and the liquidity and cost-efficiency of the investment product.
  • The third strategy combines elements of the previously mentioned two approaches actively managed exposure to digital assets. While both active token selection and passive investing yield a direct exposure to the digital asset megatrend, skill-based investment strategies may provide a less correlated access to digital assets, and hence interesting diversification benefits. The challenges with this alternative are to separate the sheep from the goats of active managers and to pick the right alpha strategy in the portfolio context.

For investors interested in diversified and fully rules based exposure to digital assets, the Sygnum Platform Winners Index ETP is listed on the Swiss stock exchange, and provides a unique, diversified, liquid, cost-efficient and collateralized investment opportunity. It is the first index to only track base-layer cryptocurrencies in a systematic, rules-based manner according to three areas of positive network effects with the potential to drive exponential growth:

1. Accelerating adoption by investors in global financial markets

2. Rising numbers of developers working to support and expand the protocol

3. Growing numbers of real-world applications the protocol is being used for

Only tokens that have significant ecosystems with accelerating network effects in all three dimensions are eligible for inclusion in the index, and are weighted accordingly. The outcome is a portfolio of up to ten attractive tokens that currently includes established protocols like Bitcoin and Ethereum, as well as rising stars such as Cardano, Polkadot, and more.

You can download the Sygnum Platform Winners Index ETP factsheet here, or invest via your bank on the Six Exchange. For more information on Sygnum’s range of asset management solutions, please contact us on [email protected]

Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

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