How we determine the Flagship Portfolio Vault's risk profile

Introduction

At Flagship, we have recently launched Flagship's Portfolio Vault. This Vault enables you to get exposure to the best of crypto in a single transaction.

In this article, we're going to break down the various key macro and market indicators that determine the level of risk in our Portfolio Vault. We'll guide you through each indicator, explaining its importance, why we've chosen it and how it determines which of the 5 risk profile the Vault is in. Buckle up, because these factors are not just important for our Vault, but also for your understanding of the crypto market!

Flagship's Portfolio Vault

We started Flagship with a mission, to make the wild crypto market accessible to those who don't have the time or knowledge to keep up with it all. Crypto holds enormous potential and can provide exponential returns, but for most people the volatility, complexity and diversity of the industry is simply too much.

So we built Flagship and our Portfolio Vault. This Vault provides exposure to a curated set of cryptocurrencies ranging from Bitcoin to Solana to dApp tokens and sometimes even memecoins. We also include stablecoins so the Vault can take profits from good trades and provide protection against the inevitable aggressive downturns of crypto.

The exact ratio between Bitcoin, stablecoins and riskier cryptocurrencies is determined by a growing set of indicators. These indicators look at the global economic environment, how much money is flowing through global markets and many different crypto-specific indicators. For the remainder of this article, we're going to explain each of these indicators and show how exactly how we use them to inform our decisions!

Macro Indicators

Global Liquidity

In our pursuit to accurately gauge the market's risk profile, the Global Liquidity Index stands out as one of the most important indicators. This applies to both crypto and many other asset classes, as liquidity determines how much money is slushing around our global economy and financial system. Liquidity is essentially like the tides of the ocean for financial markets, where a rising tide (read: low interest rates and money printing) lifts all assets, but only the strongest assets remain afloat as the tide receeds (increasing interest rates and tightening).

The Global Liquidity Index offers a bird's-eye view of the financial health and activity of major central banks worldwide, all harmonized in USD terms for clarity and comparability. By factoring in specific US accounts like the Treasury General Account (TGA) and Reverse Repurchase Agreements (RRP), we obtain a perspective on US liquidity.

While the Global Liquidity Index is crucial, we place more emphasis on US liquidity. The rationale behind this is straightforward: the US remains the world's premier financial hub, and its liquidity dynamics can significantly influence global financial sentiments. In essence, the US Liquidity Index, which is derived by adjusting the Federal Reserve System's balance with the TGA and RRP, serves as a leader for market sentiment.

To provide further clarity on market sentiments in relation to global liquidity, let’s explore the following categorizations:

In a bullish state, we witness a persistent climb in global liquidity, signifying a substantial influx of funds into the financial system, often resulting in elevated asset prices and a boost in investor confidence. A neutral stance is marked by a stable global liquidity level, denoting a balanced market where capital inflows and outflows are in sync, leading to steady asset prices and investor contentment with maintaining their current positions. On the other hand, a bearish sentiment sets in when there’s a discernible dip in global liquidity, highlighting a retreat of funds from the financial system, culminating in declining asset prices and a noticeable shift towards more conservative investment choices.

Stablecoins

The stablecoin sector offers valuable insights into the broader crypto market's health and direction. By examining the inflows and outflows of stablecoins, we can gauge the movement of capital. Specifically, when there's an influx of stablecoins, it suggests that new capital is entering the market, signaling a bullish trend. On the other hand, an outflow indicates that existing capital is being withdrawn from the crypto ecosystem back to the banks, pointing to a bearish sentiment.

A key metric to consider in this analysis is the Total Value Locked (TVL) in blockchains and decentralized applications (dApps) in relation to the market capitalization of stablecoins. When the TVL is growing, we are entering a bullish environment; when the TVL exceeds the stablecoin market capitalization, it is indicative of a bull market, suggesting that investors are more willing to take on higher risks. Conversely, if the TVL starts declining, we are entering a bearish environment. If the TVL is less than the market capitalization of stablecoins, it shows a risk-off sentiment, implying a more cautious approach by investors in the market. In essence, monitoring stablecoin movements and their relation to TVL provides an understanding of investor sentiment in the crypto space.

Forex Market (DXY)

The Forex market serves as a crucial risk indicator, reflecting shifts in global economic sentiments. A primary focus within this market is the DXY, or the U.S. Dollar Index. The significance of DXY stems from the fact that the global economy largely prices its transactions in dollars. As such, fluctuations in the DXY can offer insights into broader economic trends.

When DXY is above 100 and above the 200d Moving Average (MA) its a high risk-off environment. When the DXY is above 100 and below 200d MA its a risk-off environment. When below 100 and above the 200d MA its a risk-off environment. When DXY is below 100 and below the 200d MA its a high risk-on environment.

A rising DXY typically signals a bearish sentiment because it indicates a flight to safety and a preference for holding the U.S. dollar. Conversely, a falling DXY is generally seen as bullish. It implies a risk-on environment where investors are more willing to take on risk, investing in other currencies and asset classes in search of higher returns.

Additionally, the volatility of other major currencies, like the JPY and EUR, is monitored due to their economic impact. A continued devaluation of these currencies against the dollar could trigger a risk off environment. It's essential to understand that while the Forex market provides valuable insights, it's just one piece of the puzzle in assessing global financial risks.

Trend and Momentum indicators

In assessing the risk profile of the market, we rely on a combination of Trend and Momentum indicators. These tools help us navigate the market's direction and gauge the velocity behind its movements.

Trend Indicators:

These are used in tracking the prevailing market direction, so whether we're in an up-trend or down-trend. By understanding the current trend, we can align our strategies accordingly.

Momentum Indicators:

These measure the strength of the ongoing trend. They also alert us to potential shifts in momentum, allowing for adjustments.

Among the indicators we employ:

Whale Accumulation:

Monitoring large-scale acquisitions can offer insights into market sentiment, as significant buy-ins from "smart money" often precede upward movements.

RSI (Relative Strength Index):

An RSI above 50, whether on daily or weekly charts, signals a risk-on environment, indicating a market leaning towards bullishness.Conversely, an RSI below 50 suggests a risk-off sentiment, hinting at potential bearish tendencies. We're particularly pay attention to bearish divergences, where momentum wanes. This serves as an early warning for a risk-off scenario.

BTC.D (Bitcoin Dominance):

Bitcoin Dominance isn't just a measure of Bitcoin's market strength; it's a strategic tool for us. It guides our allocation decisions between Bitcoin and other assets. A rising BTC.D means we lean more towards Bitcoin in our portfolio. A declining trend suggests a pivot towards blockchains and decentralized applications (dapps).

MAs/EMAs (Moving Averages/Exponential Moving Averages):

We utilize the 12, 21, and 36 EMA to discern daily and weekly trends. A breach of the daily trend is a red flag for a risk-off environment. Conversely, reclaiming the daily trend is a positive sign, suggesting a transition to a risk-on phase.

Sentiment Indicator

Fear and Greed

We also pay attention to sentiment, as measured by the Fear and Greed index. However, it's crucial to note that we don't react to every fluctuation in this index. Instead, our strategy is to respond primarily to the extremes of the osscilator.

The Fear and Greed index serves as a barometer of market sentiment, which often moves inversely to risk. When the market is gripped by intense fear, typically following a sharp price decline, it signals an opportunity for us. At these moments, we elevate the risk profile of the Portfolio Vault, capitalizing on the prevailing sentiment. Specifically, when the index dips below 22, we initiate buying.

Conversely, the market can be filled with greed, often after a prolonged price surge. It's during these euphoric phases that we dial back, reducing the risk profile of the Portfolio Vault. An index reading above 70 prompts us to start taking profits.

External Catalyst

Finally, we have to factor in external catalysts that no chart or indicator can spot. As crypto is still a relatively small market with a highly speculative nature, new regulations, Fortune 500 company actions or even Tweets of prominent people can still move the market.

A few examples:

• The approval and launch of a Bitcoin spot ETF
• The collapse of Terra Luna and FTX
• El Salvador making Bitcoin legal tender
• China banning Bitcoin mining
• Tesla announcing to buy (and sell) Bitcoin

Events like these can have a rapid and signficant impact on the market. Luckily, our team of analysts (Captains) are nearly always looking at the market and have years of experience in crypto. Whenever a major event happens, we all jump on an emergency call to determine the potential impact of the event and how we will adjust the Portfolio Vault accordingly.

Portfolio Vault's 5 Risk Profiles

The indicators we've discussed, from the Forex market's insights to the nuances of the Global Liquidity Index, all play a pivotal role in shaping our investment decisions.

However, it's not just about gathering data; it's about synthesizing this information to make informed choices. Based on our comprehensive analysis of these indicators, we determine the risk profile for our Portfolio Vault. This assessment allows us to categorize the Vault's stance into one of five distinct risk profiles:

1. Mega Bearish: In the most cautious stance, the Vault is composed of 90% stables, 10% Bitcoin, and no other assets. This configuration is adopted during times of extreme market uncertainty or downturns.
2. Bearish: A slightly more open stance with 75% in stables, 10% in Bitcoin, and 15% distributed among other assets. This is for when the market shows signs of potential decline but not at its most severe.
3. Neutral: A balanced approach with 40% in stables, 20% in Bitcoin, and the remaining 40% spread across other assets.
4. Bullish: An optimistic stance with only 20% in stables, 20% in Bitcoin, and a dominant 60% in other assets. This is used when the market shows signs of an upward trajectory.
5. Mega Bullish: The most aggressive stance with a mere 10% in stables, 10% in Bitcoin, and a whopping 80% in other assets. This is for times when the market is on a strong bullish run, and there's a high level of confidence in continued growth.

Shifting profiles

In adapting to market shifts, we transition between risk profiles using clear guidelines. Post extreme volatility events , we shift from Mega Bearish to Bearish, reducing stablecoins and cautiously adding Bitcoin and select assets. As the market shows recovery and stability, we move to Neutral, further diversifying our portfolio. Clear, sustained bullish signals prompt a transition to Bullish, significantly decreasing stablecoins and increasing diversified assets. In exuberant market conditions, we adopt a Mega Bullish stance, aggressively investing in diversified assets.

Conversely, signs of market overheating or correction trigger a shift from Mega Bullish to Bullish, increasing stablecoins and reducing asset exposure. Clearer correction signs or volatility prompt a move to Neutral, balancing the portfolio while monitoring Bitcoin. Sustained weakness or downturn signals lead to a Bearish stance, increasing stablecoins and adopting a cautious approach. In extreme turbulence, we shift to Mega Bearish, heavily favoring stablecoins.

Ultimately, we assess the tides of the financial and crypto market with these indicators as accurately as possible. When we see the tide coming in, meaning global liquidity is increasing, interest rates are stable or dropping, stablecoins are flowing into crypto and the we're in an uptrend, we start increasing our risk. Conversely, when we're reaching peak euphoria, valuations becomes unrealistic and the tides is going out, we reduce our risk.

Vault thesis addition and rempval

Final Thoughts

The core objectives of our Portfolio Vault are to outperform both the US Dollar and Bitcoin. Our investment approach at Flagship is both methodical and flexible. By continuously monitoring key market indicators and adjusting our strategies accordingly, we aim to provide our investors with the best possible returns, irrespective of the market's volatilty.

The described set of indicators will continuously be iterated upon the further optimize the signals they provide. We hope that you've also learned how to better understand how to determine the market's conditions, and feel free to reach out if you think we should add a specific indicator that you have been consistently and successfully using!

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