Naive Cryptocurrency Investment Strategies
How well do they work?
Let’s say that I wanted to invest some money into crypto (Hey, this sounds like a technology that could change the world!), but I don’t want to spend a lot of time researching projects. Or perhaps it’s too difficult for me to tell the difference between a good project and a bad one. So what if I just bought a little bit of every coin and tried to make money by spreading out my risk? To figure out just how good (or bad) this idea is, I pulled some data and ran some calculations. But first, let me introduce you to the strategies I evaluated.
Buy a little bit of everything and HODL
The first strategy is dead simple: every day I look at the top 200 coins on coinmarketcap.com and buy $1000 of anything that I don’t already own. I hold these coins in a secure wallet somewhere and just passively watch my portfolio, never selling.
Take Some Profits then HODL
Another popular strategy among amateur traders is to buy some coins and sell half of them if their price doubles. This returns your original capital back to you and allows you to invest it in another coin. Also, it allows you to take advantage of early pumps in value that may later disappear. The downside, of course, is that you could be getting rid of your most profitable coins.
It’s also rather common for cryptocurrency enthusiasts to hold only Bitcoin (BTC) or Ethereum (ETH). Of course in retrospect, both of these projects were incredibly successful, so we might treat this as the upper bound for how successful our investment strategy might have been. We implement this strategy by assuming we bought a lump sum of either of these coins at a given date and continued to hold them until today.
For this analysis, I scraped coinmarketcap.com to get historical prices and market caps from 2013–04–28 to 2020-11-27. This gives us only the prices of the top 200 coins, but the assumption is that if a coin on this list doubles in value, it won’t drop off the list when this happens.
Also, to get the current value of our hypothetical portfolios, I scraped all the prices on coinmarketcap on 2021–01–03 . Admittedly we were in a bit of a bitcoin-led bubble at this moment, so it would be interesting to repeat this analysis after the current bull market ends.
This chart shows how much money we would have made (or lost) by following our strategies given a particular starting date. For example, we would have multiplied our money by x1000 if we were an early Ethereum investor (look where the orange line starts and breaks 10³) and about x100 (10²) if we had invested in bitcoin in 2015. And we would have just broken even on our portfolio if we starting pursuing a diversified strategy around the peak of cryptocurrency hype in 2017.🙃
Other Things to Note
- ETH and BTC strategies performed almost identically through this time period, although very early Ethereum investors made almost x10 more than BTC investors.
- Our “Sell Half” strategy started off performing as well as BTC, probably because the early cryptocurrency projects started off very cheap.
- The difference between the two diversified strategies disappears after the 2017 peak, probably because there were fewer smaller projects that were pumping in value.
- It’s a little bit unfair to compare these strategies since the BTC and ETH strategies can invest all their money upfront, whereas the diversified strategies require an unpredictable amount of money over time.
So what can we learn from this?
Well, it seems like the glory days of YOLO buying every coin for profit are behind us. Since 2018, we saw basically flat returns from our diversified buying strategies, although there is some hope that we will some more profits later in this market cycle as alt-coins pump.
So how should we invest our money in the crypto market? One reading of these results would be to stick with Bitcoin and Ethereum if we want to maximize returns, although this probably has some hindsight bias since we chose these coins because they’re currently the two largest crypto projects. A more reasonable approach might be to approximate the entire cryptocurrency market’s performance so that we’re not exposed to the risk of individual coins like Bitcoin or Ethereum losing their relevance. So what’s my advice? In crypto, as in stocks, just buy an index fund if you’re not willing to go out and do your research! I’m curious if there are any trustworthy funds out there that do this sort of thing, so if you know of any, please let me know in the comments below!
Example URL for historical data: https://coinmarketcap.com/historical/20180428/
Example URL for current price data: https://coinmarketcap.com/2/
Apologies for the messy code, but better to have dirty code than none, amirite? https://github.com/zscore/crypto-buying-article/upload
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