Outperforming Bitcoin

Crypto Market: Power Law Distribution Drives Portfolio Results, Says Felician Stratmann

The performance of the cryptocurrency market today follows a power law distribution, where a small number of top-performing assets can dramatically impact overall portfolio returns, according to Felician Stratmann.

For many digital asset investors, Bitcoin is the de facto benchmark, whether they intend to compare themselves to it or not. While Bitcoin has proven a tough benchmark in recent years, its dominance has been hard to beat—leading some market participants to consider giving up on altcoins altogether. But has Bitcoin always been this challenging to outperform?

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To explore Bitcoin’s performance relative to the broader market, we examined data from the top 150 tokens by market capitalization (excluding memecoins, with volume thresholds on major centralized exchanges) from 2019 onward. The top 150 tokens were selected to represent a pool of digital assets that a fund manager, considering liquidity and reasonable AUM, would likely evaluate. It’s important to note that fewer than 150 tokens met these liquidity criteria prior to late 2020.

Performance Analysis: Beating Bitcoin

We examined how many tokens within the top 150 managed to outperform Bitcoin in any given 365-day period. In 2019 and 2020, it was easier for tokens to outperform Bitcoin by significant margins—sometimes even more than 1000% above Bitcoin’s already strong returns. Additionally, outperforming tokens were often ranked relatively close to Bitcoin in market capitalization, typically averaging a rank of around 30 before 2020.

But the landscape has shifted post-2021. Over the last few years, only 10-20% of the top 150 tokens have managed to outperform Bitcoin over any given 365-day period. The average outperformance has also moderated, averaging around +100%. Moreover, the market cap ranking of the outperforming tokens has drifted higher, now hovering between the 60-80 range.

Key Insights

This data reveals a couple of key takeaways: First, beating Bitcoin today requires greater skill than it did in the past. The market has matured, and investors now expect concrete results to back the lofty visions of growing crypto projects. Selecting high-conviction tokens that can surpass Bitcoin’s performance is increasingly difficult.

However, despite this maturation, smaller projects continue to offer significant growth potential. Even in a more liquid and size-constrained market, top assets can still outperform Bitcoin by more than 100%.

This data suggests that returns in the crypto market today largely follow a power law distribution, where a small group of standout performers can lead to significant positive portfolio returns. Yet, diversification remains an underutilized strategy in the liquid token space. Many projects in crypto are still in their startup phase, and adopting a venture capital-style approach to diversification could yield promising rewards.

The altcoin market still has substantial upside, but success in this space will require careful selection, as outperformance is never guaranteed.

Disclosure: This article is for general informational purposes only and does not provide investment advice. All investments carry risk, and past performance is not indicative of future results. Please refer to Outerlands Capital’s terms and conditions.

Note: The views expressed here are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its affiliates.