Crypto Market: Power Law Distribution Dominates Performance, Says Felician Stratmann
The crypto market’s returns today follow a power law distribution, where a small group of top performers can substantially enhance a portfolio’s overall returns, according to Felician Stratmann.
Many digital asset investors measure their success against Bitcoin, whether consciously or not. While Bitcoin has been an impressive benchmark in recent years, some are beginning to give up on altcoins, feeling that it’s just too tough to outperform Bitcoin. But has Bitcoin always been this difficult to beat?
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To evaluate Bitcoin’s dominance, we analyzed data from 2019 onward for the top 150 tokens by market capitalization (excluding memecoins and with a minimum volume requirement on major centralized exchanges). We chose the top 150 tokens to represent a reasonable universe of digital assets that a fund manager with adequate liquidity and AUM would consider. It’s worth noting that until late 2020, fewer than 150 tokens met these liquidity standards.
Tokens Outperforming Bitcoin Over Time
With this sample size, we assessed how many tokens in the top 150 outperformed Bitcoin over any given 365-day period. In the years of 2019 and 2020, it was relatively easy for tokens to beat Bitcoin. Many tokens outperformed Bitcoin by significant margins—sometimes more than 1000%. Moreover, the tokens that outperformed Bitcoin were often not far from Bitcoin in market cap, with outperforming tokens typically ranking around the top 30 by market capitalization prior to 2020.
However, the landscape has shifted post-2021. Over the last few years, only 10-20% of tokens in the top 150 have outperformed Bitcoin in any 365-day period. The average outperformance against Bitcoin has also decreased, moderating to around +100%. Additionally, the average market cap rank of tokens outperforming Bitcoin has risen, fluctuating between the 60-80 range.
What Does This Mean?
The data shows that beating Bitcoin today requires greater skill. The cryptocurrency market has matured, with more tangible results now expected alongside ambitious project visions. Selecting high-conviction winners is increasingly challenging, and it’s clear that small, emerging projects still hold significant potential, even in a more mature market. However, even in a market constrained by liquidity and size, the performance of top assets can still outperform Bitcoin by over 100%.
These insights point to a power law distribution in crypto market returns. A few standout performers can generate positive results for a portfolio, while the majority underperform. Despite this, diversification is still underappreciated by many investors in liquid tokens. Given that many projects in the crypto space are still in their start-up phase, adopting a venture capital approach to diversification could be key to capturing significant returns.
The altcoin market holds promise, but navigating it successfully will require careful selection, as returns are not guaranteed.
Disclosure: This article is for informational purposes only and does not constitute investment advice. All investments carry risk, and past performance is not indicative of future results. Please refer to Outerlands Capital’s terms and conditions.
Note: The views expressed here are those of the author and do not necessarily reflect the opinions of CoinDesk, Inc. or its affiliates.
