Bitcoin & Co: How to Benefit the Most From This New Asset Class?

By Stefan Schwitter, Head Investment Solutions SEBA Bank

This naturally includes professional risk management specialized in digital assets. As a licensed Swiss Bank, SEBA Bank offers this unique service to discretionary mandate clients, leveraging our research and asset management capabilities in digital assets.

Institutional and professional investors are moving into digital assets

Digital assets have emerged as a new, credible asset class and are attracting a lot of demand and interest from institutional-grade investors. An increasing number of asset managers and family offices are looking to build exposure to this asset class and many traditional, well-known wealth management companies have expanded into digital assets stating a favorable outlook for performance and diversification potential.

Recent additions to the long list of adopters are Goldman Sachs and Morgan Stanley, both recently communicating that they will be providing access to digital assets for their clients.

shot of paper with word crypto currency torn

A new asset class with new value drivers

Digital assets have new value drivers that have little to do with those that move traditional asset classes like bonds or equities. The major value drivers for digital assets are three-fold:

  • the network and the related network effect
  • the monetary policy
  • as well as the token economics of the tokens or coins

The larger and faster-growing the networking effect, the better for the value proposition of the respective digital asset. Monetary policy governs the issue and redemption/destruction of coins or tokens – Bitcoin, of course, is the most famous example of a very restrictive monetary policy.

Finally, token economics governs the mechanism with which revenues are paid/distributed to stakeholders, an important element in the overall value proposition of a coin or token.

Digital assets provide significant diversification benefits

Professional investors are forever looking to optimize their portfolios to extract the maximum returns while bearing the minimum risk. The magic triangle of course is investment performance, volatility and correlation – and investment managers try to balance these for best effect. With this in mind, many investors have discovered digital assets as a new, credible asset class that provides valuable diversification to a traditional portfolio composed of bonds, equities and private assets.

Due to the relatively low correlation between digital and traditional assets, even a low single-digit exposure can significantly improve a portfolio’s efficiency. To optimize this effect, we recommend going beyond just allocating to Bitcoin but instead invest in an actively managed index of digital assets. Based on our calculations, a 4 percent allocation to the successful SEBAX® Crypto Asset Select Index can indeed double the Sharpe Ratio of a traditional portfolio.

SEBA Bank Allocation Crypto Assets finews en 500x300px E

This graph illustrates how a low single-digit allocation to digital assets can significantly improve the risk/return relationship of a traditional portfolio. A 4 percent allocation to Bitcoin improves the Sharpe Ratio by around half, while the same 4 percent allocation to the SEBAX® Crypto Asset Select Index roughly doubles the efficiency of the portfolio.

Investing in digital assets 2.0: tailor-made, actively managed portfolios

For professional allocators, investing in digital assets is more than just putting a few percent of their asset base into Bitcoin or Ether. This new asset class offers a number of ways to benefit from return potentials such as directional exposure in select coins or tokens or derivative strategies. For individual client portfolios, actively managed via discretionary mandates, there are broadly two potential performance drivers:

  • Firstly, taking long positions in coins or tokens that we deem attractive. For this, we have a dedicated research team conducting in-depth analysis and due diligence on digital assets. Considering that there are literally thousands of coins or tokens on the market, this bottom-up research is critical to investment success
  • Secondly, other than just being long coins, there is interesting return potential in derivative strategies on Bitcoin and Ether. As an example, the systematic selling of options on those two dominant coins can add significant returns

As a licensed Swiss bank we offer our clients individual, tailor-made investment strategies on digital assets in the secure framework of discretionary mandates. Clients benefit from our expertise in research, asset management and risk management on digital assets delivering personalized portfolios and investment strategies.

Individual, tailor-made client portfolios for digital assets

Learn more about customized investment strategies for digital assets at SEBA Bank.

Stefan Schwitter has 25 years of relevant experience in executive and senior roles in Wealth-, Asset Management and Trading. Before joining SEBA Bank as head investment solutions, he ran the global Investment & Products division for VP Bank Group. Before that, he lead the Investment Services Europe department for LGT Bank and the global Active Advisory for EFG Bank. He started his career as an options market maker at UBS and a structured product trader at Credit Suisse. He is an expert in building global cross-asset product shelves and has hands-on experience in the Fintech space. He holds a master's degree in Business Administration, Management and Innovation.