First, there was Bitcoin; then there was the crypto big bang that gave rise to the countless cryptocurrencies that we see today. Many of them seek to challenge Bitcoin with their technical structure and use case, and some managed to increase in value much faster than Bitcoin.
In this article, we look at how altcoins (alternative coins launched after the success of Bitcoin) have fared in comparison to Bitcoin. Similar to the article on Bitcoin versus the US and Singapore equity markets, we will use the Sharpe ratio to measure the altcoins.
The Sharpe ratio looks at the security’s excess returns over its volatility (standard deviation). Traditionally, we use government bond yields as the risk-free returns to subtract from the security’s raw returns to arrive at its excess returns.
However, in this case, because the default choice of most cryptocurrency investors is Bitcoin, we will use it as the benchmark to be subtracted from the altcoin’s raw return to arrive at its excess return. This way, we can easily interpret our results and identify the altcoins that have positive excess returns. We will call this modified Sharpe ratio BTCSharpe.
We derive our altcoins and Bitcoin data from CryptoCompare. There are 1947 coins marked as actively traded. We downloaded the entire history of price data for all the coins for our analysis. There were 1490 coins with data.
To see how things have evolved over time, we look at three time periods:
Let’s look at the top ten coins that have performed well versus Bitcoin.
(2011 Jan – 2018 Feb)
(2017 Feb – 2018 Feb)
|Coin Name||BTCSharpe||Coin Name||BTCSharpe||Coin Name||BTCSharpe|
All coins in the table have generated returns well over Bitcoin and are quite stable. The results for the year of 2017 is almost similar to the full period, with the only new token of CC (CyberCoin).
When we look at just this month, the list has completely changed, showing evidence that the crypto world is indeed a volatile one. The altcoins have also performed well over Bitcoin, perhaps due to the recent hammering of the most popular cryptocurrency.
In the full period, over 85% of altcoins outperformed Bitcoin. In the one year period, the number has fallen a little to 82%. By this month, only 45% of altcoins outperformed the Bitcoin. This is probably a sign of convergence to the coins with larger market capitalization, as the entire crypto market takes a beating.
Cryptocurrencies networks come to a consensus on every transaction made on its blockchain. The method at which they come to consensus is usually identified as their proof type. There are two main types of proof – Proof of Work (PoW) and Proof of Stake (PoS).
Bitcoin works through PoW, and that means your mining machine has to be the first in the entire blockchain to solve a series of complex mathematical equations to be awarded your reward.
Ethereum, on the other hand, has moved to the newer PoS where users will hold and lock up their Ether to validate ownership.
Within the 2 main types of proofing methods, there are more specific ones that differ from each other on how to prove their work or stake. Tokens can transit from one proof type to another as they progress in time, or involve both types of proofing.
Let’s look at how the proof types have fared regarding BTCSharpe.
(2011 Jan – 2018 Feb)
(2017 Feb – 2018 Feb)
|Proof Type||BTCSharpe||Proof Type||BTCSharpe||Proof Type||BTCSharpe|
|Proof of Work||0.38||Proof of Work||0.20||Proof of Work||-0.13|
|Proof of Stake||1.17||Proof of Stake||1.21||Proof of Stake||-2.77|
|Both / Others||0.68||Both / Others||0.82||Both / Others||1.08|
As we can see in the table, returns to Proof of Stake tokens have been high for the full period. It could be due to the fact that we are looking at BTCSharpe, with BTC a Proof of Work type, dominating the Proof of Work category.
In the one year period, Proof of Stake has increased its lead over Proof of Work. However, in the recent one month period, all cryptocurrencies took a beating and such a volatile market can be seen through their BTCSharpe – Proof of Stake tokens have a huge negative BTCSharpe compared to other proof types.
There are many ways to choose a coin to invest in, and we have shown here, the proof type differentiation can be a way to select multiple coins as a portfolio to guard against the wild movements of individual coins.