Does cryptocurrency offer higher average returns than the S’porean stock market?

Volatility is a trademark of the crypto space, but can a diverse portfolio guarantee better results than the stock market?

Does cryptocurrency offer higher average returns than the S’porean stock market?

An index ETF tracks the performance of a segment in a financial market. It’s made up of a portfolio of stocks and allows investors to diversify their holdings across them. In theory, this reduces market risk.

Future returns aren’t dependant on the performance of any one company, but rather, the market segment as a whole.

At the start of 2021, Twitter user @TenIndex followed this principle while investing in cryptocurrency. On January 1, he invested US$100 into each of the top ten traded cryptocurrencies at the time. He then left the investment untouched for the entire year.

The idea behind this experiment was to see if passively investing in cryptocurrency would yield higher returns than the stock market.

What happened to the investment?

At the end of 2021, TenIndex recorded a net gain of 292 per cent on his initial investment. His portfolio of US$1,000 was now worth US$3,921.

Nine of the coins which he had invested in recorded net gains individually as well. Tether (USDT) was the only odd one out of the bunch.

Being a stablecoin, Tether’s value is tied to that of the US dollar. Thus, its very purpose is to be worth US$1 per coin.

crypto index fund etfThe change in value to TenIndex’s portfolio over the course of 2021 / Image Credit: TenIndex

The highest gainer in TenIndex’s portfolio was Binance Coin, which went up over 1,200 per cent in value. Ethereum, Ripple, Polkadot and Cardano all recorded three-figure percentage gains as well.

Litecoin and Bitcoin Cash (a derivative of Bitcoin) were the worst performers, only recording gains of 16 and 26 per cent respectively.

How does this compare to Singapore-listed index ETFs?

The Straits Times Index (STI) ETF is often recommended as a safe and smart investment for beginner investors in Singapore. It tracks the performance of the top 30 companies listed on the Singapore Exchange, including firms such as Singapore Airlines, ComfortDelGro, DBS Bank, and Singtel.

In 2021, the value of the STI ETF rose by around 10.3 per cent. This means a US$1,000 investment at the start of the year would’ve been worth US$1,103 by the end.

It is also worth noting that the STI ETF is a weighted index. Investments aren’t split equally across all 30 companies on the index. In fact, DBS, OCBC, and UOB make up almost 44 per cent of the weight.

cryptocurrency vs stock marketThe annual return on USD1000 invested at the start of 2021

Most other ETFs listed on SGX track indexes from other markets around the world.

Last year, one of the best performers among these ETFs was the SDPR S&P500. It tracks the S&P500, which is a gauge of the top 500 publicly traded companies in the US stock market.

A US$1,000 dollar investment in this ETF would have turned to around US$1,265 over the course of 2021. In other words, a return of around 26.5 per cent.

This return was far above the standard for the S&P500. Over the past 50 years, the index’s value has grown at an average of 10.83 per cent.

Does this mean cryptocurrency is the way to go?

Not necessarily. It simply means that the crypto market performed incredibly well in 2021.

After all, investing in any of the top ten cryptocurrencies (apart from Tether) would’ve guaranteed a profit over the course of the year.

For a more convincing argument, it’s important to look at a larger sample of historical data. Thankfully, TenIndex has been investing US$100 into the top 10 cryptocurrencies (at the time) every year since 2018.

In 2018, the value of his portfolio dropped from US$1,000 to US$151 — an 84 per cent loss as compared to a 6.2 per cent loss on the S&P500. It’s worth noting though, that entering the crypto market at the start of 2018 meant buying into all-time highs.

In 2019, TenIndex’s portfolio recorded a gain of two per cent and was worth US$1,017 at the end of the year. The S&P500 went up 29 per cent that year.

Finally, in 2020, TenIndex’s portfolio went from US$1,000 from US$2,394.70 — a 139.47 per cent increase as compared to the S&P500’s 16 per cent.

How risky is a crypto index fund investment?

Cryptocurrency can be incredibly volatile, however reading into these results at face value might not tell the entire truth.

crypto s&P500The ROI on all four of TenIndex’s index fund portfolios combined, as compared to the same amounts invested in the S&P500 / Image Credit: TenIndex

Although TenIndex’s 2018 portfolio was worth US$151 at the end of the year, its value had shot back up to US$1,341 by the end of 2021. His 2019 portfolio would be worth around US$6,000 today as well.

This experiment doesn’t necessarily prove that passive investing in cryptocurrency is a safe bet, even in the form of an index fund. However, it does offer ways through which a crypto portfolio can be made less risky.

For example, leaving Tether aside, five out of the top 10 cryptocurrencies in 2018 were still in the top 10 in 2021. Four of them — Bitcoin, Ethereum, Ripple, and Bitcoin Cash — never left the top 10 over the course of all four years.

Investing in projects which have proven their longevity in this volatile space could be one of the strategies to a safer portfolio.

For those interested in finding out more, TenIndex posts monthly updates about all his index portfolios on his blog. Although there are no objective conclusions to be drawn here, these findings can help inform a wiser investment strategy for new and existing holders alike.

Featured Image Credit: CoinGeek