As the cryptocurrency space, especially Bitcoin, generates more attention from the participation of “traditional” institutional investors, a perennial question among crypto-savvy investors and traders pops up: Bitcoin or altcoins? Is the fabled “altcoin season” coming after the strong performance of Bitcoin in Q4 2020?
This article summarizes the performance and risk statistics of Bitcoin and the top altcoins. The top altcoins are selected based on ranking on CoinMarketCap and these are the four main categories that we considered for our analysis:
- Platform: ETH, DOT, ADA, XLM, EOS, TRX, XTZ, XEM, NEO, ATOM, VET, MIOTA
- Fast Payment: XRP, CRO, DASH
- BTC Fork: BCH, LTC, BSV,
- Exchange: BNB, LEO, UNI, HT
While Bitcoin has enjoyed a very strong performance in Q4 thus far, especially with Square’s and PayPal’s announcements in October and breaking key historical price resistance levels in early to mid-November, its Q4 and year-to-date performance still trails the top “Platform” and “Fast Payment” altcoins.
Many of the top platform altcoins showed strong performance throughout Q2 and Q3 this year during the “DeFi summer wave.” Although there were corrections in September and October, prices of these altcoins have had strong upside moves, tracking the bullish sentiment seen in Bitcoin.
BTC forks and exchange tokens have generally underperformed the overall market. BTC forks did not benefit from the DeFi wave much, and the market attention for Bitcoin also has not spread to these projects yet. Exchange tokens have also not been able to benefit as much from the strong trading volume generated from exciting market volatility and movements this year yet.
As we are heading towards the end of this eventful (and very volatile) year, and with Bitcoin hogging the spotlight, it might be wise to pay some attention to any potential profit-taking for other platform or fast payment tokens, or if BTC forks and exchange tokens see a sudden surge in buying interest.
As shown in the above chart, Chainlink (LINK) has hugely outperformed all other assets including Ethereum and Bitcoin YTD, and at one point reached more than 10x its price from the start of the year. Bitcoin’s YTD performance pales on a relative basis compared to these assets, but because of its mainstream recognition and much heftier market capitalization, its halving in May and performance in Q4 allows it to hog the limelight.
Other than performance, it is equally important to understand the risks involved in investing in Bitcoin versus altcoins. Here, we summarize the frequencies of these assets drawing down a minimum of -2.5% and -5.0% at the daily close (00:00:00 UTC):
According to this simple metric for measuring risk, Bitcoin stands out as significantly less risky than the majority of altcoins. Especially for platform projects like Ethereum, there were visibly more of 2.5% and 5% daily drawdowns than Bitcoin, or other categories like fast payment tokens, BTC fork tokens and exchange tokens.
Overall, considering the YTD return altogether, it appears that Bitcoin is potentially a better investment this year with a competitive level of return while having lower number of significant daily drawdowns.
The maximum drawdown data for Bitcoin and altcoins for year-to-date and the past six months are as follows:
Note that Polkadot was officially launched for trading in late August, hence its YTD data does not include the market-wide plummet in March.
Looking at the data from the past 6 months, Bitcoin has been significantly less risky than all these altcoins except for UNUS SED LEO.
Dollar-cost-averaging, or DCA, is a strategy that involves the periodic purchase of an asset using the same dollar value over time, as opposed to a lump-sum purchase. For example, if Alice decides to invest a total of $26,000 into Bitcoin, she can make the whole investment at once. However, if she is concerned that short term market movements will impact the value of her investment, she can invest $500 every Monday for 52 consecutive weeks. The key to this strategy is committing to purchasing a fixed dollar sum at a fixed interval, regardless of price!
This strategy has long been advocated by investing legend Warren Buffett for navigating volatile markets. It reduces the exposure of short-term price risk of entering at the “wrong time” for an asset that has long-term appreciation potential. Timing the market is a difficult, if not impossible, task and it’s too time-consuming to study the short-term market movements for most investors. This is where a DCA strategy can help investors avoid missing out on investing in an asset which has high short-term price volatility but great long-term value-appreciation potential.
Here, we compare the results of DCA investing in Bitcoin versus Ethereum as the top altcoin for $500 per Monday in the past 26 & 52 weeks respectively:
The above charts show that employing a DCA strategy over the past 52 Mondays would have generated a handsome return of 93% and 143% if invested in Bitcoin and Ethereum respectively; for the past 26 Mondays, it would have generated a return of 59% and 64% from Bitcoin and Ethereum respectively.
The performance of employing this strategy on Ethereum generally appears to outperform the same strategy on Bitcoin. With Bitcoin and Ethereum generating YTD return of 146% and 312% respectively, this is hardly surprising. The key for employing the DCA strategy should be picking projects that you think it would have a long-term price appreciation, rather than just short-term fluctuations and gains; in this case, both Bitcoin and Ethereum seem to fit the description.
Next, we compare the volatility data of Bitcoin and various altcoins in the past 6 months:
Based on a rolling 30-day realized volatility in the past six months, our data shows that Bitcoin has been consistently less volatile (risky) compared to the averages of various categories. When compared to selected top altcoins, Bitcoin has only start to be more volatile than some of them since early November when Bitcoin’s price started to surge.
Hopefully, this article will help you understand more about the return and risk involved in investing in Bitcoin versus other altcoins! As it shows, unless one has a strong conviction in a particular altcoin like Chainlink, Bitcoin might offer a superior balance between the risk and return.
(All data as of Nov. 28, 2020)