Started the experiment on November 24th, when Bitcoin broke below $4000.
The objective of the study is to verify whether it’s possible to create portfolios that decouple from the top 20 cryptos that make up for most of the market capitalization. Another aspect of the study is to check for correlation with the traditional stock market.
All of the portfolio constituents have been equally pondered at start with equal amounts of cash, started with 100 value and will be rebalanced each month. Not tradable for multiple million dollar portfolios as the liquidity is low on some of these coins but could be adapted for $100k portfolios. I will update portfolio prices every week or so for 1 year.
I hope to find the emergence of some trends at the end of the study.
Here are the following crypto strategies/sectors that I will follow:
- The top 20s
- Digital Cash
- Smart Contracts
- Privacy Coins
- Stable Coins
After two weeks, the best investment would have been to be invested in interoperability coins (yellow line at 100.83). As the global crypto market lost 20%, the portfolio managed not to lose money.
Click Here for Today’s Crypto Curious Prices
The Top 20 Index — The S&P 500 of Crypto
BITCOIN, ETHEREUM, RIPPLE, BITCOIN CASH, etc…
Through this portfolio, I wanted to create a crypto version of the S&P 500 (index that tracks the stocks of 500 large-cap U.S. companies). I used the top 20 coins ranked by market capitalization and equally pondered them at start to obtain my index.
Interestingly this is the portfolio with the most coins which should be the most diversified but has the 2nd worst performance. It’s a sign that these top 20 are highly correlated between each other.
Bitcoin Cash (-36%) dragged down the portfolio’s performance. Since its hard fork on November 15th, major market sell-off have occurred tearing up Bitcoin communities.
DigitalCash closely follows the Top 20 Index
BITCOIN, RIPPLE, STELLAR, LITECOIN, NANO, DECRED
A digital or virtual currency is designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency.
These coins account for most of the crypto market capitalization, with bitcoin amounting to 55%.
Since inception, the market has underwent major losses and when these occur Bitcoin is usually used as a hedge.
Therefore it is not surprising to see it having the best performance(-5%), while Stellar losing the most (more than 15%).
It has very similar characteristics to the Top 20 Index, with returns and volatility very close. Most of the top 20 coins belong in the digital currency space.
SmartContracts — Worst Performer
ETHEREUM, EOS, CARDANO, NEO, TEZOS, AETERNITY
Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. They not only defines the rules and penalties related to an agreement in the same way that a traditional contract does, but they can also automatically enforce those obligations.
As of today, this is the worst performing portfolio, with most coins losing between 10% and 40% since the start of the experiment. Ethereum and Cardano are hedging, with losses accounting for only 12–13%. While EOS is the worst performer, losing almost 37% in less than 2 weeks.
Overall, from the beginning, this portfolio has always been the underdog. Smart Contracts have seen a lot of hype in the last 2 years, but with the future’s market opening up and ICO startups selling their ETH to fund operations, it has put downward pressure on prices and the trend seems to remain.
PrivacyCoins — High Beta Coins
MONERO, DASH, ZCASH, VERGE, PIVX, HORIZEN, ZCOIN
The PrivacyCoins Portfolio is very volatile, with a high beta, it goes up and down more than the average market when returns are positive and negative.
Overall performance of coins is very asymmetric from -23% to 17% between coin. Verge is the out-performer of the group.
Interoperability — Best Performer
AION, ARK, ICON, WANCHAIN
Interoperability is the ability to easily share information and transact across blockchain systems. In a fully interoperable environment, if a user from another blockchain sends you something on your blockchain, you will be able to read, comprehend, and interact with or respond to it with little effort.
As of today, this is the best performing portfolio. It has constantly outperformed the Top 20 Crypto Index.
On the other hand, it has the least number of coins (4), as a result the portfolio is the most volatile (8.5% daily volatility).
AION is the best performer.
Stable Coins — Crypto World Cash
TETHER, USDC, GEMINI USD, DAI, TRUE USD, PAXOS
A stablecoin is a cryptocurrency designed to minimize the effects of price volatility. The value of a stablecoin can be pegged to fiat currencies, or to exchange traded commodities (such as gold, silver etc). Stablecoins can be centralized where they can be backed by fiat, or in a decentralized fashion via leveraging other cryptocurrency projects in different ways.
The portfolio is stable between 99.5 and 100.5 as one could expect. The pegs are holding for the moment.
Crypto markets diversify Traditional Markets
Facts from the above return correlation matrix shows:
- Crypto Curious portfolios are very correlated between each other (0.89–0.99). Except for the Stable Coins portfolio which are uncorrelated (0.03–0.14).
- Crypto Curious portfolios are negatively correlated with the traditional market (-0.53–0.06).
- Traditional market stocks/sectors/ETFs are positively correlated (0.70–0.99).
This suggest that it will be difficult for these crypto portfolios to decouple from each other over time. The good news is that they can help you diversify your traditional market portfolios. The correlation between the Top 20 Crypto Index and the S&P 500 Index is -0.21, which means that you could reduce the loss on the regular markets by investing some of your funds in cryptocurrencies and vice versa.
The only portfolio that would have beaten the traditional S&P 500 portfolio would been the Interoperability Portfolio but it is much more volatile (8.5% vs 1.5% daily volatility).
Hope you have enjoyed this weeks study. Next week I’ll be following up with more data and analysis.
Thanks for reading,