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Quarterly Attribution Analysis: CF Diversified Large Cap Index

The challenging macroeconomic environment continued for digital assets: inflation remained at multi-decade highs, central banks have made sizable policy rate increases, and global growth has begun to stall.

CF Benchmarks

• 5 min read
Quarterly Attribution Analysis: CF Diversified Large Cap Index

The CF Diversified Large Cap Index - is a liquid, investible benchmark portfolio index designed to track the performance of large-cap digital assets. The index seeks to capture 95% of the total market capitalization of the investible digital asset universe as its constituents. Index constituents are weighted using the diversified market capitalization which is determined by the free-float market capitalization adjusted by the application of the harmonic series' terms. This has the benefit of discounting the higher capitalization assets within the portfolio in accordance with the CF Multi Asset Series Ground Rules and the CF Diversified Large Cap Index Methodology. The index is calculated and published every second. The index is re-constituted on a twice yearly basis and rebalanced quarterly. The CF Diversified Large Cap Index - was incepted on December 1st 2021 with a value of 1,000. The index was launched on February 14th, all values from inception date to launch date provided are backtested.

Source: CF Benchmarks LTD., Bloomberg LP, as of August 31st, 2022

Macro Forces Remain in Control For Now

The challenging macroeconomic environment continued for digital assets: inflation remained at multi-decade highs, central banks have made sizable policy rate increases, and global growth has begun to stall. Meanwhile, the CF Diversified Large Cap Index has fallen -25.6% over the course of our most recent rebalancing period, leaving the index almost 60% lower from its early April highs. Markets have remained vulnerable to increases in central bank policy rates that has led to a tightening of financial conditions in an effort to stymie inflation in most developed market economies. Although this dynamic has been visible across most risky assets, such as equities, the naturally higher volatility in the digital asset space has amplified downside price action.

It is worth noting that macro forces were not the only driving force this past quarter. Idiosyncratic catalysts stemming from the upcoming Ethereum Proof-of-Stake (PoS) upgrade, or “merge”, helped reverse negative price momentum in July. At one point, ETH prices rose as much as 90% from the late June lows, leading the world’s second largest token (by market capitalization) to be one of the top relative performers in the Large-Cap space.

Scaling and DeFi Play Defense


Large-cap tokens remained under pressure, falling over 25%. From a Level 1 Digital Asset Classification Structure (DACS) perspective, the heavily weighted Settlement segment contributed most (-26.2%) to the index’s decline, with Bitcoin, a non-programmable token, contributing the lion’s share of negative performance.

Conversely, the Services and Sectors segments, saw relative outperformance, each contributing slightly positive performance over the rebalance period.

Source: CF Benchmarks LTD., as of August 31st, 2022
Source: CF Benchmarks LTD., as of August 31st, 2022

Merge Hysteria lifts UNI and MATIC

The world’s most used programmable blockchain is set for a major upgrade this month which propelled ETH prices up over the $2,000 level before finally giving up some the gains over the last few weeks. The positive ETH sentiment spilled over segments like DeFi and Scaling. MATIC and UNI both finished the rebalance period up +31.5% and +13.0%, respectively. Investors see the potential merge as a fundamental catalyst for DeFi tokens and Layer 2 scaling solutions to attract more institutional development once the Ethereum blockchain performs its upgrade.

The decision to switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS) is anticipated to increase ETH’s bull thesis. First off, miners will be replaced by validators who are required to stake at least 32 ETH which will offer potential yield for participating in the network. Secondly, developers are planning on decreasing annual ETH issuance by ~90%, adding a disinflationary element. Lastly, the upgrade is set to exponentially improve bandwidth and speed, while only using a fraction of the energy.

Source: CF Benchmarks LTD., as of August 31st, 2022

Crypto Fights the Fed

Central banks across the globe have embarked on an aggressive crusade in fighting historically high inflation. The Fed has even decided to super-size their rate increases by upping their policy rate by 150 bps over the last two meetings. Currently, markets are still anticipating a greater than 50% chance that the Federal Reserve and European Central Bank will both tack on another 75 bps in their upcoming September Meetings.

Meanwhile, rate speculators anticipated that the terminal funds rate should be around 350 bps for the U.S., which would imply that another supersized rate hike will set the central bank close to neutral. The chart to the right illustrates how the May and June rate increases coincidentally had a sizeable impact on Large Cap tokens, but it appears that this relationship has softened in July with markets coming to terms with a lingering hawkish monetary regime. Meanwhile, investors seem to be looking around the corner to an eventual pivot in hawkish policy stances, which would rekindle bullish sentiment.

Source: CF Benchmarks LTD., Bloomberg LP, as of August 31st, 2022

What’s Driving Crypto? Rolling 30-Day Large Cap Correlations

Source: CF Benchmarks LTD., Bloomberg LP, as of August 31st, 2022

Overall, the CF Diversified Large Cap Index continues to trade with a strong correlation to equities prices. Emerging market equities (EM) displayed a relatively lower correlation despite the duo’s shared sensitivity to rising interest rates and a strong USD. In fixed income, we can see how speculative high yield moves directionally similar during periods of poor sentiment. Lastly, the strongest inverse relationships to large-cap tokens can be found in the volatility index (VIX) and financial conditions index.

Appendix: Market Performance Overview

Appendix: CF Digital Asset Classification Structure

The CF Digital Asset Classification Structure (DACS) classifies coins and tokens based on the services that the associated software protocol delivers to end users, grouping assets by the role they play in delivering services to end users. The CF DACS powers CF Benchmarks' sector composite and category portfolio indices and allows users to perform attribution analysis to better understand the fundamental drivers of returns within their digital asset portfolios.

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Additional Resources

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