Exploring Factors Driving Crypto Performance | ETF Trends

As the cryptocurrency universe gains more mainstream acceptance and as more investors enter this arena, more factors are appearing as drivers of performance.

This year, some experts are pointing to rising interest rates and declining equity prices — bitcoin’s correlation to stocks is high in 2022 — as reasons for crypto weakness. As is the case with stocks, there are macro factors that affect various digital assets as well as asset-specific issues.

On that note, a fund such as the Grayscale Digital Large Cap Fund (GDLC) can be a practical choice for investors because it provides exposure to multiple crypto assets.

“It is as easy to invest in crypto today as it is in equities, but what is actually being bought is not as clear. When an investor purchases Shiba Inu — a token with a $15-billion market capitalization and a Shiba Inu hunting dog mascot — SHIB tokens are deposited into their digital wallet. But what do they really own? And what drives SHIB’s performance?” notes Nicolas Rabener of Factor Research.

Home to nearly $407 million in assets under management, GDLC provides cap-weighted exposure to the 10 largest digital currencies. That’s more diversity than investors with the bulk of the funds in this category. For long-term investors, GDLC’s diversification could be advantageous.

“But what about the correlation between token volume and the price for all tokens? The crypto space has its share of bad actors, and some token issuers may be more interested in fleecing underinformed investors than in building long-term businesses,” adds Rabener. “So, what if we limit our universe to only the most successful tokens by market capitalization: the top 1,000, the top 100, the top 50, and the top 10? The last of these categories has a combined market cap of approximately $100 billion and includes Chainlink and Uniswap. These tokens are associated with products that have some of the largest user bases in the crypto community. If they were normal companies, their equity would be quite valuable.”

Chainlink and Uniswap combine for about 1.05% of GDLC’s roster, according to Grayscale data. Bitcoin and Ethereum — the blockchain network supporting ether — are the two largest digital currencies by market capitalization, and as such combine for over 89% of GDLC. GDLC’s ether exposure is relevant because that crypto is a token, not a coin. In theory, it’s possible that as more coins opt to use the Ethereum blockchain, ether’s price could increase.

“The price of coins, on the other hand, ought to depend on the number of transactions occurring on their associated blockchains. The more start-ups launch their token on Ethereum, presumably the greater the demand and the higher the price for ETH coins,” concludes Rabener.

For more news, information, and strategy, visit the Crypto Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.