Kraken’s CF Benchmarks (CFB) has introduced a comprehensive analysis framework to help investors better understand cryptocurrency portfolio construction, optimization and risk management.
Why should you care about crypto factors?
A familiar model that applies to a new asset class
Investors have long relied on factor-based approaches in traditional markets to understand the underlying drivers of returns and manage risks. With growing interest in cryptocurrencies, CFB has adapted these methodologies for digital assets, providing a framework to analyze and navigate this emerging market.
Debunking the myth of randomness
A significant outcome of this research is the debunking of the myth that crypto returns follow a random walk – that they’re essentially random and therefore unpredictable. The study provides compelling evidence that cryptocurrency returns are influenced by a set of identifiable risk drivers – factors – comparable in significance to those used in traditional stock market models.
Unique inputs for a unique asset class
Cryptocurrencies lack traditional valuation metrics like cash flow or earnings, making it challenging to apply conventional investment approaches. Instead, CFB’s model incorporates unique crypto-specific data, such as onchain activity, to capture the realities of this asset class. Factors like value and growth, which leverage onchain data, emphasize crypto’s distinct characteristics and establish it as a standalone, full-fledged asset class.
A practical framework for crypto investing
The model enables investors to construct and optimize portfolios, manage risks effectively and explore opportunities for developing new financial products in the cryptocurrency market.
What is a factor model, and why does it matter?
A factor model identifies common traits (factors) that influence investment returns. These might include:
- Market Trends: How the overall crypto market performs
- Size: The total market capitalization of a given asset
- Value: Metrics like transaction fees compared to the asset’s total value locked
- Momentum: Whether a cryptocurrency’s price has been rising or falling recently
- Growth: Trends in usage or activity, such as growth in the number of active users
- Risk Sensitivity: How much an asset reacts to market downturns
- Liquidity: How easily the asset can be traded without big price changes
By understanding these factors, investors can make smarter decisions and get a clearer picture of what drives crypto prices.
How did CF Benchmarks create their model?
- Data collection: They used reliable data from crypto exchanges, blockchain networks and other sources. Their study focused on the top 50 cryptocurrencies (excluding stablecoins like Tether) to ensure replicability.
- Analysis: They examined how different factors – like size, momentum, value etc. – affect crypto returns.
- Validation: The model was extensively back-tested, proving these factors carry risk premiums and help explain