Does Buying Top10 Coins Pay Off? A Concise Study
A popular passive investing approach is buying market leaders with the belief that they have a good chance of remaining leaders in the future. We take a look at how this strategy would perform if applied to cryptocurrency investing.
Absolute Returns
Bitcoin has maintained its position as the most capitalized cryptocurrency since inception and historically dominated other cryptocurrencies. Our methodology involved checking the top 10 cryptocurrencies at the end of each half-year from 2013 onwards and assuming we invested $1000 into each new cryptocurrency we saw on the list. The results are as shown below.
With 38 different cryptocurrencies appearing on the top 10 lists since 2013, a total of $38,000 would have been invested. Currently, that portfolio would be worth $286,100, a gain of 653%.
Relative Returns
Now let’s look at the return of the same investment compared to if you had just bought Bitcoin at that time in lieu of the newly top10 coin. Our methodology this time is investing 1 BTC worth into each new cryptocurrency we saw on the list. The results are as shown below.
Conclusion
When computing the returns in BTC, they are much less promising. With a total of 37 BTC invested, the current portfolio value of 13.93 BTC–meaning the portfolio has underperformed BTC by 62%. In fact, Ethereum is the only cryptocurrency that has outperformed Bitcoin since being added to this hypothetical portfolio, up 680%.
Even if we cherry-pick the day when BTC dominance was at its all-time low, during the height of ICO frenzy on 15th January 2018, the results are not particularly impressive. With a total of 33 BTC invested, the portfolio would have a value of 76 BTC. However, if you remove the Ethereum position, the investment of 32 BTC is only worth 34 BTC! This fact shows the misleading nature of the oft-cited Bitcoin dominance figure–namely, that even as dominance decreases, that does not imply an altcoin portfolio has necessarily appreciated in BTC. Dominance decreases come from the introduction of new altcoins into the market as much as it does from continued appreciation of existing ones.
Indeed, the top 10 changes extremely rapidly in terms of composition and market capitalization and undertaking this kind of passive investment strategy is still a money burner. To add insult to injury, in equities markets retail investors have shown a propensity to sell winners and add to losers. If this tendency is overlaid onto crypto markets, it would imply the investor caps gains on large winners and loses substantially more on total losers.
Notes:
- For simplicity, this analysis excludes fork/airdrop distributions and assumes zero yield from any potential staking
- In the presence of capital gains taxation, deploying a top10 passive strategy by selling existing BTC instead of buying with fresh fiat would incur a substantial tax burden
- Being a USD stablecoin, Tether was not included as an investment in this case study.
Credit: Su Zhu, Hasu and Hedgedhog
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