IDX Insights introduces ‘smart beta’ bitcoin index

Aug 13th, 2019 | By | Category: Alternatives / Multi-Asset

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IDX Insights, an indexing firm focused on factor research, has launched a cryptocurrency index that uses a smart beta construction approach.

Bitcoin IDX Insights cryptocurrency index

The index uses short-term momentum signals to dynamically allocate between exposure to bitcoin and a basket of fixed income ETFs.

The IDX Crypto Opportunity Index dynamically allocates between bitcoin and fixed income ETFs based on short-term momentum signals, aiming to provide a risk-managed allocation to what has historically been a highly volatile asset class.

Ben McMillan, Founding Partner and CIO of IDX Insights, commented, “As crypto-assets have emerged as an alternative asset class, we continued to question how to prudently deploy risk- capital in the space.

“While several long-only cryptocurrency indexes exist, there were none that took a tactical approach to deploying risk-capital when the risk/return profiles look most favourable.

“Nascent asset classes often provide an opportunity for substantial returns but come with elevated volatility and considerable drawdowns; bitcoin (and other cryptocurrencies) have been no different. We’ve seen increased investor interest in the space but believe that a long-only approach simply doesn’t make sense for most investors.”

Methodology

The index takes a long exposure to bitcoin (expressed using the Grayscale Bitcoin Trust) when the price momentum of bitcoin is both positive and increasing. As soon as one of these conditions is no longer met, the index switches 100% of its exposure to low-risk fixed income ETFs.

The methodology thereby presents a relatively high bar for participating in bitcoin. Similarly, a relatively low bar is set for taking risk off the table.

Compared to the performance of the Grayscale Bitcoin Trust since its inception in 2013, the index has only been long 36% of the time but has captured 49% of the total upside with only 39% of the downside.

Perhaps most importantly, the index has demonstrated a maximum drawdown of 36% compared to 84% for the Grayscale Bitcoin Trust.

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