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Welcome to Crypto Long & Short! This week, Jason Hall, of Methodic Capital Management, argues that ETH ETFs, if approved, would actually disadvantage investors compared with investing directly in ETH, because ETFs are unlikely to include returns from staking.
Then, André Dragosch, head of research at ETC Group, analyzes historical month-by-month returns from crypto and finds that summer months tend to underperform compared to other times of the year. As always, get the latest crypto news and data from CoinDeskMarkets.com. – Benjamin Schiller, head of opinion and features at CoinDesk
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An ETH ETF Wouldn't Deliver Full-Returns to Investors |
ETFs bring awareness but are less effective than private funds as an ETH investment vehicle. With the recent approval, launch and success of spot bitcoin ETFs, all eyes have turned to the possibility of spot ETH ETF regulatory approval, an outcome we believe to be unlikely under the current administration. Additionally, an ETH ETF will, at least initially, lack a staking reward component, a key aspect of ETH total return. We see the primary value of crypto-ETFs being the normalization of crypto investing for traditional finance allocators. Large ETF providers entering the space license their legitimacy, allowing allocators to invest in crypto without taking career-risk. However, for all the industry benefits of a spot ETH ETF, the return characteristics are not as attractive as total return options. At the time of writing, rewards from staking eth are over 3% per annum, according to CESR, the benchmark composite ether staking rate. In other words, if an investor invests into an ETH ETF, they may be at a disadvantage compared to someone investing in a staked investment. CESR has been as high as 8% in the trailing twelve months. ETH ETFs — A liquidity mismatch due to staking Mechanically, staking reduces liquidity due to the validator entry and exit queues. In the summer of 2023 the entry queue rose to 45 days due to a surge in activity. As a network security activity, staking is not designed with the liquidity needed for securitization in mind. Due to the immense liquidity demands of an ETF, issuers will struggle to deliver liquidity and ETH total return, including staking rewards. Structural Underperformance Passively holding unstaked ETH is akin to holding unneeded fiat currency for long periods in a demand deposit account with zero interest. Said another way, passively holding unstaked ETH will create structural underperformance and, if compared to a total return benchmark, persistent negative tracking error. From any angle, that is an untenable position for an investor. Private Fund Solution For accredited investors, private funds offer an effective solution to achieve total return ETH exposure. Buying and staking ETH through a private fund structure does not face regulatory challenges. Managers can also match the liquidity of the fund to stake and unstake ETH on behalf of investors. With a thoughtful operational setup, there are limited tradeoffs; a private fund can be audited, benchmarked, and keep assets in qualified custody. Disclosure: Methodic partnered with CoinDesk's index affiliate, CoinDesk Indices, on a private fund that uses the CoinDesk Ether Total Return Index, a combination of the CoinDesk Ether Price Index (ETX) and the Composite Ether Staking Rate (CESR), calculated by CoinDesk Indices and administered by digital asset manager CoinFund. |
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'Sell in May and Go Away': The Seasonality of Crypto-asset Returns |
Tick, tock, next block. Bitcoin works like clockwork as they say. Approximately every 10 minutes a new block of transactions is timestamped into the public ledger. Obviously, time plays an important role in Bitcoin's protocol. But what about the seasons? Traditional financial research provides ample evidence for seasonality in equity returns. You have probably come across terms like the "January Effect" or "Turnaround Tuesday." Seasonal performance patterns that are statistically significant can be observed on almost any time frame: Quarterly, monthly, weekly, daily, hourly, and so on. The saying "sell in May and go away" has already been around since the nineteenth century, as the summer months tend to have shown a remarkable weakness in equity returns historically compared to other months of the year. A look at Bitcoin's average monthly returns reveals that the summer months between June and September have also shown significantly lower below-average returns. |
Why should we care about this?
Well, if you just held cash during the months of August and September (when you were on holidays) and were only invested in Bitcoin during the rest of the year, you would have outperformed a Bitcoin buy-and-hold investor by four times!
Hence, statistically-significant seasonal performance patterns could theoretically be used to derive significant alpha.
Moreover, the average seasonal performance pattern also suggests that Bitcoin could continue to rally over the coming weeks until around June, when the average seasonal performance pattern suggests that bitcoin could make a pause during the summer months before continuing its ascent towards the end of the year. |
Having said that, as mentioned above, seasonal performance patterns can be observed on almost any time frame. In this context, bitcoin seems to have fared best at the beginning of the week (Monday – Wednesday) while the performance towards the end of the week and especially on weekends have historically been below-average. |
Similar patterns can be observed during different trading hours: While the performance during Asian trading hours (12 am UTC – 6 am UTC) were mostly below average, European (8 am UTC – 4:30 pm UTC) and American (2:30 pm UTC – 9 pm UTC) trading hours usually show above-average performances historically. That being said, towards the end of the American trading session (9 pm UTC), Bitcoin returns have historically been the worst. |
Similar intraday performance patterns can also be observed in the traditional FX market where most of the trading volumes occur during the intersection between European and American trading hours (between 2:30 pm UTC and 4:30 pm UTC). Bitcoin trades 24/7/365 around the globe but fluctuations in price are ultimately a product of human action. Thus, it is no surprise that "sell in May and go away" seems to apply to Bitcoin's return profile as well. While Bitcoin continues to work like clockwork, its performance is ultimately determined by the time we are awake or asleep, when we start working ande when most of us are on holidays or not at work. Tick, tock, next block. This is not investment advice. |
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From Nick Baker, CoinDesk's deputy editor-in-chief, here is some news worth reading: |
- LUKE VS VADER: Author Michael Lewis, in spite of Sam Bankman-Fried's conviction that recently led to a 25-year prison sentence, tends to take a very charitable stance about SBF. Following publication last year of "Going Infinite," a book about the FTX founder many said is over-generous, a Time magazine journalist asked him about criticisms. "This is what happens when you address a mob," he said. When movie rights for the book were shopped around Hollywood, the pitch letter said, as reported in 2022, that Lewis "likens [SBF and Binance's Changpeng "CZ" Zhao] to the Luke Skywalker and Darth Vader of crypto" – and it wasn't hard to deduce that SBF was, in the "Big Short" author's view, the good guy and CZ the bad guy. Well, so much for that. SBF got a quarter century in prison. CZ was just sentenced to four months, and the judge said, when explaining why he didn't go harsher on the former Binance CEO, "Everything I see about you and your characteristics are of a mitigating nature." Also: "There's no evidence that the defendant was ever informed" of illegal activity at Binance, the judge said. Contrast that with what a judge told SBF when deciding the length of his prison stay: "The scale of his crimes is measured not just by the amount of money that was stolen, but by the extraordinary harm caused to victims, who in some cases had their life savings wiped out overnight." Also, SBF never offered "a word of remorse for commission of terrible crimes." Meanwhile, CZ stepped up, according to his judge: "The court finds the defendant has accepted responsibility." Lewis sold a lot of copies of his book, and a movie is apparently being made via Apple. But he might want to watch "Star Wars" to remind himself who's who, if the U.S. legal system is any judge of character.
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