‘Hedge’ funds?

Well, originally the hedge in a hedge fund meant that risks were limited by having short positions in addition to the long ones, making the fund market neutral. This is not a common thing in these crypto funds, where they’re mostly long.

So what?

In this series I’ll analyze a particular type of fund where almost all of the data is publicly available: index funds. I will recreate the return on investment of investing into crypto index funds across the past 5 years (even when they didn’t exist yet) and compare that to buying bitcoin through that period.

TL;DR

2013–2015: Bitcoin’s ROI > Crypto index funds’ ROI

2015–2017: Bitcoin’s ROI < Crypto index funds’ ROI, but index funds didn’t exist yet, so ¯\_(ツ)_/¯ . Results highly influenced by Ethereum. What if we remove it from there? Stay tuned!

2017-…: 🤔. In this time Coinbase Index Fund and Bitwise HOLD10 Fund were launched. Would they have been a good option? Stay tuned too

What is an index fund?

They are funds that try to replicate the performance of a group of underlying assets. There are index funds that track the S&P 500, the DJIA…

This is the market that a crypto index fund would try to replicate. The classic sell line for index funds is an obvious one:

Less risk and volatility than if investing in a single asset

Exposure to a full market for a lower cost than buying each one of the assets individually.

In this post I analyze a simple recreation of crypto index funds using real data, with the following features:

A 2% annual fee

No rebalancing

No assets are excluded from the index.

Yeah let’s look at the data

Not all index funds include all of the assets and they normally rebalance the asset allocations they make over time. I will analyze these in a future post. Now, let’s see how this simple funds would have performed against Bitcoin.

As we have all the historic prices and market caps for each coin, it’s possible to recreate the performance over time of buying any one of them, or them all weighted by market cap (that is, an index fund), since any particular day until today. This is what I’ll do next.

First step: getting the data

Coinmarketcap offers historic price, volume and market cap of Bitcoin and other ~1600 coins. I created a Python script that crawled through them all and saved the market cap and the close price for each day from April 2013 until today.

This was the first and probably the last time we will hear about all these shitcoins

Then: computing the weight of each coin for each day

In an index fund, the allocation that is invested in each of the assets is proportional to the market cap of each asset relative to the sum of the market caps of all of the assets.

Weights of of the index funds in the first four days we have data from. Bananacoin didn’t exist yet

In our case, imagine that in a given day, Bitcoin’s market cap is $80B, Bananacoin’s is $15B, Dentacoin’s is $5B and those were the only coins in the market. So if we had $100K to invest, we’d buy $85K worth of Bitcoin, $15K worth of Bananacoin and $5K worth of Dentacoin

(Yeah, those coins do exist)

Next: calculating the performance of index funds and bitcoin

For each day, the weights that day are multiplied for the cumulative returns of each coin since that day until today. Then those values are summed and that final value is the performance of the index fund created on that day.

To calculate the performance of bitcoin since each one of the days is easier: we just have to multiply the price returns of bitcoins since that day until today to have the cumulative returns since each day.

After that, we have this. For a clearer visualization of the results, only a 1/60 of the analyzed investments are shown.