Crypto – The Ultimate Asymmetric Asset Class
Author: Reji Vincent shares views on the value of a HODL strategy in crypto. Follow Reji on Twitter @ cryptofromindia for regular updates on all things crypto
The term Hodler has become synonymous with the Crypto investor.
A little bit of crypto folklore here. During the early crypto days investors chatting in Reddit inadvertently typed “Hodling” instead of “Holding” and now that’s become an investment term and popular meme across asset classes, wherein an investor who holds the asset for a long time frame is termed as a “Hodler”!
There is enough research out there that points to the advantages of passive investing. Assets like stocks and commodities have trended up over long periods of time.
However can such benchmarks be used in crypto; an emerging asset class that is prone to violent swings in prices on a day to day basis?
Below is a chart of the S&P and gold from Jan first week, 2018 to May 31st, 2021.
On January 2, 2018 opening at 2683.73 the S&P closed at. to 4204.11 on market closing May 28,2021.1 That’s a 56.65% overall return over a period of close to 3.5 years. A $10000 investment in a passive S&P index would return $15665.17 before expenses and taxes.
Gold too shows a similar win for buy and hold.
On January 1, 2018 opening at $1291/Oz , Gold closed at. to $1899.95/Oz on market closing May 28,2021. 2
That’s a 47.16% overall return over a period of close to 3.5 years. A $10000 investment in gold would return $14716.88 before expenses (storage of physical gold, transportation) and taxes
For the basis of our analysis we use January 2018 as our starting point.
This was a period when crypto prices started trending down from their all time highs in December 2017 and only in hindsight did we know that the crypto ‘alt season’ was over and a bear market in crypto was dawning on us.
So would a buy and hold strategy work for Crypto too?
Well herein lies the nuance. Crypto is not defined by just one token. Bitcoin was the first crypto introduced in 2009, but as of now there are over 10,000 tokens on exchanges and daily 10s of new tokens are coming to market.
So how can a passive investment strategy be designed for a market like crypto that is developing so fast that it’s impossible to keep up with it?
Even a simple task such as checking the price becomes a chore since crypto markets trade 24/7, 365 days and prices can vary between exchanges.
To make this task easier, let’s look at designing a basket of crypto tokens to spread the risk around and also give us an exposure to the potential of some tokens growing exponentially!
An illustrative Case Study
For this case study I have chosen to invest $1000 each in the top 10 crypto projects from January 7, 2018. The top 10 projects in crypto by market cap on January 7, 2018 is shown below;
Below is what an investment of $1000 invested in each of the top 10 projects, by market cap, from January 7th 2018 to May 31st, 2021 would look like (Red denotes being in losses, green denotes being in profit)
What this shows us distinctly is that the crypto asset class is too varied to paint it all with one brush. An Investment of $10000 ends up at $8717 on May 31st, 2021, a loss of 12.83%.
The Safe investment advice of Wall street of buy and hold a basket of big companies in the index obviously doesn’t always ring true in the crypto world.
While 2021 has caught the attention of the main street markets due to the jump in Bitcoin prices, the average investor who might have followed a passive buy and hold strategy of investing equal amounts in the top 10 crypto projects by market cap has actually lost money.
There is so much churn not just in the token prices, but also the market rankings of the crypto projects.
Of the top 10 projects in the first week of 2018 only 4 of them are still in the top 10.
Of the top 10 projects by market cap on May 31st, 2021 its worth mentioning that XRP is a stand out. Despite being in the top 10 projects, XRP holders have lost a whopping 70% of their capital since the first week of January, 2018.
In contrast, holding Bitcoin right through this time frame might have been the best choice, but looking at the previous table shared above we notice that Ethereum which at number 3 in market cap in January 2018 has jumped up a position to number 2 by May 31st, 2021 and has also slightly outperformed Bitcoin over this time horizon.
So if passive investing is a hit and miss, how can an active investment strategy be designed in such a fast moving market like crypto. Again as alluded to previously the approach is slightly nuanced and not a straight forward, buy and forget approach.
What I suggest is a yearly expansion of the portfolio with lower capital allocations and expanding out of the top 10 and going into top 30 projects.
So while we started our investment in 2018 with $1000 invested in 10 crypto projects , our yearly portfolio expansion in January of every year would involve an investment of $100 each in the top 30 projects in crypto by market cap.
This strategy would involve a maximum of $3000 additional capital assuming that all 30 projects in crypto are new entrants to the top 30 which may not be the case, but gives us an outer bound of how much capital this strategy entails.
Let’s start off by looking at the top 10 projects on January 6th, 2019.
We can see that the top 10 projects have remained similar with only 2 new entrants in the first week of January 2019; EOS and Bitcoin SV.
Below is how our portfolio expansion will look when we buy tokens in January 2019 which have made it to the top 30 crypto projects by market cap and hold them till January 2020 when the next expansion is due. (For tabulating new entrants into the top 30, stablecoins such as Tether and USD coin, Binance USD have been excluded)
As we can see above we started January 2019 by investing $1800 in total in 18 new projects apart from the 10 we already hold from 2018.
The objective here is to recognize that Crypto is an Asymmetric Investment at this point and thus we want to capture asymmetric returns. (Project which have dropped out of the top 50 are marked in Red)
An Asymmetric investment is one in which the downside is limited but the upside potential is magnitudes larger than the potential loss.
In our scenario, we are putting in a small amount of $100 in each project. Even if 1 project does a 10x returns, it can cover the losses of 9 other projects going down to zero in price.
In our above example we notice that in January 2020 our $1800 investment from January 2019 is worth only $1699, a loss of 5.61%.
We carry the same portfolio investment strategy into 2020 by investing into the projects that are new into the top 30 while holding onto the projects invested in 2018 and 2019 respectively
We invest in 9 new projects in January 2020 and hold them till January 2021.
We can see below that our 2020 investments have performed better in their first year compared to the first year performance our 2018 and 2019 investments.
Our $900 investment is worth $1573 in January 2021, a return of 74.77%.
A similar investment for January 2021 in the new entrants to the top 30 projects is shown below:
Now on May 31st, 2021 we try to see how the asymmetric nature of crypto investment helps us to capture more of the upside and limit our potential losses.
The image below shows our January 2019 investment held up-to May 31st , 2021:
The $1800 invested in January 2019 , which was at a slight loss in January 2020 has spiked up in value to $29305.76 by May 31, 2021.
All 18 projects are in the green even though 8 of those projects have dropped out of the top 30 project category from January 2019. the returns on the $1800 investment is a whopping 1528.09% (15.28x returns)
The 2020 investment returns is shown below. The $900 returns $3299 ( 266.55%)
So how does our overall investment from 2018 look?
As of May 31, 2021 we are holding 45 projects. One could argue that every year we should have rebalanced our portfolio by selling out the projects that dropped out of the top 30 and investing that money in the top 30 projects. Such an investment approach doesn’t take into nature the asymmetric returns that crypto can provide.
Take for example 2 projects from 2019 , Waves and Zilliqa. From a purchase price of $3.21 and $0.02171 in January 2019 respectively, they fell to $0.8918 and $0.004643 in January 2020.
They came roaring back and on May 31st, 2021 they were $13.05 and $0.1127 an overall return of 306.54% and 419.11%. Selling them off at the lower prices in January 2020 wouldn’t have allowed up to capture these profits.
In our 2020 purchases we see 2 tokens 999 and Mindol which have losses of 100% and 86.71% respectively. The asymmetric nature of crypto shines through here. Since we invested only $100 in each of those projects and those losses wouldn’t hurt the overall portfolio where there are 40+ other projects that can cover this $200 overall loss on the upside.
So overall our portfolio expansion strategy returns are as follows
The Asymmetric nature of crypto helps investors capture higher profits during a bull run and limit the losses in individual projects during a bear run
- A buy and Hold strategy for Crypto might not be the best option like that in the stock markets
- Crypto is an Asymmetric investment class and spreading investments across multiple projects can provide good returns over the long run through a passive buy and hold strategy.
- Portfolio expansion (holding onto losing projects and investing in winning projects) should be attempted rather than portfolio rebalancing (selling losing projects and investing that money in winning projects)
This article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
1. S&P historical returns from https://finance.yahoo.com
2. Gold historical prices /https://www.gold.org/goldhub/data/gold-price
All token prices historical and May 31st, 2021 are picked up from www.Coinmarketcap.com
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