blog
23Jun 2020

On Crypto Correlations and DeFi Breaking

by Henrik Andersson

On Feb 1, 2018, when The Apollo Capital Fund started the ten crypto assets with the highest market cap looked like this. On the column furthest to the right is ‘ROI to Today’, the asset’s return up until today.

Source: OnChainFX

Source: OnChainFX

There is an enormous difference in performance between these assets. For an asset that is down 80% from this date to be instead down 90% it needs to fall another 50%!

Jan 1, 2019 the same table looked like this:

Source: OnChainFX

Source: OnChainFX

In a sideways market is is easier to see the differences in performance between these assets very clearly. It should be noted that top 10 is not our investment universe at all. In fact from the list above the only two assets we hold are Bitcoin and Ethereum.

The above tables gives us a sense of the huge performance differences between crypto assets, but it doesn’t tell us the whole story.

One way to systematically look at the market is in different sector or verticals. Indeed, if you’re an investor in our fund you would have seen this type of sector break-up in our Quarterly Letters. We should further note that within these verticals we can further divide the space in sub-categories. For example within Decentralised Finance (DeFi), you have Lending, DEXes, Stablecions, Synthetic assets and so on.

This is the average performance of some different verticals year-to-date compared to Bitcoin and Ethereum:

Source: Messari and Apollo Capital

Source: Messari and Apollo Capital

And for comparison this is the median performance within the verticals:

Source: Messari and Apollo Capital

Source: Messari and Apollo Capital

Above charts clearly shows the breakout performance of DeFi in 2020. This is also evident looking at the metric Total Value Locked in DeFi as reported by DeFi Pulse which just surpassed US$1.5bn, a new all time high. What does it mean that the Median performance is lower than the Average performance above? To us, it indicates that you will want a relatively broad exposure to the credible assets within a sector. The key word here is credible.

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We ofter reiterate that indexing just doesn’t make sense crypto. The reason is that outside Bitcoin, everything else is more akin to VC investing where most projects will ultimately fail. We believe investing in assets that are credible within well defined market segments will deliver superior returns for our investors. Just take a look at the first table in this article again. If you would have indexed the top ten on Feb 1, 2018 your portfolio would have been down 76%. That’s very hard to recover from. By systematically combining top-down with bottom-up analysis within verticals we have significantly outperformed an indexing strategy.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Capital. Henrik actively manages both of the Apollo Capital investment funds; the Apollo Capital Fund and the Apollo Capital Opportunities Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.