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Crypto Drawdown – Have we seen the worst?

As a few our subscribers may have noted, Crypto Strategies suffered greatly in June. We saw the third consecutive large negative down month for the index. It was not pretty for other strategies, but Cryptos seems to have delivered the largest average downside. With this, our NilssonHedge Crypto index have given back most of the 2021 performance. Our Daily Crypto Index had slightly worse numbers, but the overall picture remains the same. June’s low concurred with the lows in equity markets and we have since then seen a slightly recovery.

The NilssonHedge Crypto Index was down 25% last month (based on current reporting)

Our Crypto indices are directional in nature, and we may separate out the more market neutral strategies to create a comparable benchmark for them. A significant amount of non-directional strategies have done well in the market, so all is not gloom and doom.

Crypto Assets, especially so the larger coins, have remained correlated to equity markets and effectively acted as a high-beta bet on equities. We noted a specific change post the Covid Crash in 2020. After that event, Crypto strategies have remained correlated with equity markets. We publish daily updated for estimated short-term correlation and beta. In line with this observation we have also noted a bounce-back in the early part of July, confirming the “risk-on” nature of Digital Assets.

Post Covid, crypto has acted large as a risk-on strategy

At the same time, the “crypto-winter” have resulted in additional strategies being knocked-out. While this is not indicative of larger funds, a number of strategies have stopped reporting, and have potentially withdrawn all-together from the Crypto markets. How this affects the future profitability of for instance arbitrage strategies remains to be seen.

Number of active Crypto Strategies

A fair amount of the portfolio that we have transparency for, are holding large-cap currencies. Bitcoin and Ethereum are the largest ones. In addition, Stable coins are the largest aggregated holding, with around 25% (around 30% including the Gold Proxy PAXG) of the portfolio. Some dry power remains, but it is unclear what will trigger a re-deployment.

Composition of an average Crypto Portfolio (Long-Biased)

We are about to launch a more granular dataset that allows investor to track the most popular Crypto coins and to see how money is moving between them.

Cryptos have certainly offered a close to unbearable volatility and has shown if something is up triple digits in one year, it is within the realm of possibilities to have large crimpling drawdowns.

Drawdowns are not unexpected in Cryptos

While we have seen large drawdowns for Crypto strategies historically, this one is the largest since we launched our Daily Index. At the moment, we are down around 70% since peak.

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