The Current State of Crypto Mid-Caps
Crypto mid-cap assets are currently facing significant challenges. While many digital asset investors are on the lookout for hidden gems and potential powerhouses within this tier of market capitalization and liquidity, their efforts have often gone unrewarded. Interestingly, mid-caps have shown much higher volatility compared to their larger counterparts, presenting a scenario of less reward coupled with increased risk. But what is driving this trend?
The Dynamics Behind Mid-Cap Performance
Is the current situation a reflection of the “Mag 7” dominance observed in the equity markets? Or does it stem from a lack of promising assets within the mid-tier range? It could also be that the evolution of finance is simply taking longer than anticipated to unfold.
Understanding Market Indices
To better analyze the situation, we utilize the CoinDesk 20 and CoinDesk 80 indices. The CoinDesk 20 index tracks the performance of the top digital assets while adhering to specific restrictions aimed at promoting adoption across various platforms—this includes avoiding memecoins, ensuring access for U.S. investors, and listing on select exchanges with ample liquidity.
On the other hand, the CoinDesk 80 index encompasses the next 80 assets beyond the CoinDesk 20, allowing for a broader spectrum of trading pairs and exhibiting fewer restrictions. Essentially, these indices help define what we consider mid-cap assets.
Performance Insights
Both indices were established on October 4, 2022, with a base value of 1000. As of now, the CoinDesk 20 index boasts an impressive value of around 3200, reflecting a staggering 320% return since its inception. In stark contrast, the CoinDesk 80 index has seen a decline of 3%, now sitting at 970.
When we analyze the volatility metrics, we find that the CoinDesk 80 index experiences significantly higher volatility than the CoinDesk 20 index. However, its price patterns still closely mimic those of its larger counterparts, including major assets like Bitcoin and Ether.
Challenges in the Mid-Cap Segment
What exactly accounts for the underperformance of these mid-cap digital assets? Are they simply poorly conceived platforms or trivial projects? Not necessarily. While some highly volatile memecoins, like PNUT, are present, many assets in the mid-cap segment are well-known and widely recognized.
If we focus on the year-to-date performance of current constituents (post the January 31 reconstitution of CoinDesk 80), we find that only one asset has shown gains this year. The leaders and laggards within this index are largely established names that have been around for quite some time.
Analyzing the Underlying Causes
Determining the root cause of mid-cap underperformance is as complex in the crypto space as it is in traditional asset classes. The size factor is one of the three classic Fama-French factors, suggesting that small-cap equities should outperform their larger counterparts. However, this principle hasn’t held true consistently in the crypto market.
It appears that despite the crypto community’s willingness to trade a diverse array of assets, there is a notable preference for investing in larger, well-established, and familiar names. This trend could also influence regulatory developments, such as the introduction of ETFs, which are likely to follow a similar path.
Future Outlook for Mid-Cap Assets
Does this indicate that a bias towards large-cap digital assets—contrary to the Fama-French size factor—will yield superior returns? Time will tell. In the meantime, investors should continue monitoring the values of both the CoinDesk 20 and CoinDesk 80 indices, as they provide vital insights into the performance of digital assets across different market segments.
