Analyzing a decade worth of crypto data to identify future moonshots

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Buying BTC at $1. Going up 37,000% with Dogecoin. Buying $8,000 worth of Shiba Inu and having enough money to buy Guam a year later… We all dream of finding the next great crypto project early and riding it to financial freedom. But for every coin that moons there’s a thousand more that go to $0. The odds aren’t in our favor. Is there anything we can do to identify moonshots before they take off? That’s the question that led me to comb through nearly a decade of data and build an automated crypto fund to give me the best chance of riding the next crypto rocket to the moon.

Data and Methodology

All the data used below was pulled from coinmarketcap.com. Their data goes back as far as Jan 1st of 2014. At that time there were 67 coins listed on the site. Today there are over 10,000. To keep our strategy straightforward we focused on the top 100 coins, comparing the top 10 to the next 90.

95% of the entire crypto market cap is held by the top 10 coins. They’ll serve as our benchmark, “blue-chip” allocation. The next 90 coins will serve as our “potential moonshots” portfolio. We’re focusing on the top 100 coins because with hundreds of new coins launching every day it’s nearly impossible to do proper due diligence on the entire market. Over time we’ll vet more projects and expand the scope of our moonshot finder.

Results

Before we jump into the calculations, it’s interesting to see how the crypto market has changed over the years.

https://preview.redd.it/pwj29tdor2291.png?width=1236&format=png&auto=webp&s=e6982003cc1bbc14a3b9fb2645384afe5ae7467c

To answer our initial question, whether it’s better to invest in the top coins or spread your bets among smaller coins in hopes of a moonshot, we’ll create an equal-weighted index. We’ll track two hypothetical investors who begin investing in crypto in 2014. One index, Top 10, will always hold the top 10 coins by market cap. The other, Next 90, will hold the next 90 biggest coins by market cap.

Here’s how our investors did:

https://preview.redd.it/y1gjv26rr2291.png?width=1262&format=png&auto=webp&s=343a815c7851c06d3c777157aeaa73a856891569

Returns shown here are till Jan 1st, 2022

There you have it! Our Top 10 portfolio significantly outperforms a portfolio comprising the next 90 coins. The Top 10 portfolio returned 5x more than the Next 90, and performed 2x better than Bitcoin alone.

Survival is Key

Warren Buffett has two rules for investing:

Never lose money. Never forget rule #1.

The underperformance of the Next 90 index came down to breaking Warren Buffet’s rules. As the chart below shows, the Next 90 fund saw significantly more coins go to $0, and those losses were too much to overcome. The probability of survival of a coin is extremely skewed towards the top 10 currencies. As you can see, over 80% of the top 10 coins from 2014 are still in existence today compared to only 26% of the Next 90.

https://preview.redd.it/8on4gf9tr2291.png?width=1270&format=png&auto=webp&s=1e3ef8ed9cbea57868c8c2cbfba3140aa4617fdc

Moonshots

Now we come to the million dollar question. What are our chances of actually hitting a moonshot in our indexes? For this test we’ve defined a moonshot as a 100x, or 10,000% return.

https://preview.redd.it/fd3fm9fvr2291.png?width=836&format=png&auto=webp&s=c9d994592a17473e075457679072c05a6ccc21f5

Surprisingly, your chances of hitting a moonshot were much higher following the top 10 strategy! Overall we had a 1 in 10 chance of hitting a 100x return with the Top 10 index, and only a 1 in 30 chance with the Next 90 index.

The above chart also shows another interesting stat → Out of the 500+ cryptos that we analyzed, less than 4% of them ended up becoming a moonshot. Think about that for a min – Of all the cryptos you are likely to hear about (as there is very less coverage if it’s not in the top 100), only 3-4% of them end up giving you those insane returns. You have similar chances betting on a single number on the Roulette wheel.

https://preview.redd.it/w398w3uwr2291.png?width=796&format=png&auto=webp&s=b63198ee04133b2281cee4b3a68a6e24cfec33be

As you can see, of all our moonshots, Ethereum investment in 2016 ended up returning the most at a whopping 397,548%!

Limitations

It’s important to understand the limitations of the current analysis before trying to replicate it.

Data – As I discussed earlier, all the data is from coinmarketcap and I have assumed a coin is dead if it’s not listed in the following year’s data. This analysis is only as strong as the quality of input data. I have done extensive QCs but feel free to play around with the raw data to see if I missed something. Base Effect – The market is considerably different now than it was in 2015-17. There is more awareness as well as penetration. So the future growth might not be as explosive as the one that we observed in the past decade, so you should be realistic about your return potential Intra Year Returns – The current analysis only considers returns based on Jan 1st of every year starting from 2014. If we pick another date within the year, we might get slightly different results as there might have been ATHs and ATLs within the year which we are not capturing.

Conclusion

I started this analysis thinking that investing in lesser-known, low market cap coins would provide better returns. But, we can’t deny the data. In the case of crypto it’s much more profitable to invest in the top currencies.

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