Four month ago I published an article that asked “Can You Beat the Crypto-Market?” and concluded that — unlike in classical stock markets — it is relatively easy to do so.
During this time, the cryptocurrency market and particularly bitcoin received an unparalleled amount of attention across globally mainstream media outlets such as The New York Times and The Guardian. With the listing of Bitcoin futures on two of the world’s biggest options exchanges, another milestone towards mass adoption of cryptocurrencies has been reached in mid-December. A Google Trends analysis revealed that the ‘Bitcoin’ search term is now almost twice as popular as ‘gold,’ whereas historically — that is before December 2017 — the search term ‘gold’ was between two and ten times more popular.
In light of this increased popularity it is perhaps no surprise that the Bitcoin price has surged from $1k to almost $20k (or $22k accounting for hardforks) between the beginning of the year and today. At the same time, the entire cryptocurrency market’s capital has multiplied by more than 34 times from $17B to $580B — implying that Bitcoin alone did not beat the market. But what about our original question:
Can you beat the cryptocurrency market?
Just as in my previous article, we refer to ‘the market’ as the TOP 5 cryptocurrencies by market capitalization summarized in a hypothetical index fund weighted by market capitalization. We compare six different trading strategies. The first portfolio contains: the TOP 5 (alt-)coins by market cap (M), the second: all altcoins except for the Top 5 (S) and the last one: only altcoins that are priced below $0.01 (L). For each composition we analyze two different weightings — equal weighting (e), i.e. if the portfolio contains 10 (alt-)coins, then each coin receives 1/10 of the total investment, and weighting according to market cap (c). Taking into account that most coins are divisible into 18 decimal places, the composition strategy (L) is certainly the most uncommon approach from a classical point of view but corresponds to a rule of thumb among many altcoin traders. The strategy (Mc) will be identified with ‘the market’.
Given the eventfulness of the current year, all comparisons start at the beginning of different months in 2017. Once purchased, no further re-balancing is undertaken.
In early 2017, the number of tradable altcoins* was at 305 and 175 of them were priced below $0.01. Just as in our previous study, all alternative strategies (Me,Se,Sc,Le,Lc) beat the (Mc) by a large margin. The clear winners are again the (L) strategies with a 12000% ROI.
An investor who entered the market in the second quarter of 2017, was able to choose between 276 altcoins tradable altcoins* and 181 of them were priced below $0.01. The results are almost identical to before and again, all alternative strategies beat the market with the low-priced coins coming out on top.
At the beginning of the third quarter, the number of tradable altcoins* had increased to 531 and 214 of them were priced below $0.01. Thus, even though more coins were tradable, the number of low priced coins remained relatively constant. Surprisingly, if an investor entered the market on July 1, 2017, his best investment would have been the market (Mc) and only the strategy (Le) would have yielded similar returns.
At the beginning of the fourth quarter, a total of 604 altcoins were tradable and 248 of them were priced below $0.01. The only strategy that was able to significantly outperform the market was once again (Le). If an investor had entered in the beginning of August or September the results would have been qualitatively the same (not shown here).
Finally, even an investor entering at the beginning of December, would have been better off staying away from Bitcoin, Ethereum, Bitcoin Cash, Ripple and Dash and instead invest his money in less popular altcoins.
Assuming that the investor did not enter the market in early July, there is again a very clear answer to our original question:
YES! Alternative strategies can beat the market significantly!
And just as in out previous article, the most obscure strategy (Le) was the most successful across all quarters (and also from Aug, Sept and Nov). Even if one entered in the exceptional month of July, where the market performed best, the strategy (Le) was within short reach.
*Data Acquisition and Data Normalization
All data has been obtained from coinmarketcap.com, saved as an sqlite database, queried with pandas and visualized with Chartblocks. Care has been taken to avoid performance artifacts that may arise from a naive evaluation of the market performance. Particularly, we have not used the total cryptocurrency market cap as a performance indicator but rather the price development of each currency. Thus, the performance of the index replicates exactly the performance of an investor who invested in each cryptocurrency weighted by market cap. Furthermore, all altcoins with a market cap below $10,000, without a price or with low volume were excluded from the comparison. Also, we did not consider any token sales as it is often a matter of luck if one is able to get in (cf. GNO, BAT) and/or the volume is restricted (cf. ZRX, CVC). Thus, a follower of our trading strategies could not expect the same performance. Of course, once the token is listed on exchanges it was included in the comparison. We have also accounted for the bitcoin cash and bitcoin gold hard forks in the bitcoin price development.
Disclaimer: Nothing contained in this article constitutes investment, accounting, tax or legal advice or a recommendation to buy, or sell any (alt-)coin or other investment, management product or service or pursue any investment strategy. You should not buy any (alt-) coin unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges. Moreover, past performance is not indicative of future results.