Cryptocurrency Portfolio Valuation
A case study using Kaiko's custom valuation service
(5 min read) This case study will explore how investors can use Kaiko's valuation service to build and track custom portfolios for any combination of crypto asset.
Investors are increasingly diversifying their crypto holdings beyond Bitcoin, creating a growing appetite for reliable multi-asset indices to measure and compare sector performance. However, due to the fast-changing nature of crypto markets, it is difficult to build indices that remain relevant over an extended time period.
Kaiko’s custom valuation service enables investors to build single-asset and multi-asset price feeds for any combination of crypto asset. This one-stop solution is optimized for portfolio managers, traders, asset managers, funds and index providers.
Comparing Crypto Sector Performance: L1 vs. L2 Tokens
Slow transaction times and high fees on the Ethereum network are driving investor appetite for alternate Layer 1 and Layer 2 protocols. To better understand investor sentiment for these two crypto sectors, we built simulated portfolios for Layer 1 and Layer 2 tokens using Kaiko’s valuation service.
L1 protocols are alternate blockchain networks, often known as “Ethereum Killers,” while L2 protocols are scaling services for the Ethereum blockchain designed to process transactions off-chain and reduce congestion. We selected the top five assets for each sector to build a multi-asset price feed with the following features:
Two simulated portfolios containing the top 5 assets within the L1 and L2 crypto sectors.
The data output comprises a composite index starting at base 100 for each daily fixing time along with the asset reference price, contribution and weight for each constituent crypto asset used in the calculation. We chose the same weight (20%) for each of the five assets included in the two portfolios.
Tracking and Comparing Performance Over Time
Using the output data, we chart the composite returns of our Layer 1 and Layer 2 portfolios compared with Ethereum since the start of Q3 2021. Layer 1 tokens gained 431% over this period, significantly outperforming both Layer 2 tokens (+92%) and Ethereum (+77%). Buying and holding spot Ethereum appears as the least profitable strategy in terms of composite returns.
Comparing our L1 and L2 portfolios with Ethereum.
Kaiko’s valuation service also returns the contribution price for each asset over the selected time period. This allows crypto assets managers and financial professionals to periodically rebalance their portfolio based on their risk profile and trading strategy. We can observe that the individual contribution for each Layer 1 asset is asymmetric over time, resulting in allocation drift.
How Kaiko's Valuation Service Works
Kaiko's valuation service is available through our REST API as an endpoint with customizable parameters. Contact us for an API key to get started, and view our API documentation here.
Our valuation tool takes the following inputs:
Crypto Exchange Selection: Crypto assets are traded across hundreds of exchanges. Kaiko’s valuation service allows users to select trustworthy exchanges or opt to use data from all exchanges under Kaiko’s coverage.
Base and Quote Asset: The user can choose to receive data denominated in either fiat or crypto currencies.
Asset Weighting: Different portfolio allocations can be tested by selecting weights for each asset.
Interval: Receive end of day or intraday price feeds at intervals ranging from a few seconds to 1 day. This is also known as the "fixing" time.
Semi-Length Window: The price of each single-asset or multi-asset feed is averaged over a time interval and to mitigate the impact of a single price distorting value, you can specify which time interval of data to include in each computation (fixing). Users can specify the semi-length window for any interval (1 minute, 3 hours, 6 hours, etc). For example, a semi-length window of 6 hours would include all transactions executed 6 hours before and after the fixing.
% Outlier Management: Users can exclude trades which have been executed at prices significantly different from the mid-price of the data sources. For example, with 80% outlier management (20% outlier filtering) , only trades that occur within 80% of the median price are included.
The data output is the following:
|Date||% Outlier||Price||Asset Pair||Asset |
'Price' for the first time interval of every request will always start at base 100. Each subsequent price is calculated dependent on the weight assigned to each asset and underlying price movements.
Using the field 'asset contribution,' you can determine how the allocation for each asset evolves over time, as some are more performant than others. The field 'reference price' is the underlying price for each asset.
Data Reliability Through Outlier Detection and Time Windowing
The ability to exclude potentially misleading data points from a price feed's computation is a powerful feature of our valuation service. We give the option to select custom percentiles of outlier management, enabling users to test how different feeds react to volatility over time.
Below, we compare different percentiles of outlier management for our Layer 1 portfolio. We can observe small differences depending on the degree of filtering, but over time this can add up for a portfolio. Outlier management is a crucial feature for mitigating the effects of market manipulation and is used in the calculation of all regulated indices.
Comparing percentiles of outlier management
Another feature of Kaiko's valuation tool is the ability to select custom semi-length windows for computing the price. Unlike traditional markets which have defined trading hours, crypto markets are open 24*7. This makes it complicated to compute a daily close.
Most price data is thus a volume weighted average price over a set time interval, instead of data pulled at a set fixing time, such as the 4pm close at the New York Stock Exchange. Kaiko's valuation service lets users select which time interval to include data points surrounding a custom fixing time, which we call the semi-length window.
Below we explore the change in portfolio valuation when different semi-length windows are used to compute composite returns. We observe that the choice of window significantly impacts Layer 1 portfolio performance.
Price feeds using a 3 hour semi-length window had a different performance compared with price feeds using a 12 hour semi-length window. This can affect how profit and loss is calculated for a fund, so it is important that investors understand price calculations that leverage different methodologies.
Kaiko's valuation service is optimized for funds managing single-asset or multi-asset cryptocurrency portfolios. Our tool lets users input custom parameters to build the feeds that match their use case. To get started on a trial, contact us today.
Founded in 2014, Kaiko is a market data provider in the blockchain-based digital assets space, providing institutional investors and market participants with enterprise-grade data infrastructure. We collect, normalize, store, and distribute digital assets market data via a livestream WebSocket, REST API, and cloud-based flat file (.csv) Data Feed, to which clients connect to build data-driven applications.