How to identify future cryptocurrency winners – based on market capitalisation or other information?
Market capitalisation is a widely accepted passive investment approach in traditional finance. It however poses significant challenges for cryptocurrencies.
Despite the rise of smart beta and factor investing, market capitalisation has remained as one of the most prominent passive investment strategies in traditional finance. Especially in stock selection, the value of a company as measured by its market capitalisation can be seen as an indicator for success – the higher the market capitalisation, the more successful the company.
It is tempting to also use market capitalisation as a guide for token selection, both because it is a readily available metric, and because it is the most common weighting methodology in traditional markets. Unfortunately, transferring the concept as is to cryptocurrencies yields suboptimal results. Size is not necessarily equal to success – for various reasons.
First, digital assets are not one market. Different tokens provide access to different use cases, technology, revenue streams, ownership rights, risk profiles, etc. Consequently, they are not a consistent set of assets with a common risk/ return profile. Second, various cryptocurrencies follow different supply models. The continuum of options is rather broad. Bitcoin for example has a pre-defined maximum number of tokens that will ultimately hit the market and an expected growth rate that can be relatively well estimated. The maximum number of Ethereum that can be mined on the other hand is not pre-defined and its growth rate depends on the actions of decentralised actors. XRP as another example also has a defined maximum number of tokens, but the number that is released to the market is centrally administrated by the Ripple Foundation. There are several other supply models, and variations of these models. Various supply metrics yield different results for the relative prominence of tokens – total supply versus circulating supply (which excludes irrecoverably lost and vesting tokens) versus liquid supply (which excludes tokens held by the protocol foundation, used as collateral, or held by long term holders) versus maximum supply versus future supply. This variety in use cases, supply models and challenges with measuring the relevant numbers makes it very difficult to use market capitalisation as a consistent indicator for the future potential of a specific project.
What is a better approach then? As the blockchain industry is still in its nascent stage with much of the development and growth yet to come, it isn’t necessarily a financial market metric such as market capitalisation that best reflects a project’s prominence. It is critical for the success of projects that a strong and thriving ecosystem builds, and as the technology is still experimental with many challenges yet to overcome (such as capacity and transaction speed for example), one of the strongest votes of confidence in a project is the level of focus it receives from the developer community – market capitalisation does not necessarily reflect these factors.
One smart way to identify future project winners is hence to focus on what the crypto economy is telling you. For that reason, three dimensions might be useful:
- What attention are the financial markets paying?
- What ecosystem is the project able to attract?
- What is the developers’ focus on the project?
The Sygnum Platform Winners Index tracks these metrics to provide a diversified and fully rules-based exposure to digital assets. A corresponding ETP is listed on the Swiss stock exchange, and provides a unique, diversified, liquid, cost-efficient and collateralised 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
Tokens are selected, and weighted, according to the above metrics. 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 Polkadot, Solana and more.
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 you bank on the Six Exchange. For more information on Sygnum’s range of asset management solutions, please contact us on asset-management@sygnum.com
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