In 2020 I created an investing experiment to see if I can create an “all weather portfolio” that would beat S&P 500 index and Warrent Buffett’s Berkshire Hathaway.
It ended quite well after 7 months:
As you can see from results - I was able to outperform S&P 500 index and Warren Buffett’s Berkshire Hathaway ($BRK.B) mainly because of my decision to invest 40% in Bitcoin.
Investing in Bitcoin
Did I get lucky? Maybe, but if you check what returns can be produced by using a DCA strategy and investing in Bitcoin, there are not many things that can beat it.
For example, if someone had started investing in Bitcoin at one of worst possible times: 16.12.2017 when cost of 1 Bitcoin was $19 500 (and it was less than $1 000 at beginning of 2017), and used DCA approach - and invested $1000 in BTC each month up to today, results would be following:
It almost looks too good to be true:
In short - while in the first investing experiment I tried to beat S&P 500 and $BRK.B, the real challenge could be to outperform Bitcoin. Is it possible at all in longer term?
Can I beat Bitcoin?
I decided to create a new experiment and try to outperform Bitcoin. I am probably setting myself up for a failure, but still interested to try a new challenge and learn more about altcoin space.
So I've decided to invest $1 000 per week in following way:
$350 in Bitcoin
$150 in Ethereum
$500 in some other crypto currency
So after a while 50% of portfolio will consist of BTC and ETH - so called Blue Chip cryptocurrencies, and 50% of portfolio will consist of many so called “shitcoins”. If I don't run out of money and continue this experiment till end of year, I should have a portfolio of 50 different altcoins.
The goal is to find out over longer time period:
Can ETH outperform BTC? I am skeptical, but there are lot of ETH fans talking about possible flippening and people are paying lot of money to use ETH network, so it must be valuable.
Can I somehow pick 50 altcoins from ~10 000 in the market that outperform Bitcoin?
Even if I pick few high-performing altcoins, how does that translate to overall results of a larger crypto portfolio? Does diversification make any sense?
What about risks?
The biggest risk is picking up lot of altcoins that end up like this:
My hope is that even if most of altcoins perform very bad, then BTC and ETH should work as a hedge overall.
Of course, there is also a risk - that investing in crypto ends up as a bad idea in general, and for some reason (heavy regulation, stablecoins like Tether going to 0, etc.) all portfolio value underperforms S&P 500, $BRK.B or just holding cash, but I am not too worried about this and think that the longer I continue the experiment, the less likely that this risk will materialize.
At least in case of cash, it seems like even the most developed countries will do everything possible to print it like there is no tomorrow, and you can expect your USD or EUR to lose purchasing power over time just like most of crypto altcoins:
Portfolio: Week 1
I've made my first $1 000 investment today, and the altcoin of the week is $KP3R, you can read more about it here.
To track results of this experiment, I started using Coingecko portfolio function:
You can also use this link coingecko.com/en/portfolios/public/kristapsmors to view the same info, but without PNL or holding amounts.
It is very difficult to beat the average market return, but beating Bitcoin - almost impossible
The reasonable way to invest in Bitcoin: use DCA, but remember about volatility: it can drop in price -50% per day, or even -80% in a year.
Most altcoins just like fiat currencies tend to become worthless over time.
P.S. Join “High-risk investments“ Telegram group for an informal discussion.
Interesting experiment to create an "all weather portfolio" Kristaps. So far it has been tested in bull market conditions of the last 7 months. Given the heavy allocation in bitcoin and its relative high volatility compared with the rest of the portfolio, I wonder how it will perform in bearish market conditions like the one that seems to be forming. Please keep us updated!
Very interesting strategy, looking forward to seeing how it'll perform this year as some expect it to be "crypto winter". Do you have an opinion on N.N. Taleb's view on Bitcoin? Taken from his paper on BTC and cryptocurrencies in general:
''In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short nor long term store of value (its expected value is no higher than 0), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one’s investments, a shield against government tyranny, or a tail protection vehicle for catastrophic episodes. Furthermore, bitcoin promoters appear to conflate the success of a payment mechanism (as a decentralized mode of exchange), which so far has failed, with the speculative variations in the price of a zero-sum maximally fragile asset with massive negative externalities.''