In the last year we have witnessed an unprecedented rise in mainstream media coverage of cryptocurrencies, highlighting it mostly as a means of speculation, with the term bubble being often used to describe the current state of affairs in the crypto market. In fact the usage of the word bubble itself in this context has become a bubble. Irrespective of it being a bubble or not, the idea of making money in the crypto market has resonated quite strongly amongst the young people who seek to find their place in this global crypto rush. The main reason for it being attractive to the young folk may come primarily from the lack of sufficient funds to participate in big time investing, therefore opting to use crypto markets, as they offer small time investments. Amongst the young people it is generally believed and much more so declared, that you can not fail with crypto investments. To what extant this is indeed true I seek to present here by analysing the behaviour of Bitcoin's (BTC) main contester, namely Ethereum (ETH). I focus on finding the answer the one question, which is rather hard to come by despite all the data available, and the question is as simple as this: What are the average returns on ETH?
To answer this I first define what I mean by average returns, or to be more precise by the term return of investment (ROI). Economists define it as the gain of the investment relative to the cost of the investment:
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The definition is pretty straightforward and boils down to the relative amount of money one gets back from an investment, compared to the money that one has invested. By knowing ROI in advance one knows the answer to the following question: How much money will I get back from this? In my biased personal opinion it is not widely known amongst the youngsters what the returns are in the crypto market. This is rather unfortunate, given that all crypto data are publicly available. Having information on the returns can help young investors know what to expect and in what time frame.
Coming back to the previous definition, in terms of ETH, we can look at the gain as the price on the selling day and the cost as the price on the purchasing day. To calculate this I downloaded data on ETH from the Cryptocurrency Market Capitalizations website (coinmarketcap.com) which is freely available for anyone to use. First I calculated the daily returns on each day t, i.e. the ROI under the assumption that ETH was purchased on the day before t-1 and sold on day t. I label this as ROI(1). The results are shown below (Figure 1, light grey).
Figure 1. Time series of weekly returns (blue and red) superimposed onto daily returns (grey). Periods of positive weekly returns are given in blue, whereas negative are given in red.
As can be seen the daily returns are quite sporadic without a clear regularity. To display this apparent randomness I plotted a histogram of the daily returns (Figure 2, blue colour) which turned out to be symmetric. Interpreting this means that the chances of profit and loss are nearly equal on a daily basis. In fact the chances are 50.53% in favor of profit versus loss, which is nothing more than throwing a dice. Therefore daily trading on ETH is not a good idea.
Figure 2. Histograms of daily returns (blue) versus weekly returns (red).
With this in mind I proceeded to calculate the weekly returns ROI(7) to see if the situation is any different here, which are now given as:
These are displayed in Figure 1 (blue and red). The blue colour marks the periods when ROI(7) is positive and the red colour when it is negative. We can now see prolonged periods of both, but with more blue surface. This implies longer periods of growth and bigger gains, which is reflected on the shape of the weekly ROI histogram (Figure 2, red). As can be seen this histogram is slightly skewed to the right. This implies higher chances of profit, in fact to be exact the chances of profit are 57.75%, slightly better than a dice throw.
Finally I calculated the monthly returns and this is where things started becoming interesting. Monthly returns are given as:
These are plotted in Figure 3, along with the daily returns given in grey.
Figure 3. Time series of monthly returns (blue and red) superimposed onto daily returns (grey). Periods of positive monthly returns are given in blue, whereas negative are given in red.
From this figure we can instantly see prolonged periods of gains (given in blue), which are considerably higher then the losses (given in red). One can recognize that chances for profit are higher now, in fact they are 67.52%, which is now considerably better than the dice throw. Comparing now the histograms (Figure 4, red) we notice ROI(30) histogram is skewed significantly more to the right than its daily counterpart (blue). This naturally implies that holding (colloquially HODLing) ETH for a month and then selling is better than doing so after a day, or a week. This is a common sense conclusion, but here I have backed it up with concrete data. One has also to keep in mind that the period of selling is also important, as selling during a red period is certainly not profitable.
Figure 2. Histograms of daily returns (blue) versus monthly returns (red).
In conclusion, for non professional traders, trading on a longer time scale may be more safe and profitable than quick trading. Although this conclusion is trivial and this analysis is rudimentary, they both serve a purpose. In my opinion the purpose is to show people on how easy it is to get data on cryptocurrencies and how even easier it is to perform such analysis. All one requires is a little spare time and some will. I hope that with this article I have shed some light on ETH returns. More coming soon.
PS
If anybody wants high quality figures I will be more than happy to share.