Does crypto offer higher average returns than S’pore’s stock market?

An index ETF tracks the performance of a segment in a financial market. It is made up of a portfolio of stocks and allows investors to diversify their holdings through them. In theory, this reduces market risk.

Future returns do not depend on the performance of any particular company, but rather on the market segment as a whole.

In early 2021, a Twitter user @TenIndex has followed this principle when investing in cryptocurrency. On January 1, he invested US $ 100 in each of the ten most traded cryptocurrencies at the time. He then left the investment intact for the entire year.

The idea behind this experiment was to see if investing passively in cryptocurrency would produce higher returns than the stock market.

What happened to the investment?

At the end of 2021, TenIndex recorded a net gain of 292% on its initial investment. His US $ 1,000 wallet was now worth US $ 3,921.

Nine of the coins he had invested in also saw net gains individually. Tether (USDT) was the only odd in the group.

Being a stable coin, the value of Tether is tied to that of the US dollar. So its very goal is to be worth US $ 1 per coin.

etf crypto index fund
The evolution of the value of TenIndex’s portfolio during 2021 / Image credit: TenIndex

The biggest winner in TenIndex’s portfolio was Binance Coin, which rose in value by more than 1,200%. Ethereum, Ripple, Polkadot, and Cardano also all saw triple-digit percentage gains.

Litecoin and Bitcoin Cash (a derivative of Bitcoin) were the worst performers, registering only gains of 16 and 26% respectively.

How does this compare to index ETFs listed in Singapore?

The ETF Straits Times Index (STI) is often recommended as a safe and smart investment for first-time investors in Singapore. It tracks the performance of the top 30 companies listed on the Singapore Stock Exchange, including companies such as Singapore Airlines, ComfortDelGro, DBS Bank and Singtel.

In 2021, the value of the STI ETF increased by around 10.3%. This means that an investment of US $ 1,000 at the start of the year would have been worth US $ 1,103 at the end.

It should also be noted that the STI ETF is a weighted index. Investments are not evenly distributed among the 30 companies in the index. In fact, DBS, OCBC and UOB account for almost 44% of the weight.

cryptocurrency vs stock market
The annual return of the 1000 USD invested in early 2021

Most other ETFs listed on SGX follow indices from other markets around the world.

Last year, one of the top performers among these ETFs was the SDPR S & P500. It tracks the S & P500, which is a gauge of the top 500 companies listed on the US stock market.

An investment of US $ 1,000 in this ETF would have turned out to be around US $ 1,265 during 2021. In other words, a return of around 26.5%.

This yield was well above the S & P500 standard. Over the past 50 years, the value of the index has increased by an average of 10.83 percent.

Does this mean cryptocurrency is the way to go?

Not necessarily. It just means that the crypto market has performed incredibly well in 2021.

After all, investing in any of the top ten cryptocurrencies (except Tether) would have guaranteed a profit during the year.

For a more compelling argument, it’s important to look at a larger sample of historical data. Fortunately, TenIndex has invested US $ 100 in the top 10 cryptocurrencies (at the time) every year since 2018.

In 2018, the value of his portfolio fell from US $ 1,000 to US $ 151, an 84% loss compared to a 6.2% loss on the S & P500. It should be noted, however, that entering the crypto market in early 2018 meant buying all-time highs.

In 2019, TenIndex’s portfolio recorded a gain of 2% and was worth US $ 1,017 at the end of the year. The S & P500 rose 29% that year.

Finally, in 2020, TenIndex’s portfolio grew from $ 1,000 to $ 2,394.70, an increase of 139.47% from the S & P500’s 16%.

How risky is an investment in a crypto index fund?

Cryptocurrency can be incredibly volatile, but reading these results at face value might not tell the whole truth.

crypto s & P500
The return on investment of TenIndex’s four index fund portfolios combined, compared to the same amounts invested in the S & P500 / Image credit: TenIndex

Although TenIndex’s 2018 portfolio was worth US $ 151 at the end of the year, its value had rebounded to US $ 1,341 by the end of 2021. Its 2019 portfolio would also be worth around US $ 6,000 today.

This experience does not necessarily prove that passive investment in cryptocurrency is a safe bet, even in the form of an index fund. However, it does offer ways in which a cryptocurrency wallet can be made less risky.

For example, leaving Tether aside, five of the top 10 cryptocurrencies in 2018 were still in the top 10 in 2021. Four of them –Bitcoin, Ethereum, Ripple, and Bitcoin Cash – have never left the top 10 in the past four years.

Investing in projects that have proven their longevity in this volatile space could be one of the strategies for a more secure portfolio.

For those who want to learn more, TenIndex posts monthly updates on all of its index portfolios on its blog. While there are no objective conclusions to be drawn here, these findings can help inform a smarter investment strategy for new and existing holders.

Featured Image Credit: CoinGeek


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