  Weekly insights, news and analysis for the professional investor By Noelle Acheson, Managing Director of Research March 29, 2021 Sponsored by  Prices as of 03/29/21 @ 12 p.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.
Hi all!
As the end of the quarter looms near (yes, really), investors everywhere will be pulling up their quarterly performance figures. If they're anything like the benchmarks' performance, investors will probably be squinting at them sideways and wondering if the relative stagnation in stocks and the loss of gold's luster point to a market top, or perhaps to the beginning of an "inflation, what inflation?" boom as vaccine rollouts give rise to celebration spending that does not distort official price indexes. Investors who have been keeping up with market movements will also increasingly realize that they are looking at two phenomena the investing world has never seen before:
1) The role of virology and health systems in determining market trends, with vaccine policy differences even influencing currency movements.
2) The relentless growth of an entirely new asset class that runs on different rails and different metrics, and is spinning off more innovation than the market can efficiently consume.
Looking at the relevant market benchmarks' performance, we see a familiar pattern of strong outperformance by the leading crypto assets. And while investors know that historical performance is not indicative of future returns (or do they?), it does go a long way towards entrenching narratives.  But what about the risk? This week's THE BRIEFING comes to you from our Director of Data, Galen Moore, who looks more closely at the myth that bitcoin is too volatile for portfolios.
Read on...
– Noelle
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THE BRIEFING Bitcoin vs. Penny Stocks Bitcoin is getting boring, with annualized 30-day volatility at Thursday's close taking a sharp downward dip, reflecting a March when the weather here in the Northeast U.S. has seemed to see more ups and downs than the orange coin.  To emphasize the point, have a look at the chart above, which shows the volatility of bitcoin daily returns for the past month. To be fair, I'm employing a little chart crime here, starting the y axis at 40% in order to accentuate the drop between March 24-25, as all but the last days of February have disappeared from the 30-day look-back on the CoinDesk Bitcoin Price Index.
The boredom engendered by a tame month sparked an idle argument with First Mover host Lawrence Lewitinn, about penny stocks vs. bitcoin. We were discussing the benefits of using indexes weighted either by price or by market cap. Price-weighted indexes can be more volatile, because smaller-cap components can have a greater impact. I said a crypto index doesn't need more volatility, because crypto assets already have the volatility of penny stocks.
Naturally, I had to go look up penny stocks vs. bitcoin's volatility.  It turns out I was wrong, at least as far as bitcoin is concerned. On Wednesday, I grabbed a handful of pennies off the top of a list of "hot penny stocks," ranked by 24-hour volume, provided by Barchart. These five stocks represent micro-cap companies, all in multimedia content or internet industries, all traded on the Nasdaq or the NYSE. As you can see, when bitcoin is stacked against this grab bag of penny stocks, it tends to be less volatile than all of them except one.
Cinedigm Corp. (CIDM), a multimedia production company based in Los Angeles, is the only stock out of these five that's consistently less volatile than BTC. (You know it's a good investment when a web search of the ticker yields a page of penny-stock roundups that outrank the company's website itself.)  Volatility is a measure of risk, and that's often measured in relation to returns. And by that measure, bitcoin is a beast so far this year. How does bitcoin compare vs. penny stocks on returns? The honey badger is running about the middle of this pack, it turns out, with some of these pennies outpacing it, including Cinedigm and Genius Brands International Inc. (GNUS), another L.A.-based multimedia producer.
As the chart above shows, if you'd bought these penny stocks at the close on Dec. 31 and held through Tuesday of this week, you'd be doing better vs. bitcoin holders over the same time period. But let's look at bitcoin vs. penny stocks over a longer term, using a measure that incorporates both returns and volatility.  This chart shows the monthly Sharpe ratio, annualized, for bitcoin vs. these penny stocks going back to July 2020. Sharpe ratio is intended to capture returns relative to risk as measured by volatility. Specifically, excess daily log returns over the risk-free rate are averaged across the month, then divided by the standard deviation of daily log returns. That monthly figure is then annualized.
As you can see, despite lagging some of these penny stocks in year-to-date returns, and outpacing at least one of them in 30-day volatility of daily returns, bitcoin is in another category or risk-return over each month. And, with bitcoin volatility lower in the second half of 2020 than it has been so far in 2021, and the price running from around $10,000 to where it was today, you can imagine how much stronger that Sharpe ratio case is for the orange coin over the long term.
Penny stocks are always a hot topic – more so than ever, these days, as mainstream media chronicle the efforts of COVID-bound day traders to find and build a bandwagon for the next GameStop. But for investors who aren't yet convinced of their own brilliance at picking investments and playing momentum, bitcoin may be a better place to look for risk.
— Galen Moore
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CHAIN LINKS A Fidelity Investments affiliate has filed an application to offer the bitcoin ETF Wise Origin Bitcoin Trust in the U.S. TAKEAWAY: This makes the sixth application in front of the SEC, and from Fidelity, no less. The mood has definitely shifted – three months ago, there was a total of one active proposal.
Blockchain startup Staked has created an investment trust that reflects staking rewards on Eth 2.0. TAKEAWAY: Eth 2.0 is the new proof-of-stake blockchain that the Ethereum network will migrate to either this year or next, according to current plans. "Staking" involves locking up ether in a special contract that contributes to the validation of the network, in exchange for a yield. A trust that reflects that yield is not only an example of the growing range of Ethereum investment vehicles for accredited investors; it also represents the new type of investment product that is emerging from technological progress in the blockchain industry.
Zurich-based investment firm Tavis Digital, a spin-off of $1bn AUM Tavis Capital, is also forging a path in institutional investment in staking. It has partnered with Persistence, a Singapore-based firm that helps investors participate in the governance of proof-of-stake networks. TAKEAWAY: Bitcoin may be the onramp into digital markets for most institutional investors, as it is the most liquid, with the greatest number of products and the most accepted regulatory clarity (everything's relative). It is just one part of the opportunities emerging in the crypto industry, however. As overall familiarity with blockchain and crypto assets continues to deepen, and as the need for returns becomes more urgent, we are likely to see more institutions take a closer look at other blockchains and their yield opportunities.
Argo Blockchain (LON: ARB) and blockchain and cryptocurrency technology firm DMG Blockchain Solutions are jointly developing "Terra Pool," a mining pool completely powered by clean energy. TAKEAWAY: I'm including this in the week's roundup of notable investment-related events because of the escalating conversation around bitcoin's energy consumption and its environmental impact. We've argued for some time that bitcoin is more an accelerant for clean energy development than it is a polluter. This development could represent a growing trend toward greater energy transparency in the bitcoin mining industry, which in turn could start to attract the attention of ESG funds. Early days yet, but it feels like the debate is getting kicked up a notch.
Cryptocurrency exchange FTX has secured the naming rights to the home arena of NBA team Miami Heat for the next 19 years, for a reported $135 million. TAKEAWAY: Including this here because it's a mainstream moment. Who needs Superbowl ads?
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