While a few years ago cryptocurrencies were still seen as an atypical investment meant for insiders, now they are an entire part of the financial ecosystem. They are even a staple for many investment portfolios Institutional.
The cryptocurrency market is still very young and has recently experienced sharp declines, as we have seen with the 2022 trend on Bitcoin (BTC) and Ethereum (ETH). However, it is still interesting to consider this new asset class, since the target diversification and use financial products Like ETP Cryptos, it is possible to improve the performance of a crypto wallet.
Discover our three tips for investing in cryptocurrency.
Learn how to value cryptocurrency
since existence bitcoinA question that arises regularly is determining the intrinsic value of Bitcoin and calculating its valuation. While some financiers have given a zero value, there is a useful method for calculating the value of cryptocurrency that we will explain in detail in this article.
Before continuing, let’s go over some definitions.
Intrinsic value is what relates the value of an asset to its ability to generate time-adjusted, risk-adjusted cash flows. While evaluation Relative is the fair price to be paid for an asset based on what others are paying for similar assets.
Coded Evaluation Methodologies
Valuation methods depend on the type of crypto-asset and must first be categorized in order to understand the differences we can expect in the formation of its value (see table below).
Active cryptocurrency valuation
Source: 21Shares
Determine the intrinsic value of crypto assets by following the Proof of Stake protocol, such asEthereumand governance codes, using the discounted cash flow method. In addition, the cost of mining imposes a minimum price for crypto assets after a proof-of-work protocol such as Bitcoin.
As a reminder, the discounted cash flow method (or DCF, for discounted cash flows) on the principle of estimating the value of an asset in relation to its cash flows, so the value of the asset is equal to the net present value of the cash flows it generates. The peculiarity of this valuation method is that it does not take into account assets and debts, but cash flows resulting from the exploitation of assets and debts.
On the other hand, relative value can be measured by studying and comparing the size of the cryptocurrency market to other markets close to it (gold, technology sector, etc.).
Please note that there are inherent limitations to assessment approaches, including bias, uncertainty, and complexity. While there is no perfect valuation, it is important to keep in mind that the more difficult it is for an investor to find an asset valuation, the more important it is to provide it.
An example of an Ethereum valuation
In order to calculate the intrinsic value of Ethereum, it is necessary to use a discounted cash flow measurement method, by estimating the cash flows allocated to the validators of transactions in the protocol (those who make stacking of Ethereum tokens) during the active crypto lifetime. So it was necessary to estimate the age of the crypto asset, and then estimate the discount rate that would be applied to these cash flows to get the net present value.
Source: 21Shares
We then evaluated Ethereum’s price (relative value) by comparing its price-to-earnings (PE) ratio with EP ratio The average number of companies in the technology sector that are in different stages of growth (example: scope of application of technology, number of users, etc.).
Bitcoin valuation example
To estimate the relative value of Bitcoin, one must use the market size approach as if to capture a certain percentage of the market value of Bitcoin. He went. Bitcoin is often compared to digital gold or the gold standard for the cryptocurrency ecosystem. Traditionally, this approach involves creating a total addressable market (TAM) and a percentage that the asset can capture.
Source: 21Shares
To determine the bitcoin price, we used two multipliers (NVT ratio and market capitalization/thermocap) to evaluate the price of Bitcoin based on the data available on the Blockchain.
It was then necessary to determine a potential floor price (or intrinsic value) for Bitcoin using the global average cost of production for one Bitcoin in US dollars. Note that the previous cycle lows have roughly coincided with the estimate of the BTC production cost range.
Do a regular rebalancing of your portfolio
studies 21 posts Proof that adding cryptocurrencies to a classic investment portfolio leads to better results. To fully understand the improvement of results with the addition of crypto assets, studies compare investment strategies on different types of assets (ProceduresAnd the Commitmentscryptos) with multiple risk profiles. Particular attention has been paid to rebalancing the portfolio, as well as the risk/reward ratio (Sharpe ratio).
Perform different wallets with 5% bitcoin
Source: 21Shares
The results obtained completely shattered the myth that was intended to give too much importance to the relationship of the stock market to cryptocurrencies.
Over a one-year investment period, 90% of wallets with Bitcoin added to the formation (up to 5%) delivered better fruit From standard wallets without bitcoin.
Over the course of 3 years, 100% of wallets containing Bitcoin have outperformed, regardless of when BTC was added to the mix.
As part of this study on the performance of cryptocurrency investments, portfolio rebalancing played an important role in the results obtained.
Remember, rebalancing (or rebalancing) consists of buying or selling a portion of your portfolio to compensate for differences in weighting An asset that is formed after the positive or negative performance of the latter.
For example, if you have 5% of your portfolio in Bitcoin, but BTC prices are up 25%, and the stocks that make up the rest of your portfolio are down 10%, your exposure to Bitcoin will not be more than 5% but more than 7%.
Thus, rebalancing allows investments to respect their investment plan over time, despite market developments.
Rebalancing is crucial to getting good results with cryptocurrencies, because a wallet that integrates bitcoins without regular rebalancing will be affected by volatility higher (42.2%) and the reward/risk ratio will never be the same (0.93 vs. 1.03).
With regular rebalancing, the annualized return was 9.1% higher than the benchmark portfolio and the resulting Sharpe ratio was 1.3. The portfolio with the best risk/reward ratio (1.39) is the one that is rebalanced quarterly, because transaction costs have negatively affected the performance of those who are rebalanced on a daily, weekly or monthly basis.
The study also shows that increasing their exposure to Bitcoin from 5% to 10% would significantly improve performance, but with a much higher risk level (20.7% vs. 11.9%).
Invest in cryptocurrencies with the right financial products
Many solutions are available when you want to invest in cryptocurrencies. This can be done by “physically” buying cryptocurrency through a “cryptocurrency exchange,” that is, a cryptocurrency exchange platform, which is sometimes still unregulated.
Alternatively, it is possible to invest through and p Encryption copies the requested digital asset.
Whatever the solution, there are advantages and disadvantages associated with each investment solution. Keep cryptocurrency in wallet or Pocket wallet The ledger can put you at risk of losing or destroying the USB Key. Cryptocurrencies are also often a target for hacking while ETP issuers can expose you to credit risk.
However, investing in the cryptocurrency market using trackers ETP Cryptos is easier and faster than other alternatives. Investors can carry out the process directly through their bank or Stockbroker that they are used to.
ETPs issued under the Swiss model of 21Shares are physically copied securities, i.e. cryptocurrencies the basic It is effectively owned by the issuer, and is held with a trustee bank who will provide security in the event of the issuer’s bankruptcy.
Whether it is ETP Cryptos tracking a single cryptocurrency or a basket of cryptocurrencies, providing bullish or negative exposure, it is now possible with 21Shares to easily add crypto assets to your portfolio to improve to diversify.
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