Crypto markets ring in the new year in style 🎇

Hey folks!

We wish all our readers a very happy new year. Hope you folks have a great year ahead filled with health, wealth, and prosperity. 

We are all ready to turn a new chapter in our lives as 2024 sets in. The past year had been monumental for investors and traders alike. The crypto market woke up from its slumber to a bull run, and the Indian stock market saw one of the best years in its history as the benchmark indices scaled new highs. 

This year's major events on investors’ radar are the likely SEC approval for spot BTC ETFs, BTC halving, expected interest rate cuts, and general elections in India and elsewhere. 

You all have been our loyal readers, and we aim to bring you market updates and some interesting reads on finance to help you achieve financial stability and financial freedom in the new year. Let’s dive into the first newsletter of 2024.

Mutual fund schemes come in various forms. There are growth mutual funds that invest in growth stocks with a primary goal of capital appreciation. Dividend funds, on the other hand, invest in dividend stocks and bonds. Investors can opt for a payout from the proceeds from dividends and interest income or to reinvest the proceeds. 

Click on the link below to learn more about dividend mutual funds. Whether you're a beginner or looking to expand your investment portfolio, this episode will provide valuable information to help you make informed investment decisions.

Up next, we bring you the portfolio-building series that discusses portfolio rebalancing and reappropriation for people who have already started investing and are looking to organize their investments to match their goals.

Portfolio Building in your 20s and 30s - Part 6

Some of you might not be building your portfolio from scratch. This is because investment is an over-discussed and under-explained topic these days. Investment recommendations are easy to find, and if you lack basic investing knowledge, there is a high chance that you might have acted on these recommendations without doing the necessary research. 

One of the pitfalls of investing by following the herd is that it might not align with your long-term financial goals. Now is the time to start evaluating your portfolio and see if it needs an overhaul. 

Here are ways in which you can evaluate your portfolio: 

• Portfolio under-diversification: 

Diversification is an investment strategy that blends different investments in a single portfolio. The idea behind diversification is that a variety of investments will yield a higher return. It also suggests that investors will face lower risk by investing in different vehicles.

A portfolio under-diversification is when your investments are concentrated. An underdiversified portfolio would be a portfolio biased towards just IT stocks or a portfolio with investment-similar assets with a strong positive correlation. This means all your assets will appreciate or depreciate in value at the same time. 

An underdiversified portfolio can reduce your chances of returns. Therefore, if you already have mutual fund investments and some investments in stocks, it is time to reevaluate to check if your portfolio is underdiversified or not. 

• Portfolio over-diversification 

Portfolio over-diversification is when the number of assets in your portfolio exceeds the point where the marginal loss of expected returns is higher than the marginal benefit of reduced risk. 

In your existing portfolio, every time a new script is added, it lowers the risk of the portfolio to a very small extent. But at the same time, each additional investment lowers the expected return.

For example, if you own 100 different stocks, you have reduced the unsystematic risk, but at this stage, your portfolio does not have a good number of high-performance stocks.

There is a high chance that your portfolio will be over-diversified, which can be as harmful as under-diversification. This is how you can check if your portfolio is over-diversified or not.

Check your mutual fund investments. Streamline them to find out if you have SIPs in similar funds. If you have an ongoing SIP in index funds, it is advisable to reorganize so that your money isn't invested in similar asset classes. 

Another thing to check is your stock investment. If you have bought stocks in too many companies that belong to the same sector or have too many scripts in general, your portfolio is over-diversified and thus requires some consolidation.

• Optimal portfolio diversification

The optimum portfolio diversification is to own a number of individual investments large enough to nearly eliminate unsystematic risk, but small enough to focus on the best opportunities.

This is because different industries and sectors don’t move up and down at the same time or at the same rate.

If you mix things up in your portfolio, you’re less likely to experience major drops because as some sectors encounter tough times, others may thrive. This provides for a more consistent overall portfolio performance.

That said, it’s important to remember that no matter how diversified your portfolio is, your risk can never be eliminated it can only be reduced. 

You will have to figure out your optimal diversification as it will depend on your risk tolerance, but it is very important to check for diversification at regular intervals. 

Do have a look at your portfolio to check if it needs consolidation in the coming few days. In the meantime, we will bring you some important retirement planning tips in the coming week. 

Recession forecasters were proved wrong in 2023 as global GDP expanded and stock markets soared. Crypto markets ended the week and the year higher, continuing their steady climb even as the approval for spot Bitcoin ETF appears likely. 

Overall, the crypto market cap remained steady at $1.76 trillion as BlackRock and Valkyrie, leading applicants for ETF products, named their respective authorized participants in anticipation of the US SEC approval. 

After a tumultuous 2022, the year gone by witnessed strong performance by the likes of Bitcoin and Ethereum, the largest and the second-largest cryptos by market capitalization. BTC notched up annual gains of about 173% to trade above $45k, while Ethereum, which started the year with $1,200, capped the year at $2,425, a gain of about 102%. However, the year’s standout performer was Solana (SOL), which zoomed about 1,066% to $114.30 from a meager $9.80 in January, securing a spot among the top five crypto assets by market cap.

As the new year dawns, a recap of some of the significant events of 2023—-ranging from alarming to morale-boosting—is in order. Clearly, the year's major theme was the crypto industry making rapid advances toward mainstream adoption, with TradFi players devising new products based on digital assets. BlackRock, the world’s largest asset manager, filed a registration statement with the United States Securities and Exchange Commission (SEC) in June to launch a spot Bitcoin ETF, not to mention other firms like Fidelity that have put in applications. The product, which is widely expected to be approved shortly, seeks to make Bitcoin investment more accessible. Also worth mentioning is the attempt by traditional finance players to tokenize real-world assets such as US Treasuries.

On the downside, we saw the conviction of FTX founder Sam Bankman-Fried (SBF) for fraud in November 2023, which followed the spectacular fall of the then-leading cryptocurrency exchange in 2022. However, the weeding out of bad actors is a positive for the crypto industry as it evolves. The depegging of stablecoin USDC in March stemmed from Circle holding $3.3 billion in reserves at the failed US lender Silicon Valley Bank. Another noteworthy event was the $4.3 billion settlement between the US Department of Justice and crypto exchange Binance in November following an investigation into charges related to money laundering and violation of US sanctions. Binance co-founder and chief executive CZ, who faced criminal charges, quit as CEO. 

On the regulatory front, Europe made a giant stride with the European Union’s Markets in Crypto Assets (MiCA) regulation scheduled to come into force in 2024. In another encouraging development in the euro area, Coinbase and Circle secured conditional licenses to operate in France. The UK is also making steady progress in its attempt to finetune crypto regulations. However, in the US, we witnessed some moves from the SEC to regulate the crypto sector by enforcement. For instance, the US markets regulator sued both Binance and Coinbase for alleged violations of securities laws. The lawsuit also named cryptos such as SOL, ADA, MATIC, FIL, and SAND as securities. 

However, the Ripple vs. SEC lawsuit had an interesting outcome as a US court held that Ripple is not a security, setting a healthy precedent. In another positive development for the crypto industry, digital currency asset manager Grayscale Investments, which had applied to create a spot bitcoin exchange-traded fund (ETF), won a legal reprieve in October after a court ruled that the SEC was wrong in rejecting its application.

The macro-environment appears favorable as the crypto industry rings in the new year. Global liquidity conditions have steadily improved during the final quarter of 2023. Besides, investors now expect the US Federal Reserve to cut rates in 2024, which is a good prospect for risky assets.    

It was mostly rangebound trading for the broader crypto markets, but certain token-specific developments resulted in major outsized positive returns! 

The past week saw some interesting price moves in BTC as chatter surrounding spot Bitcoin ETF approval has reached a crescendo. 

Another token that remained firm was SOL as it sustained the momentum. 

BTC $45,731 ⏫ 7.20%

ETH $2,417  ⏫ 8.3%

SOL $116  ⏫ 2.2%

(All data here is as of 3.30 pm., 2 January 2024)

Before we conclude, here’s a quick look at some important news from around the crypto world.

• The price of Bitcoin (BTC) soared more than 6% on the first day of 2024, as the world’s largest cryptocurrency by market cap blew past $45,000 for the first time since April 2022. The expectation that the US SEC will approve the launch of several spot Bitcoin ETFs appears to be the catalyst. Read more here.  

• ARK Invest bought 4.3 million shares of ProShares Bitcoin Strategy ETF (BITO) yesterday after dumping its remaining Grayscale Bitcoin Trust (GBTC) holdings. The ProShares stake is valued at $9.2 million based on closing prices. Cathie Wood’s investment vehicle also sold $27.6 million worth of Coinbase (COIN) stock and bought 20,000 shares of the Ark 21Shares Active Bitcoin Future Strategy ETF, according to a communication. Read more here.  

Coffee Can Investing

Author: Saurabh Mukherjea, Rakshit Ranjan, Pranab Uniyal

Coffee Can Investing talks about buying and holding a portfolio of high-quality shares for the long term, typically five years or more. Saurabh, the author of this book, follows the conservative Coffee Can approach to high-quality, low-risk investing. His firm, Ambit Capital, is one of the largest wealth managers in India which follows this investment approach to deliver stupendous returns. Saurabh discusses how to handle low-risk investments that generate great returns. 

Read the book to gain valuable insights about portfolio creation and management. 

Before you get on with your day, don’t forget to flex those brain muscles with our weekly crypto crossword.

That’s it for now. Thanks for sticking around.

See you later, folks! 👋

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