How long should you hold your cryptocurrencies?

According to Benjamin Graham every investment have two important characteristics: safety of principal and adequate return. While it is impossible to guarantee any of these in such an unproven market as cryptocurrencies, let us see how holding period impacts safety of principal and expected return.

How do we evaluate the same question for stocks? Simply with a diagram depicting stock volatility over time.

A Random Walk Down Wall Street, p. 353

We can see that if we were to hold the entire American stock market, we can make a few observations based on data from 1950–2013.

1. Based on the average return, we can expect the annualized growth rate to be slightly over 10%.
2. The data suggests that if you want to minimise loss of principal, you should hold the stocks for more than ten years.

Let us look at how a similar diagram looks for cryptocurrencies. We gather data from coinmarketcap, and plot similar data for the ranges 20130505 and 20181007 (the available data). We urge you to consider the following points:

• The stock market has been alive and kicking for hundreds of years, it would be imprudent to put the same faith in the crypto market. The data is severely limited compared to stock market.
• The data from CoinMarketCap is not complete (sometimes, for example, coins are missing in one dataset).

With that being said, a simple plot yields the following results

The bars indicate the range of returns for any # week window, with the average return in grey. I.e., if you look at every possible 90 week window between 201505 and 201810 the highest annualized return you would have achieved would be 1337%, the lowest -53%, and the average of all 90 day windows is 337%.

• The average return has a downwards trend, with a rise at the end due to the strong bull market in 2017.
• As expected, it behaves like the stock market and volatility goes down as holding length goes up.
• There is no three year window where you would have had a loss of principal.
• The average annualized return is currently below 200%

It makes sense that the average return should go down. We have a lot more 90 week windows, and it is easier to grow 10% when the market is €1bn than €100bn. In addition, higher risk means higher potential returns. As risk decrease in the market (adoption, institutions are moving in) rewards are diminishing. There is no free money. Big upside comes with big risks. Less risk means smaller upside .This means that the best time to get in is asap, as returns will diminish over time.

Conclusion

While lightweight in its essence, the above data tells us three things:

1. The longer you hold your crypto currency the less volatility you have.
2. Historically, you would not have risked loss of principal if you held your assets for three years or more.
3. The gains are slowing down.
4. The expected annualized gains are likely somewhere south of 200%

So to frame the situation in the mind of Benjamin Graham: If the cryptocurrency market grows you can expect major returns between 100% and 200% annually. If you want to treat it as an investment and minimise risk of principal you should be ready to hold minimum three years. But more is better.

You should also enter the market asap. (But don’t invest too much, and invest it over time. Dollar Cost Averaging is amazing!)

If you want to read more about solid financial theories applied to crypto, check out my other posts.