Beating Bitcoin

Many digital asset investors benchmark themselves to bitcoin, at least psychologically. Whether or not bitcoin is the right benchmark, it has certainly been a tough one to beat over the last few years — so tough that some market participants seem ready to throw in the towel on alts. But has bitcoin always been this tough to beat?

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We reviewed data going back to 2019 for the top 150 tokens by market cap (excluding memecoins and with a minimum volume requirement on major CEXs) to see what it took to beat bitcoin over the years. We picked the top 150 tokens as a starting point to illustrate the universe of tokens that a manager of a liquid token strategy, with some liquidity considerations and reasonable AUM, may realistically evaluate. Note that until late 2020, there were fewer than 150 tokens that met these requirements (on account of the liquidity filter).

With this universe in mind, we examined how many tokens in the top 150, on any given day, outperformed bitcoin over the next year. At certain points in 2019 and 2020, it seems like beating bitcoin was easy, with many tokens beating it by a wide margin (north of 1000% over bitcoin’s own generally stellar return, on average). What’s more, it used to not require too much exploration out of the scale of market cap to find the tokens beating bitcoin, with an average market cap rank of the outperformers of ~30 pre-2020.

Post-2021, the picture is different. Only 10-20% of the top 150 have beaten bitcoin in any 365 day period over the last few years, with average outperformance vs bitcoin also moderating to around +100%. The average market cap rank of tokens beating bitcoin over the last few years has also drifted higher — oscillating around the 60-80 rank mark.

What does this tell us? For one, it is clear that capturing the winners takes considerable skill — perhaps more so now than it did 5 years ago. The cryptocurrency market has evolved since the heady days of easy monetary policy, with tangible results now expected to accompany the vision of growing crypto projects. Still, the figures suggest that selecting just a handful of high conviction names could leave an investor with low odds of beating bitcoin.

It is also clear that smaller projects continue to hold significant potential, and that even though the crypto market has matured, performance for the top names, even in a liquidity and size constrained universe, is still significant (>100% over bitcoin).

These points suggest that returns in crypto markets today largely follow a power law type distribution, with a handful of outperformers capable of driving an overall positive result for a portfolio. To this end, diversification still seems underappreciated by investors in the liquid token space. Still largely a collection of start-up stage companies, investors could benefit from adopting VC-style approaches to diversification, while reaping the benefits of the liquid secondary market. Alts have a bright future, but it won’t mean investing will be easy.

Disclosure: The information herein is for general information purposes only and is not investment advice. An investment involves a high degree of risk. Past performance is not necessarily indicative of future results. Please see Outerlands Capital terms & conditions.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.