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 crypto price changes.
Key takeaways from the research
- Crypto factors work: Factors like market, size, and value are just as useful for understanding crypto as they are for stocks and bonds, debunking the myth that digital assets follow a random walk.
- Crypto is a new and distinct asset class: The use of unique data like on-chain metrics highlights crypto’s position as a standalone asset class.
- Our factor model is a framework that yields practical benefits: This model supports portfolio construction and optimization, risk management, and the development of innovative financial products.
Why this matters for investors
Crypto markets can seem unpredictable, but CF Benchmarks’ factor model brings some order to the chaos. By borrowing proven methods from traditional finance and adapting them to crypto, this research gives investors a new way to approach digital assets with confidence and clarity.
It’s a step toward making crypto investing a mainstream component of diversified investment portfolios and more accessible for everyone.
That’s the summary – now get the details
Read CFB’s original, more technical blog post, CF Benchmarks introduces first Institutional-grade Factor Model for Digital Assets.
Download CFB’s full 44-page PDF report, A Factor Model for Digital Assets.
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, stake, or hold any cryptoasset or to engage in any specific trading strategy. Kraken makes no representation or warranty of any kind, express or implied, as to the accuracy, completeness, timeliness, suitability or validity of any such information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Kraken does not and will not work to increase or decrease the price of any particular cryptoasset it makes available. Some crypto products and markets are regulated and others are unregulated; regardless, Kraken may or may not be required to be registered or otherwise authorised to provide specific products and services in each market, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto-asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your cryptoassets and you should seek independent advice on your taxation position. Geographic restrictions may apply. See Legal Disclosures for each jurisdiction here.
