Bitcoin Correlation with Alpha: How FNDX 100 Yields the Best of Both Worlds
Most HNIs and institutional allocators that FNDX has spoken to are faced with a seemingly intractable dilemma: Bitcoin is the go-to token to build portfolio exposure to digital assets. But Bitcoin has been notably flat since the middle of 2022. And it’s down multiples from its high of November 2021. Can they do better?
As it turns out, the FNDX 100 accomplishes exactly that - strong exposure to Bitcoin price movement while also outperforming it. This dive explores how.
Correlation
The FNDX 100 is the world's most diversified passive digital assets strategy. It looks to hold the top 100 tokens by market cap – after specific exclusions. And that means a large part of FNDX 100's composition is Bitcoin.
Because of the dominance of Bitcoin in the strategy holdings, the FNDX 100 price movement is highly correlated to Bitcoin's. This is a comparison of the FNDX 100 and Bitcoin price (both normalised and in USD):
It's clear how closely they follow each other. From 23 September 2022 to 4 November 2022, the FNDX 100 and Bitcoin have a coefficient of correlation of 0.9595 (two perfectly correlated data sets will have a coefficient of 1; those that move perfectly opposite to one another, -1).
This gives allocators what they’re looking for – spot price exposure to Bitcoin.
Performance
At the same time, there's a difference in the performance of FNDX 100 versus Bitcoin. During the same time period as in the chart above
FNDX 100 returned 7.95%
Bitcoin returned 4.9%
This is just 43 days of data, but the outperformance is clear once one projects the FNDX strategy back in time:
The close correlation between FNDX 100 and Bitcoin continues, but the outperformance becomes more pronounced over time. Over just under four years, through two major boom-bust cycles, the outperformance is 570% vs 490%.
This outperformance is FNDX's core thesis, backed by data, that value in the digital assets space is captured disproportionately by newer, more innovative projects lower down in the market cap rankings. Moreover, tokens that are already in the top rankings are more likely to drop than to rise/stay stable. See FNDX's previous dive into this – in summary,
> The majority of top 20 tokens dropped in rank over that three year period. Not just that, the majority also dropped out of the top 20 altogether - this is particularly notable.
> The majority of the top 20 tokens today are made up of tokens that were not in the top 20 three years ago. And nearly half were not even in the top 100 - this is also notable.
This is borne out by a look at one-year holding periods for the FNDX 100 strategy starting Jan 2019:
It's clear that
Given any one year holding period, FNDX 100 is more likely to outperform Bitcoin than not
More importantly, when FNDX 100 trails Bitcoin, it trails modestly. When it outperforms Bitcoin, it outperforms significantly more
Over longer holding periods, this translates to greater odds of high outperformance.
Side Benefit - Resilience
The broad market strategy also serves another purpose - being agnostic to the Next New Thing in digital assets.
As the space evolves, momentum builds around different types of projects.
In 2018-19, infrastructure projects like decentralised storage (FIL), decentralised compute (GLM), decentralised identity (CVC) launched
In 2020, several projects launched that fractionalised real-world assets and launched them as 'security tokens'
2021 was the year several DeFi came into its own
2022 is when NFTs became mainstream in games and in the 'metaverse'
Instead of betting on specific projects in specific industry sectors like the above, the FNDX 100 strategy automatically increases allocation to those projects that rise in value and reduces exposure to those whole value falls. When a token's value falls far enough, it falls out of the top 100 and from the FNDX 100 altogether.
In summary
The construction of the passive FNDX 100 strategy biases its holdings towards Bitcoin, but the disproportionate value captured by other, more innovative projects provides consistent alpha.
To conclude, the FNDX 100 strategy yields three distinct yet related benefits for participants who wish to build portfolio exposure to digital assets.
Strong price exposure to Bitcoin through high correlation
Consistent outperformance over Bitcoin through broad-market holdings
Resilience to short-lived trends via automatic rebalancing across 90% of the digital assets market cap
★
Featured image by Jonathan Chng on Unsplash.