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American investment research giant acknowledges crypto is unparalleled in returns

As the popularity of cryptocurrencies explodes around the globe, the asset class that is still considered new and unregulated has warranted a deeper analysis of the forces behind its unparalleled growth.

One such analysis is the report by the major American investment research company Morningstar, published on April 5. It is the company’s first to examine the crypto industry and unravel some expected and unexpected conclusions “of this novel, heavily concentrated, and highly volatile asset class.”

Specifically, the 2022 Cryptocurrency Landscape has highlighted that cryptocurrencies were beyond any comparison to the stock and bond markets in terms of resilience of their returns to risk factors rampant across those traditional universes.

It also added that “the contours of the market’s returns in aggregate fly in the face of normal market dynamics.” As the report explains:

“While they still have a short history, thus far, cryptocurrencies demonstrate virtually zero sensitivity to established risk factors like size, valuation, or term and credit premiums.”

However, there are certain exceptions to these observations, including Bitcoin (BTC), which “still behaves too much like a risk asset to warrant comparisons with gold.”

‘With great returns comes great volatility’

Despite the prospect of unparalleled returns that the crypto market may offer to its participants, its volatility is equally unparalleled, according to the report which stated that:

“Every breathtaking rally has ushered in an equally punishing crash on the other end, and cryptocurrencies lack a fundamental anchor like the par value of a bond or a stock’s discounted cash flows.”

To illustrate this statement, Morningstar noted the 90% drop in the value of Ethereum (ETH) between December 2017 and December 2018, as well as Solana (SOL) which lost more than half of its value between November 2021 and January 2022.

Cryptocurrency drawdowns, 2015-22. Source: Morningstar Direct and CoinGecko

In other words, the report concludes that:

“Surveyed in aggregate, the volatility of cryptocurrencies has no parallels to any other measurable asset classes.” 

According to the analysis, between January 2015 through January 2022, “the MVIS CryptoCompare Digital Assets 100 Index posted a standard deviation well over double that of the second-most volatile index we identified and more than 5 times as volatile as the MSCI ACWI index.”

It should be noted that the MVIS CryptoCompare Digital Assets 100 Index is a market-cap-weighted index tracking the performance of the 100 largest cryptocurrencies. The MSCI ACWI Index represents the performance of large- and mid-cap stocks across 23 developed and 24 emerging markets.

1 year rolling standard deviation, 2015-22. Source: Morningstar Direct

Increased institutional demand

Having said that, the research company also discerned that the cryptocurrency market “has sparked the interest of institutional investors looking to boost their exposure to uncorrelated returns.” 

It is worth noting that Finbold has reported on this increased institutional demand, most recently observed in the case of Cardano (ADA), which saw its on-chain transactions climb more than 50-fold in 2022.

Elsewhere, increased interest from investors in general has motivated banking giants like Goldman Sachs to introduce crypto services to its high net worth clients, as well as the largest bank in Israel which began offering crypto trading to all of its customers.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

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