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Crypto-currency Index Funds, the simulations have surprising results

Bitcoin vs Index Portfolio of top 10 alt-coins. Bitcoin 4.6x vs Index 1.2x

This year, the idea of managed portfolios and index fund portfolios has been on the rise, you can bet on many hitting the market in 2017. It’s a popular idea borrowed from Wall Street. For stocks 99% of index funds, namely a fund that buys the entire market passively, outperform actively managed funds.

Sounds like a great idea for crypto-land right?

I’ve been running simulations in the alt-coin markets to see if this is true. If so it would be prudent to diversify across many alt-coins as a higher performance investment over Bitcoin.

The results are surprising.

The simulations.

This simulation spans 16th October 2013 through to today – exactly 3 years. Earlier than this, and you’ll find the alt-coin market was very undeveloped. My 3 year span happens to nicely capture the last bubble of 2013, the long bear market of 2014/15 and its subsequent recovery until today. This is great as it allows us to observe how indexes and bitcoin perform relative to each over in each scenario.

For all of my indexed portfolio simulations below, I rebalance them every 30 days to account for new comers into the list and old dropouts leaving.

Bitcoin vs The top 10 ranked alt-coins proportioned by marketcap

Bitcoin vs Index Portfolio of top 10 alt-coins. Bitcoin 4.6x vs Index 1.2x
Bitcoin 4.6x vs Index 1.2x

Bitcoin outperformed the alt-coin portfolio by 3.8x. Surprisingly during the 2013 bubble, alts performed even higher, but lost more ground in the bear market thereafter.

This pattern of alts having an edge in bull markets happened twice. I make out the bottom of the market was mid-May 2015, since that time alts recovered with a 3.8x rally (from 0.308x to 1.17x), while Bitcoin recovered with a 2.7x rally (from 1.68x to 4.56x).

For those interested here is the coins held each 30-day cycle denoting the top 10 alt-coins over the 3 years.

Top 10 alt-coin rankings over 3 years

Bitcoin vs The top 20 ranked alt-coins by proportioned marketcap

For those who want to see more coins in the portfolio, here’s the same simulation run across the top 20 alt-coins. The results are almost identical. (At this point I’ve had people say to me the numbers are wrong – trust me these numbers are correct).

Bitcoin vs top 20 alt-coins
Bitcoin 4.6x vs Index 1.2x

Bitcoin vs the 11th-20th ranked alt-coins by proportioned marketcap

To shake things up, here’s a portfolio with ten “small cap” alts ranked 11th through to 20th making up the index. The idea behind this one is to capture the coins that have more potential for growth and exiting once they graduate to the big leagues (or fade into oblivion).

These results were one of the more promising index allocations, the portfolio dropped less during the bear market and had impressive gains during bull markets, however bitcoin still won out with a 4.6x return vs 3.6x for the index which also exhibited more volatility.

Bitcoin vs alt-coins ranked 11th to 20th
Bitcoin 4.6x vs Index 3.6x

Bitcoin vs The top 20 ranked alt-coins by CAPPED marketcap proportion

Off the back of Iconomi’s ICO raising $10.6m USD, I wanted to simulate an index similar to their CTF offering. Iconomi use a 25% cap and a further mechanism of categories to distribute the allocations.

Here’s an index with a maximum allocation of 25% for any alt-coin in the basket. It will differ slightly from Iconomi’s fund, but likely their results will be a halfway point between these results and the last index simulation which uses equal allocation.

Ahem. Our first loss maker of 0.82x vs bitcoin’s 4.6x.

I may run their exact allocation through a simulation if I get enough requests (try me on Twitter).

Part of my beef with their investor whitepaper is they picked a bull market (since Jan 2016) to demonstrate their glam results, but here’s a simulation run through a bear market. It seriously underperforms the vanilla standard indexes above, and significantly underperforms Bitcoin. Nevertheless clients will unlikely notice this until our next bear market which is a while away.

Bitcoin 4.6x vs Index 0.82x


Bitcoin vs The top 20 ranked alt-coins allocated by EQUAL proportion

Going with the theme of more distributed allocation, this index proportions holdings equally at the start of each 30 day cycle. This one was a disaster with an abysmal 0.64x return (a significant loss).

Bitcoin vs top 20 alt-coins by equal allocation
Bitcoin 4.6x vs Index 0.64x


Bitcoin is really hard to beat with index funds, maybe unbeatable with the present state of alt-coins we have. Not only do they underperform Bitcoin by a significant amount, but as a combined basket their day to day volatility is higher.

I ask myself why we don’t parallel the stock market world where indexes are very successful and my conclusion is we are in a world of unvetted shitcoins. When a company goes IPO, it needs to mature for many years and must qualify under stringent SEC criteria. Not so in alt-coin land, they are like early stage startups who IPO immediately, but any angel investor will tell you they see a 99% failure rate of early stage startups.

There will be a bunch of alt-coin funds hitting the crypto investment world in this coming year. Having seen the data, I would take the index based approaches to fund investment with a decent grain of salt.

I have a lot of brain-farts on crypto-currency. For more farting, follow me on Twitter @dangermouse117

BTC Tips: 1KrYzd8y6gnJekibZpb4ixif4nJYbaaZct

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  1. Part of the problem here may be that you’re buying things after they rise, selling them after they drop. Unless prices exhibit a lot of momentum (risers keep rising), this is a recipe for steady losses.

    Here’s an alternative algo. Every time a coin enters the top 10 for the *first* time, sell enough of your most valuable holding(s) to reallocate, say, 1/40 of your capital to it. Never buy or sell otherwise.

    Eg, suppose when XMR first appears in the top 10 your fund’s value is $1m, with its top holdings BTC ($125k) and ETH ($110k). Then you would sell $20k of BTC and $5k of ETH (trimming both top holdings down to $105k) in order to buy $25k (2.5% of capital) worth of XMR.

    • The purpose of this study is to assess whether a passive Index Fund would work for alt-coins as it does for stock markets, not to develop a trading algorithm.

      • Jacob Eliosoff Jacob Eliosoff

        Well, the algorithm I described is passive and *any* index fund needs to use some rebalancing algorithm, but fair enough I guess…

  2. Phil Phil

    Not everyone was interested in alts at the same time. What if you changed the starting date of investment at each period ? Or at each major ICO ?

  3. Gautam Desai Gautam Desai

    Fantastic study. While I am blown away with the conclusions, I think there is still a role for crypto funds, if they are ACTIVELY MANAGED. Seems that robo-investment in an index style crypto fund is doomed for failure in today’s market. Active management could certainly change the formula. It’ll be interesting to see how this brave new world evolves. Thanks again for the fantastic work!

  4. Kalle Kalle

    Interesting. But the conclusion is incorrect. Saying “Apple is really hard to beat with index funds” might seem correct, but it would be stupid. And saying “Bitcoin is really hard to beat with index funds” is more stupid since it has a shorter history.

    One single asset should not be compared to index investing.

    • mmortal03 mmortal03

      Making an analogy between Apple and Bitcoin as single assets is flawed here, in the sense that Bitcoin not only did better, but it was also *less* volatile than the indexes it was being compared to.

    • Stephen Stephen

      This is actually correct. The point of index funds is to make sure, that you get the average return of the index. As it turns out, by allowing the index to rebalance itself passively actually helps you to beat the market in vast majority of the cases where you take more active approach, i.e. choose your investments yourself (or allow someone else choose them for you). Even index funds loose to top performers of the market with benefit of hindsight. This comparison really proves nothing about the validity of the alt-coin index funds.

  5. CL CL

    Yes, Time based analysis just proves what you want. Need a longer term time frame to determine if BTC is really better.

  6. MoveCrypto MoveCrypto

    Very interesting Read

    Mr. Woo arbitrarily included the top 10 or 20 altcoins, without doing any vetting to keep obvious losing picks or scams out of the indexes, like Paycoin, Auroracoin, Quark, Bytecoin, Worldcoin

    Quote from Iconomi:
    “The currency must have an underlying concept which ICONOMI estimates as viable in the long term.”

    ^^^That’s the reason why this eligibility factor for inclusion in iconomi.index is so important

    Quote from: Mr. Woo:
    “Part of my beef with their investor whitepaper is they picked a bull market (since Jan 2016) to demonstrate their glam results”

    Prior to 2016, the altcoin market was not mature enough for an index fund. The first 1.5 or 2 years of Willy Woo simulations was a time when complete scams or copy-paste shitcoins with hardly any team/community could pump up into the top 10 crypto market cap.

    Those days are in the past. Nowadays, I count at least 8 projects in the top 20 which have millions $ in the bank for development. This is a recent development since Ethereum hit exchanges in October 2015. During the first 1/2 or 2/3 of Willy Woo’s 3-year simulations, such altcoin projects did not yet exist.

    • I’m seeing comments like this pop up. They misunderstand the purpose of the study. It was intended to assess whether a PASSIVE fund without management works for alt-coins as it does on Wall Street. I still think alt-coin markets are still too immature for passive index funds, and are best left to shorter term trading strategies.

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