Aug 12, 2019
Sell the Mainnet
Statistically significant data confirming the popular hypothesis
April 24, 2019
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For professional investors, life is measured in terms of alpha, the excess return an active manager earns above a defined benchmark. If you’re an equity investor it’s not good enough to earn 5% for your clients. Not when the S&P 500 returns 7%.
You’ve got to demonstrate some sort of “edge” that helps you outperform the market.
That edge can come in all shapes and sizes. Typically, though, you need to either a) make better decisions than your competition (you’re smart and fast), b) earn some type of asymmetric information advantage (better deal flow, operate in immature/messy markets), or c) actively drive better outcomes (have a kingmaker’s rolodex and human capital to invest alongside financial).
The requirements for generating alpha are generally the same regardless of what type of fund/investing vehicle you’re running. But the strategies to actually perform differ.
Long/Short: Use fundamental research to identify over/undervalued assets
Quantitative: Rely on proprietary algorithms to make fast trading decisions
Arbitrage: Exploit observable price inefficiencies across markets
Global macro: Play broad economic, political, or general industry trends
Event-driven: Put on positions around specific events (mergers, product launches, etc.)
Most crypto fund investors we know tend to focus on a mix of macro and event-driven strategies.
Quant trading is still immature, and arb plays are getting harder to come by. But the early investors who identified multi-decade changes in monetary policy and political climates as catalysts for crypto were handsomely rewarded.
More recently, many investors have sought to trade signals surrounding specific events like exchange listings, halvings, or technical milestones (positive and negative).
A recurring thesis we’ve seen discussed recently has to do with investing around token project testnet or mainnet launches.
It’s a simple one: teams that meet important technical milestones and move their networks closer to production (when tokens can be used for something other than speculation), are creating real value, and that should be reflected in market prices.
But good investors should have the inside scoop on whether a given team looks like it will actually ship a product. Similar to our thoughts on halving cycles, we were skeptical there would be a repeatable trading strategy around network launches that could produce outsized returns because this news would likely get priced in as private investors leveraged their inside information to make the trade.
An examination of testnet and mainnet launches for prominent projects in the space yielded a couple of statistically significant results.
We considered:
- Buying a week prior to a network launch and selling on launch day.
- Buying the day before and selling on launch day.
- Buying on launch day and selling the next day.
- Buying on launch day and selling a week later.
For mainnet launches, we found purchasing a token and selling it on the date of the launch would generate a median return of 1.9%. Not statistically significant. Compared to Bitcoin, the results were even less significant with a median return of only 0.3%.
But returns after a mainnet launch were largely negative. Out of the 14 projects we tracked, 10 had negative seven-day returns with a median return of -7.5%, -8.9% vs. the BTC benchmark. Folks are (maybe) buying the rumor, but (probably) selling the news.
As you’d maybe expect, advanced knowledge of mainnet launches could mean news got priced in over a longer time period than one week. But traders have usually waited to dump on the news before moving on to the next trade.
Testnet launches showed similar, but more pronounced trends. The median return for buying the week prior to a testnet was 1.8%, compared to 1.9% for mainnet launches.
Similar to mainnet launches, returns following a testnet launch were negative. But the results varied wildly, and weren’t statistically significant.
One explanation could be that investors are split on testnet launches. Some may be significant milestones on a team’s roadmap, while others might be lower versions with limited features that don’t spark much excitement.
Another could be that the assets trading prior to a mainnet launch tend to be represented by futures, non-native tokens (e.g. ERC20), or other “speculative” instruments, which could lead to more pronounced volatility as there is only speculative use vs. application utility.
In the volatile world of cryptoassets, there are numerous ways for a savvy investor to earn outsized returns. But one age old truism seems to have legs so far:
Sell the news.
Or at least, sell the mainnet.
