Analysis of Altcoins Returns Relative to Bitcoin — Drop the Alts?
As of June 2019, Bitcoin remains the cryptonetwork with the highest valuation. However, its share of the total crypto market capitalisation has fallen significantly over the past 3 years from c. 80% to c. 56%. Digital assets other than Bitcoin (altcoins or alts) are responsible for this decrease. Does it mean that alts have been generated superior returns to Bitcoin?
To answer this question, I will analyse historical data from Messari.
What does the data show?
What can be immediately observed is that only 8 assets out of 586 listed on Messari generated positive 1-year returns as compared to Bitcoin. Apart from the 15 top-performing assets, all other alts have declined by over 25% relative to Bitcoin. At the same time, Bitcoin has demonstrated consistently the lowest volatility against USD over the 90-day, 1-year and 3-year periods, making it the safest digital asset.
How consistent is it across time?
Analysis of historical returns reveals the following:
- 11 alts outperformed BTC in 2018 (out of 133 available on Messari)
- 28 alts outperformed BTC in 2017 (out of 32 available on Messari)
- 16 alts outperformed BTC in 2016 (out of 30 available on Messari)
- 6 alts outperformed BTC in 2015 (out of 24 available on Messari)
Apart from 2017, all other years have demonstrated altcoin returns to be sub-par or on par relative to Bitcoin, supporting the previous insight. The data suggests that investing in alts, on average, does not generate returns in excess of Bitcoin.
It should be noted that although most of the assets that outperformed Bitcoin in 2017 have fallen by over 90% in 2018, 23 alts have generated superior returns to Bitcoin over both 2017 and 2018 combined.
What makes 2017 different?
2017 is marked as the year of the largest crypto bubble to date. A few factors have contributed to the extraordinary returns achieved. It was a perfect storm of limited liquidity, limited investor knowledge base, a retail-heavy market, an exponential growth in funds inflow and proliferation of alts listed on exchanges. None of the Messari’s 33 assets has returned less than 350% in 2017. With that little differentiation between projects, each $1 invested led to disproportional returns for cryptonetworks with the lowest valuation at the beginning of 2017, regardless of the underlying project quality. Bitconnect, a widely known scam that collapsed in January 2018, saw its market cap peak at over $2.7bn, placing it in the top 10 most valuable “cryptonetworks” at the time.
What about altcoin index funds?
The analysis so far has demonstrated that in the absence of exceptional market conditions, an individual is more likely to choose an altcoin that would underperform Bitcoin over a 1-year time frame. Given that digital assets represent a completely new asset class, many resources (such as time, energy, and mental capacity) are required in order to conduct robust due diligence on altcoin investments. A typical retail investor is unlikely to have sufficient resources available to enable him or her to consistently choose those few alts that do outperform Bitcoin. As an alternative solution, such an investor might consider obtaining exposure to the alts via a passive index fund.
In order to assess this altcoin investment strategy, I will analyse the Bitwise data associated with its Bitwise 70 index. As per its website, “The Bitwise 70 Small Cap Crypto Index (BITW70) tracks the total return of the 70 largest cryptoassets that fall outside of the Bitwise 10 Large Cap Crypto Index and Bitwise 20 Mid Cap Crypto Index, as weighted by free-float and 5-year inflation-adjusted market capitalization.” Bitwise 70 index has been chosen for its often-reported superior returns profile as compared to other indexes. Bitwise 70 price data is available for every date between 31 December 2016 and 1 June 2019.
3 sets of data have been produced, including a comparison of Bitwise 70 returns versus Bitcoin on the year-on-year (517 observations), half-on-half (731 observations), and quarter-on-quarter (790 observations) bases. We will focus mostly on the year-on-year comparison.
The above output shows that the mean (average) outperformance (compared to Bitcoin) across the observed period for the index is positive. On average, the index has outperformed Bitcoin by 21%.
However, the median is much lower in a year-on-year comparison at 36% relative underperformance of the Bitwise 70 index. This means that on a random date, the index is more likely to have generated a lower year-on-year return than Bitcoin with some exceptional days when Bitwise 70 has significantly outperformed Bitcoin. To be more precise, on only 30% of days, the index has been a better investment year-on-year than Bitcoin. Lastly, the max-min range demonstrates no significant benefit from the altcoin volatility. Bitwise 70’s best performance has outperformed Bitcoin by a factor of 6.39x, while on the worst day it has reduced capital to c. 1/5th of the same-size investment in Bitcoin over the same 1-year period. Using this rough measure, it appears that investors are not rewarded disproportionately for the increased risk implied by higher volatility of relative returns.
The shorter-term results suggest a closer correlation with occasional significant outperformance by the index.
Conclusions
The analysis presented here supports the view that for an average retail crypto investor with an investment period of 1 year, diversification into altcoins does not generate superior returns in absence of abnormal market conditions that were characterising the 2017 crypto markets.
This analysis is by far incomplete to draw any reliable conclusions. There is scope for multiple improvements, including conducting analysis across wider time frames, a wider range of periods, and across more indexes. Lastly, the present analysis has not considered any investment screening or trading strategies that are likely to have generated superior returns as compared to hodling an asset for 1 year.
