Bitcoin and cryptocurrencies reached a state of frenzy and mania in 2017. I'm sure you noticed.....
People have been asking me more often not just about Bitcoin but about Litecoin, Ripple, smaller coins, sillier coins, and scammier coins.
It made me think. How can people really assess all the altcoin (alternative coins to Bitcoin) options out there? I follow them for a living while writing for my primary Bitcoin company client and I have a tough time keeping up. How can the average person?
The reality is you can't. So you need to do what pros in other asset classes do and develop strategies.
Here's my first crack at an altcoin investment strategy: The CryptoDogs strategy.
Who's heard of the Dogs of the Dow?
The idea is that each of the 30 Dow stocks pays a dividend so stocks with a high Dividend Yield might be underpriced compared to similar stocks. The reasoning is that price is a factor in dividend yield.
It's a Value-based investing method to find underpriced value stocks, as opposed to growth opportunities.
For instance, if most stocks pay a dividend of 5% and a Dow stock is paying 8%, then it's likely the Dow stock is underpriced since the same dividend payout (in dollars) would yield 5% on an increase in the stock price. With a $10 dividend per share, at 8% dividend yield that is a $125 share price (10/.08) but at a 5% yield, we get a $200 share price (10/.05) all with the payout staying the same. Value investors hope the higher yielding stock will go back to the average (revert to the mean) and capture some of that $75 share price increase.
That's the essence of this strategy. Buy the underpriced, hold it for a year, and rebalance the next year.
The exact strategy is to buy the 5 highest yielding stocks in the Dow Jones Industrial Average in equal dollar amounts (NOT share amounts) and hold them for a year. Rebalance next year with the 5 highest yielding Dow stocks then.
The Dogs of the Dow is a great way to filter for value investing opportunities. We need some of this in crypto too since tracking every single project is tough. There is no similar value type play in crypto since its a high growth market more measured by x (5x return, 10x return etc) than by % yield.
But we can apply these filtering techniques to find the laggards of growth compared to the crypto market as a whole, so that's what I did.
This chart below is what the bottom 7 returns are in cryptocurrencies based on either January 4, 2017 pricing OR its inception pricing if it was not in existence then. These lowest return coins are the CryptoDogs.
|Coin||Jan 4 2017 Price||Jan 4 2018 Price||Returns|
Notice that the 6th WORST return was still a 920% return for Qtum, a currency designed to take advantage of Ethereum's smart contracts and Bitcoin's secure blockchain. A standard stock and bond investor wouldn't even know what to do with a 920% return in one year......
The Investing Strategy
Here is the CryptoDogs strategy.
To follow the crypto equivalent of the Dogs of the Dow strategy, we need to follow the same rules of buying an equal dollar amount of the lowest 5 returns in cryptocurrencies. The lowest 5 are:
Using my January 4 pricing, and buying $200 worth of each for an investment of $1000, this is what we get:
|CryptoDogs||Price 1/4||$200 Worth|
For the next year, I am going to track this return against the price of Bitcoin and Ethereum, at $14,752 and $972 respectively.
CryptoDogs Strategy 1(a)
If you looked at these 5 cryptocurrencies, you probably noticed that the bottom 2, or 2 out of 5 are forked coins from Bitcoin: Bitcoin Gold (BTG) and Bitcoin Cash (BCH). Some of you have no interest in these coins for various reasons so I'm also going to look at the bottom 5 excluding those two.
Now the 5 excludes BTG and BCH and includes (see first table) Qtum and ICX (ICON) instead. This is how that table looks:
I'm going to track this one throughout the year as well and also against the incumbents of Bitcoin and Ethereum.
Instead of splitting $200 into 5 coins, with BTC and ETH we are buying the full $1000 worth to compare returns.
This is a new market and like all asset classes, returns vary from year to year. Some of the questions I hope this will answer include:
- Can a value strategy be applied to this market?
- Will an altcoin return better than BTC or ETH?
- Is it worth buying other coins over the incumbents?
- Is a buy and hold (or HODL) strategy better than a rotation strategy like this one?
- Is the rumored rotation between Bitcoin and the alts true or just a rumor?
What do you think will return best in 2018? Do you rotate within altcoins or between altcoins and Bitcoin or ETH?