Factor Friday - August 21, 2026

Liquidity Leads in Broad Market Rally

The market rebounded +16.2% for the week ending August 20, 2026, reversing last week's -1.3% decline and producing the widest factor spread since early July. Liquidity followed at +2.2%, while Downside Beta fell -2.2%, Size lost -1.5%, and Growth, Momentum and Value each finished modestly lower. The mixed cross-section matters: Size is sign-inverted, so its loss means larger names beat smaller ones, while Liquidity's gain means less liquid assets outperformed more liquid peers. Downside Beta is also sign-inverted, and its loss means the defensive sleeve trailed higher-downside-risk exposure. Broad beta has returned, but it has not produced a clean small-cap bid yet. Over four weeks the market is +13.1% and Liquidity +3.0%, while every other style factor is negative; year-to-date, Size at +3.4% remains the only style factor above zero and the market remains -27.2%. The positioning read is a directional recovery with uneven participation. Sustained confirmation from a factor standpoint would require the Market's advance to broaden into small-caps

Rolling Factor Rankings and Rotation

A week ago, just 2.06 percentage points separated first from last. This week the market's +16.2% and Downside Beta's -2.2% opened that range to 18.3 percentage points. The reversal is particularly sharp because the market had registered six consecutive weekly declines before last week and was last of seven on August 13. The month-to-date ranking now has the market first at +16.8%, Liquidity second at +3.8% and Size third at +0.3%, while Downside Beta is last at -5.1%. Liquidity has also resumed the lead it briefly surrendered last week, after a two-week run of leadership in late July. That ordering pairs broad beta with a less-liquid premium, but Size's weekly loss says capital was still selective across the cap curve. For allocators, the relevant distinction is between a durable expansion in risk appetite and a rebound confined to the market's large-cap core. A renewed small-cap bid would change the character of the move; another negative Size print would keep that question open.

Market and Key Factor Betas

Market Beta

Market-beta composition barely changed during the rebound. The high-beta cohort remains liquid staking, cross-chain messaging, meme coins, gaming, naming-service, modular data-availability and scaling exposures, with the same ten names represented at both ends as last week. LDO now leads at 1.62, while ZRO slipped to second at 1.59; the lower-beta roster is still anchored by WLFI at 0.69 and BTC at 0.89, followed by enterprise interoperability, legacy payment chains and older smart-contract platforms. That stability is useful context for the +16.2% Market return: the rally repriced an established broad-beta book rather than rotating into a new one. Broad-beta exposure is again being rewarded, but the frozen composition leaves it sensitive to any reversal in the same higher-beta themes that lagged through the prior six-week decline.

Liquidity

Liquidity led the non-market factors at +2.2%, extending its four-week gain to +3.0%. Because the factor is sign-inverted, the result is a premium for less-liquid exposure. The high-sensitivity cohort remains led by a perpetuals-exchange token and a political token, followed by a scaling token, legacy platforms, gaming and infrastructure names. At the other end, EOS remains the extreme negative exposure at -4.76, followed by WIF and JASMY, with TAO entering the bottom ten as FET exited. The signal is therefore not a broad small-cap chase, since Size fell -1.5%; it is a more selective willingness to accept trading-friction risk while larger names still dominate the market rebound. That combination can persist, but its fragility is clear: if liquidity preference turns negative again, the less-liquid sleeve gives up the week's defining non-market advantage.

Downside Beta

Downside Beta was the week's weakest style factor at -2.2%. Its sign inversion means the defensive, lower-downside-beta sleeve lagged higher-downside-risk exposure as the Market recovered. The beta roster remains concentrated in older platforms and payment-linked assets at the high-sensitivity end, with EOS still a substantial outlier at 4.72, far above XLM at 0.74. The lower end contains speculative and newer-risk exposures led by WIF, WLFI and JASMY, then ENA, GALA and scaling names. There was little structural rotation beyond ZRO entering the top ten and XRP leaving it, and ENA moving higher in the bottom cohort. The message is less about a newly built risk trade than about the failure of a familiar defensive book to participate in a large directional bounce. A renewed decline in the Market would be the test of whether this underperformance was temporary or whether defensive exposure has genuinely lost its hedge value.

What Factors are Driving Markets

Factor contributions across the CF DACS Sectors universe total +4.6% over the trailing 30 days, while the Sectors index returned +8.9%, leaving the index 4.2 percentage points (pp) ahead of the factor sleeve. That is a sharp reversal from August 13, when factors led the index by 5.3 pp. Downside Beta contributed +2.8%, Liquidity +1.2% and Growth +1.0%, while Size and Value detracted modestly. The contrast is important: the 30-day index recovery now exceeds the systematic contribution stack, so direction has done more work than the six style sleeves. Sectors exposure is becoming less about factor selection and more about whether the index-level rebound can hold.

In the CF DACS Services universe, factor contributions total only +1.1% against an index return of +11.0%, a 9.9 pp advantage for the index. A week ago, factors were 5.4 pp ahead, so this is the largest of the three reversals. Downside Beta added +1.8% and Growth +1.0%, but Value subtracted -0.7%, Size -0.6% and Liquidity -0.5%. Services has therefore joined the Market's broader directional recovery without a commensurate factor explanation. Investors using the factor sleeve as a map of participation should treat this as an index-led move until the contribution stack catches up.

The Settlement universe carries the clearest index-level signal. Factor contributions are effectively flat at -0.1% over the trailing 30 days, while the index returned +11.4%, a 11.5 pp gap in the index's favour. No individual factor moved more than a few hundredths of a percent, so the advance is almost entirely outside the systematic style basket. This is the mirror image of last week, when factors were about 2.9 pp ahead of a falling Settlement index. The read-through is straightforward: Settlement is participating in the Market rebound directionally, while factor selection adds little. That remains the case until the contribution stack begins to move with the index rather than trail it.

Appendix: CF Factor Methodology

Market Factor

The market factor captures the broad, systematic risk that permeates the digital asset ecosystem. It reflects aggregate influences such as macroeconomic conditions, investor sentiment, and overall market volatility. As such, this factor is defined by the daily returns of the CF Broad Cap (Free Float Market Cap Weight) Index, offering a comprehensive and capitalization-weighted representation of the asset class.

Size Factor

The size factor captures the return differential associated with asset scale, reflecting the hypothesis that smaller-cap digital assets tend to outperform their larger-cap counterparts. This effect is understood to compensate for elevated operational and financial risks while exploiting potential market inefficiencies. In this framework, the size factor is defined by each asset’s fully diluted market capitalization. The value is sign-inverted so that higher z-scores are assigned to smaller assets and vice-versa.

Value Factor

The value factor reflects a protocol’s ability to generate economic output relative to its capital base and market valuation, combining measures of both efficiency and user engagement. It is constructed as the average z-score of two key ratios: transaction fees relative to total value locked (Fees/TVL) and daily active users relative to market capitalization (DAU/MCap). This composite metric captures how productively a protocol utilizes its resources while also serving as a proxy for user-driven demand. A higher combined score indicates efficient resource utilization and strong user engagement.

Momentum Factor

The momentum factor captures short-term price persistence by identifying assets that have recently exhibited strong performance. It is computed as the average z-score of two metrics: the 2 weeks cumulative performance and the 2 weeks risk-adjusted cumulative performance. This approach aligns with established findings in traditional financial literature and demonstrates empirical relevance in digital assets, where price trends tend to exhibit momentum over short horizons.

Growth Factor

The growth factor captures the expansion of a protocol’s network activity and user adoption. In the context of digital assets, it reflects metrics such as fee generation and user engagement, which serve as indicators of increased platform utilization and operational scale. The factor is defined as the average z-score of 30-day fee growth and 30-day weekly active user growth, thereby identifying assets exhibiting consistent and measurable increases in underlying network usage.

Downside Beta

The downside beta factor captures an asset’s sensitivity to adverse market conditions by isolating its behavior during periods of negative market returns. Empirical evidence shows that assets with lower downside beta tend to outperform their higher-beta counterparts over the long-term, due to their reduced participation in market drawdowns and more stable return profiles during periods of elevated volatility. As such, it is estimated through a regression of the asset’s daily returns over the most recent four-week period against market returns observed exclusively during negative sessions. The resulting value is sign-inverted to ensure that assets with lower downside exposure are assigned higher z-scores.

Liquidity Factor

The liquidity factor captures the ease with which a digital asset can be traded without significantly impacting its price. Empirical evidence shows that illiquid assets tend to command a higher risk premium than their more liquid counterparts, serving as compensation for trading friction and price volatility. To quantify this, the factor is measured using token turnover, defined as trading volume as a percentage of circulating supply. The value is sign-inverted such that higher z-scores are assigned to less liquid assets.

For further detail, view the CF Factors Methodology Document, the CF Factor Data Suite, and Our paper “A Factor Model for Digital Assets” in Springer Nature’s Mathematical Research for Blockchain Economy.