introduction
A falling stock market is not bad for everybody. Of course, many investors lose out when their portfolios decline in value, but those that are only starting out investing or are underweight stocks can profit from lower valuations, which are likely to deliver higher returns in the long term.
Of course, the stock markets don’t fall for no reason. When the economic environment changes, expectations also change. The positive feedback loop that results in rising valuations eventually reverses course and becomes negative. But in some unspecified time in the future economic and business conditions stabilize and valuations fall enough to draw latest investors and lure old ones back. For example, corporations with countercyclical business models can increase their attractiveness by increasing their dividend payments.
However, not all securities markets have the identical dynamics because the stock markets. For example, the Italian lira steadily lost value against the German mark for a long time before each currencies merged into the euro, and currencies can turn into virtually worthless if hyperinflation sets in.
So what about cryptocurrency tokens? Critics have long raised concerns about their intrinsic value, or lack thereof, and that shouldn’t be the case seem like a relationship between the worth of a token and the product for which it is meant to function a medium of exchange.
However, with nearly 10,000 cryptocurrencies available, security selection should matter. So, right? Can token pickers display differentiated performance?
Probability of earning profits with cryptocurrencies
One of the more profitable approaches to cryptocurrency is to take a position within the private seed round of a startup in search of token funding. The early price tends to be heavily discounted in comparison with the general public selling price, which is comparable to investing before the IPO.
But More than 4 out of 5 tokens are trading below Their initial trading price, in keeping with an evaluation of nearly 10,000 cryptocurrencies by Jackdaw Capital, a London-based asset manager.
Crypto Tokens: Current Price vs. Initial Trading Price
Types of tokens
Such possibilities – lower than 20% that a token traded on an exchange will eclipse its original listing price – make investing in tokens difficult. However, there are several types of tokens. Some categories could still offer investors the prospect of attractive returns through security selection.
To discover, we created a universe of the greater than 3,500 tokens traded today and divided them into 17 categories. The largest category – non-fungible tokens (NFT) and collectibles – had 585 components, while the smallest – Move to Earn – only had 19. These token variants represent different crypto products that must be relatively uncorrelated.
Token Types: By Numbers
Token performance
Next, we created equally weighted indices for every of the 17 token categories. Most of our categories only have just a few years of trading history, but NFTs and masternodes date back to 2013 and have a track record of virtually a decade.
Most of those indices performed so unusually well that we would have liked a logarithmic scale to measure them. This explains quite a lot of crypto’s appeal: the potential for a 1,000% annual return is difficult to withstand.
Token performance by type
Cryptocurrency volatility
But the crypto market has experienced a difficult phase in the previous couple of months. Its total market cap fell from nearly $3 trillion to lower than $1 trillion, while Bitcoin fell from an all-time high of $69,000 in November 2021 to $20,000 as of this writing.
Still, the protocol charts barely register the cryptocurrency crash of 2022 because token indices use mean return and equal weighting for index calculations. The tokens had such a high positive skew that the common return increased significantly greater than it decreased. For example, in 2013, Terracoin (TRC) rose from $52 to $2,535 in only just a few days. The maximum a token can lose is 100%, however the uptrend could possibly be parabolic.
Cryptocurrency Volatility: Performance of TRC
Token performance adjusted to reality
However, because the common investor cannot take part in every token sale, the median return shouldn’t be an accurate measure of the performance of a token index. Mean return is a greater metric. And it tells a totally different story.
All 17 token types have lost money for his or her investors because the indices were launched.
Performance between 2013 and 2018 – the height of the primary crypto bull market – was varied, despite only just a few tokens being traded. Some token types – governance, for instance – performed well in comparison with NFTs, for instance. However, a whole bunch of Initial Coin Offerings (ICOs) took place from 2017 to 2018. Many of those were speculative at best; others were pure scams.
Since 2018, all token variants have been constantly declining. Despite their different purposes and supposed business models, all sorts of tokens have followed the identical downward trend. This signifies that the alternative of security doesn’t matter within the crypto space.
Furthermore, our universe consists of tokens which are still being traded and subsequently has a certain survival orientation. So the returns are barely overstated, which makes the outlook much more negative.
Token performance by type: Medium return
Inflationary vs. deflationary tokens
But perhaps these declining results aren’t as bad as they appear. What happens if we differentiate between cryptocurrencies with limited supply, like Bitcoin, and people like Ethereum, which don’t have any supply limits? Bitcoin and other tokens with limited supply could have a deflationary effect, especially if the issuer buys back tokens, while unlimited tokens could have an inflationary effect as an increasing number of tokens put downward pressure on the token price.
We divided the 550 DeFi tokens in our universe in keeping with these principles and located little difference between these two varieties between 2018 and today. The supposedly deflationary tokens with limited supply actually performed worse.
DeFi Token Performance: Limited vs. Unlimited Token Supply
More thoughts
Fund managers find it difficult to create value through security selection in stocks and other traditional markets. The alpha generation has been low to negative in recent a long time. In theory, the brand new and sophisticated world of cryptocurrencies should present quite a few information asymmetries for classy investors to use.
But unfortunately theory and reality often collide within the investment world. All token types exhibit the identical negative performance trends, making the safety selection environment difficult.
The average cryptocurrency hedge fund manager offers nothing greater than contact with Bitcoin. Investors can replicate such exposure themselves efficiently and cost-effectively through exchange-traded funds (ETFs).
The latest world looks very much like the old world.
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Photo credit: ©Getty Images / Nawadoln Siributr / EyeEm
