Key Points
- While a falling stock market can benefit new or underweight investors, not all securities markets exhibit the same dynamic as equities.
- Crypto tokens have long been debated for their lack of intrinsic value and the disconnect between their price and the product they are meant to represent.
- Security selection does not seem to make a difference in the performance of crypto tokens, as the majority of them trade below their initial listing price.
- There are different categories of crypto tokens, but all have shown negative performance trends, indicating that security selection is challenging in the crypto space.
- Crypto tokens with limited supply do not necessarily perform better than those with unlimited supply.
- Crypto hedge funds and managers have struggled to outperform bitcoin, making it more efficient for investors to replicate exposure to bitcoin through ETFs.
- Overall, the performance of crypto tokens shows similarities to traditional markets, indicating that the new world of cryptocurrencies is not as different as initially perceived.
Introduction
While a falling stock market can benefit new or underweight investors, not all securities markets exhibit the same dynamic as equities. The performance of crypto tokens, in particular, has been a subject of debate due to their lack of intrinsic value and the disconnect between their price and the product they are meant to represent. Critics have long raised concerns about the viability of these tokens, and the question arises: does security selection make a difference in the performance of crypto tokens?
Probability of Making Money in Cryptocurrencies
Investing in the private seed round of a start-up seeking token financing can be a profitable approach to cryptocurrencies. However, more than four out of five tokens trade below their initial trading price, according to an analysis of nearly 10,000 cryptocurrencies. This indicates that security selection in the crypto space is challenging and does not guarantee positive returns.
Types of Tokens
To understand the potential differences in performance based on security selection, a universe of more than 3,500 tokens was divided into 17 categories. These categories represent different crypto products that should be relatively uncorrelated. However, the majority of these tokens have shown negative performance trends, suggesting that security selection may not matter significantly in the crypto space.
Token Performance
Equal-weighted indices were created for each of the 17 token categories to assess their performance. Most of these indices have generated abnormally high performance, but it’s important to note that these performance figures are based on a logarithmic scale. While the potential for high returns may be tempting, it does not guarantee consistent positive performance.
Cryptocurrency Volatility
The recent cryptocurrency market decline has highlighted the volatility of crypto tokens. However, token indices using mean return and equal weighting calculations do not fully capture the extent of the decline. Tokens have exhibited a high positive skew, with potential for significant gains but also the possibility of substantial losses.
Token Performance Adjusted for Reality
Since the average investor cannot participate in every token sale, the median return is a better metric to assess token index performance. And unfortunately, all 17 token types have shown negative returns for their investors. This indicates that security selection does not matter significantly in the crypto space, as all types of tokens have followed the same downward trajectory.
Inflationary vs. Deflationary Tokens
There has been speculation about the performance of crypto tokens with limited supply versus those with unlimited supply. However, the analysis shows little difference between these two varieties in terms of performance. Limited-supply tokens actually performed worse, debunking the notion that they have a deflationary effect.
Further Thoughts
While theory suggests that information asymmetries in the crypto space can be exploited for alpha generation, the reality is that security selection has not proven to be successful for crypto hedge funds and managers. Their performance has been comparable to simply holding bitcoin, making it more efficient for investors to replicate exposure to bitcoin through ETFs. This indicates that the new world of cryptocurrencies may not be as different from traditional markets as initially thought.
