What if you bought $100 of all of the top cryptocurrencies?
Constructing an equally-weighted crypto index (plus, the single worst investment of 2021)
I’ve been hearing about some viral YouTube videos and Tweets where some crypto memelord goes onto some crypto exchange and buys, say, $100 of every single cryptocurrency they can find. I think these are often intended as a sort of stunt to see if they can grab the next coin that’s going to “moon,” but I asked myself: would this actually be a smart crypto investment strategy?
It’s particularly interesting to me because this approach — buying an equal amount of every asset on the market — is effectively an equally-weighted market index, which you see in the traditional stock market. (In an equally-weighted S&P 500 index, for instance, you’d give each of the top 500 stocks a 0.2% weighting, instead of weighting the highest-market-cap stocks more.) Given that we constructed a market-cap-weighted index for crypto last time, I got thinking about what an equally-weighted index for crypto would look like.
The theory behind equal-weighted indices
Equal-weighted index funds are nowhere near as common as market-cap-weighted indices, but they still exist. In theory, there are a handful of benefits to weighting each asset equally instead of giving extra weight to the biggest ones:
Equal-weighted funds give you more exposure to smaller and undervalued assets, which have a lot of room to grow. Meanwhile, market-cap-weighted funds make you focus on the top assets (which might be overvalued and therefore likely to decline).
Equal-weighted funds are more diversified. With market-cap-weighted funds, you’re overly-exposed to whatever market segment happens to be hot right now, such as big tech.
The big downside1 of equal-weighted funds, though, is that you’re highly-exposed to smaller companies that might not be as sturdy. If a market downturn comes, those might lose a lot more value than the blue-chip big stocks that dominate market-cap-weighted indices.
I figured these two beasts would behave very differently, but to my surprise the normal market-cap-weighted S&P 500 and the equal-weighted S&P 500 have historically been highly correlated:
However, it appears that the equal-weighted version has consistently underperformed the normal version. The same trend seems to hold with the NASDAQ 100 index.
Let’s build our equal-weighted crypto index
OK, that’s enough theory; let’s build our equal-weighted crypto index and compare it to the market-cap-weighted index we made last time (nicknamed the Moon & Rug Index).
The big-picture methodology was to pretend you’d bought an equal amount (we can suppose $100 each, but it doesn’t really matter) of each of the top N cryptocurrencies on January 1st, 2021, and then see how well your portfolio would have done by December 31st, 2021.
CoinGecko doesn’t directly show you which coins were the top ones on a given date in the past, so we have to guess and check, in a way. I grabbed the top 2500 coins on CoinGecko as of December 31st (a refinement on last time, when I only grabbed the top 500) and traced them back to January 1st, 2021. As usual, I discarded the stablecoins (like Tether) and derivative coins (like Wrapped Bitcoin).
Then I made some lists of the top 1, 2, 5, 10, 20, 50, and 100 coins on January 1st and divided a pot of simulated money among them.
(Note that this methodology only works if the coins that were in the top 100 back in last January are still among the top 2500 today; otherwise I’d miss some major losers. I think this is fine, because of all the coins I put in last January’s top 100, the lowest-rated one today is at #587. I think it’s highly unlikely that anything from the true top 100 back then fell all the way to #2501 or below. So I think my methodology is fine up to the top 100, but it might get shaky beyond the top 100, so I’m not going to look any further.)
Some colorful graphs
Anyway, I then computed the performance of each of these “baskets” over the year. I just divided the price of each coin on December 31st by the price on January 1st to figure out the returns.
We can see the performance of each basket on the below graphs, with our old friend the Moon & Rug 20 (a market-cap weighted index of the top 20 coins on any given day) as a comparison:
That’s a lot of lines, so here’s a simpler version with fewer baskets:
Analysis: looks like a decent investment
Looking at these graphs, a few things jump out:
The Moon & Rug index did pretty well over the year, growing by over 150%. But it was trounced by the equal-weighted baskets (besides the top-1-coin basket, which was just Bitcoin), with the top-50-coin basket returning 280% and the top-100-coin basket returning a jaw-dropping 540%. This indicates that, like we saw last time, smaller “altcoins” had a great year.
Before, we saw that the more coins you added to the Moon & Rug index, the better the performance. The pattern is murkier here. In terms of end-of-year performance, the ranking is Top-100 > Top-10 > Top-50 > Top-2 > Top-20 > Top-5 > Top-1, though the baskets traded places a lot throughout the year. This is probably an artifact of my arbitrary cutoff points and idiosyncratic features of the past year (in this case, #2 Ethereum was spectacular, while the coins ranked between 11 and 20 happened to do pretty badly). I wouldn’t read too much into this, though it still seems like adding more coins tends to be better.
You’re still at the mercy of the broader market. If you bought in at the peak of the early-2021 cycle (mid-May), you would have been in pretty much the same place, or even down a little, come the end of the year.
These baskets were quite volatile, though they tended to move together.
To unpack the last bullet, I compared the performance of each basket to the Moon & Rug 20:
The lines are still all over the place, but it appears that these baskets (besides the top-1-coin one) consistently outperformed the Moon & Rug 20 throughout the year, as indicated by each line staying relatively flat after a few months.
Unpacking the big winners
So far, these baskets look like a pretty decent investment: the Moon & Rug 20 index did great, and these did even better! And actually implementing this strategy would have been relatively easy: just buy the coins at the beginning of the year and sit on them.
The burning question I had, though, was one of where these impressive gains came from. Were most coins terrible and the investment only rescued by Dogecoin? (Spoiler alert: Dogecoin was “only” the 3rd-best performer, and Shiba Inu was in none of the baskets, since it was far from the top 100 lat January.) Or did all the coins grow in lockstep?
Below we can see a distribution of returns for each coin in the top 100:
I was expecting most coins to lose money, but it looks like just 8 of the top 100 did (and of these, 3 lost 10% or less). Most coins did very respectably, with 66 of the top 100 more than doubling (shown as a performance of 2+). As the caption mentioned, there were some big winners that really dragged the average up:
Note how many of these smash-hits were out of the top 50 on January 1st, 2021. This hints at why the top-100-coin basket did so well. But besides that, there’s no particular pattern as to why these coins were so successful — which is yet another reason why you should stop trying to pick winners and just buy the market.
The losers
If you’re curious, these were the worst performers:
I remember how buzzy some of these coins were last year! EOS was dubbed one of “the Ethereum killers™,” for instance. Again, don’t try to pick winners — you’re quite likely to be wrong!
But the absolute worst crypto investment of 2021 was…
While NEM had a bad year, it’s got nothing on what I think was the absolute worst investment of the year, crypto or otherwise:
This is the IRON Titanium token ($TITAN), a DeFi protocol that got a strong start, with its price rising from under $2 to an intraday peak of almost $65. But after a bank run of epic proportions, the price of $TITAN collapsed to $0.0000006, a loss of 99.9999999% in about two days. (The coin is still tradable, though, and I suppose the good news is that it’s up 20% in the last week. Yay?)
This was more of a humorous aside than anything else, but it goes to show: for every Shiba Inu-esque story out there, there’s probably a Titanium-esque story too, though the latter will probably get far less media attention. As always, don’t try to beat the market.
The takeaway: in theory, at least, a sound investment
With all this research under our belt, let’s go back to the original question: is trying to buy a little bit of every cryptocurrency on the market a good idea?
This strategy did better than the Moon & Rug market-cap-weighted index last year, though that’s no guarantee of future returns. If we’re being cautious, we might want to call this a wash — both strategies would probably do well enough in the coming years.
The difference-maker in my mind, though, is how simple this buy-’em-all strategy is, at least in theory. Just find the top coins, buy an even amount of each, and sit on your money, and you’ll get some nice exposure to crypto’s growth potential without the danger, hassle, or confusion of trying to pick the winners.
But! As they say:
In theory, theory and practice are the same. In practice, they are not.
Next time, we’re going to get ours hands dirty and try to buy (on paper, at least) as broad a coin portfolio as we can get. I suspect there are going to be a lot more fees, friction, rough UXes, and pitfalls than this clean and simple story lets on. There’s no one-stop-shop where you can get all of these for free, like we might have come to expect in the stock-market world of Vanguards and Robinhoods.
But that hacking-and-slashing through the crypto jungle will be for next time. Until then, thanks for reading.
Appendix: follow along at home
If you’d like, you can check out the data and code on my GitHub and the analysis on Google Sheets. It’s extremely rough, though, and not intended for public consumption. But I am the “open data” guy, after all, so have at it.
I haven’t touched on index rebalancing at all yet, but from what I hear it’s a pain with equal-weighted funds since you have to constantly sell assets that are growing and buy assets that are shrinking. That can add up to a lot of transaction fees and taxes.
Fab analysis, Neel.
To buy Crypto ETFs, you can look at Mudrex. They offers an easy way to invest in crypto baskets.