Statistical Analysis with Cryptocurrencies

Can randomized portfolios beat a ‘cryptocurrency hedge fund’?

Jiayuan (Kevin) Dong

Introduction
During the year of 2017, Bitcoin, together with the thousands of cryptocurrencies, has grown
exponentially in value. Many of the cryptocurrencies had ten-fold annual return. With the
frequent exposure of news and social media, investors from all over the world streamed in the
crypto market during the rally to pursue a fast and easy profit. There existed many irrational
investors that had no idea about cryptocurrencies still made a great profit. On the other hand,
rational investors, although showing great interest, tend to avoid investing in crypto market
because of its huge volatility (it is very normal that a coin has 50% volatility within a same day).
In response to this demand, the Token Fund (thetoken.io), a professional cryptocurrency hedge
fund emerged during the year. Up till now, the Token Fund has gained an 812.53% return since
its launch in March 24th, 2017 and became a hot choice for crypto investors. However, many
doubt that investing in the Token Fund is not that profitable since its return seems less than many
cryptocurrencies, more importantly, like many traditional hedge funds it charges a 2/20 fee (2%
asset management fee and 20% of the profit), which shrinks more of the investors’ return. In
fact, many buyers that just randomly buy and hold a bunch of cryptocurrencies had better return
than did the Token Fund. So, which is more profitable, the Token Fund portfolio or a random
buy-and-hold portfolio? In this article, I will try to answer this question with statistical analysis.

Datasets

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First, I will gather the data of monthly price information of the Token Fund from its official
website ‘www.thetoken.io’. Since the Token Fund is originally launched on 3/24/2017, we will
use price data of the 24th of every month between 3/24/2017 and 3/24/2018. (Graphs below are
Token fund price index and current portfolio components)

The other dataset is from kaggle.com containing the day-to-day trading information of 1,200
cryptocurrencies since their launch. Since it was too large, I modified the dataset in excel in
advance and left only the useful parts for convenience. Now the data contains the ‘symbol’,
‘name’, ‘date’, and ‘price’ of six top traded coins Bitcoin, Ethereum, Ripple, Litecoin, Monero,
and Dash. We use these 6 coins because they are the top traded coins during March 2017 on
‘Coinbase’ and ‘Kraken’, two main cryptocurrency exchanges. (Below is a snapshot of the
modified dataset)

Research Topics and Conditions

The goal of this project is to use statistical analysis to demonstrate if a randomized
cryptocurrency portfolio's return can even beat that of a hottest cryptocurrency hedge fund
portfolio — 'the Token Fund' base on the data from March 2017 to April 2018. We divide our
topic into the following comparisons:

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 1. Token Fund vs. a random portfolio (Bitcoin, Ethereum, Litecoin, Ripple, Monero and
Dash);
2. Token Fund vs. a random portfolio of Chinese exchange users (Bitcoin, Ethereum,
Litecoin);
3. Token Fund vs. a random portfolio of Coinbase users (Bitcoin, Ethereum);
4. Bitcoin vs. a random portfolio of Altcoins (Ethereum, Ripple, Litecoin, Dash, Monero);
Also, some condition and constraints need to be set:
1. The analysis is based on the time range between 3/24/2017 and 3/24/2018 and the result
cannot be used to predict future performance.
2. Use monthly return as the measure of return.
3. Investors of random portfolios only use buy-and-hold method with no active operation
and change on portfolio.
4. Use Bitcoin, Ethereum, Litecoin, Ripple, Monero and Dash, the top traded coins (adding
up more than 70% of the total cryptocurrency market cap) during March 2017 as
representative and reflection of the cryptocurrency market.
5. By stating 'cryptocurrency hedge fund', we just use the Token Fund, one of the most
popular decentralized cryptocurrency investment fund in the industry as a representative
measurement. (thetoken.io)
6. By stating 'randomized portfolio', we mean that an investor put his or her money in a
bunch of selected cryptocurrencies randomly without knowing what portion they put on
each coin.

Methods
Before start, I will introduce the methods and terms that I will use in the following statistical
analysis.
1. Monthly return formula
Calculate the monthly return base on the extracted monthly price with formula below:
(price_month2 - price_month1)/price_month1
Since the Token Fund requires a 2/20 fee as mentioned above in introduction, the
modified monthly return after the fee is:
- For months with positive return: ((1+monthly_return)*(1-0.02)-1)*(1-20%)

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 - For months with negative return: monthly_return -(1+monthly_return)*0.02
2. Resampling method
Since it is hard to get a large number of real users’ portfolio components, I will use
resampling method to build 100,000 random portfolios of selected coin. For example, if
we select 3 coins to build a portfolio, I will first generate 3 random numbers from 0 to 1
that add up equal to 1 to represent the portion of each coins, then multiply them together
with each coin’s monthly return respectively, and finally add them together to get the
random portfolio’s monthly return. (0.2+0.4+0.4=1; 0.2* bitcoin_return1+0.4*
Ethereum_return2+0.4* ripple_return1=portfolio_return). Repeating this for 100,000
times we get 100,000 different random portfolios.
3. Hypothesis test
A hypothesis test is the statistical analysis to test if a hypothesis is statistically significant
to be proved by rejecting a null hypothesis. In this project, we are going to use the ‘t-test’
to test if there is enough evidence to proof our hypothesis with a 95% confidence interval.
The t-test could be used to compare two independent samples when the sample size is
large enough by setting up a null hypothesis and an alternative hypothesis. A confidence
interval is applied since the degree of test cannot guarantee 100% accuracy, so a 95%
confidence claims a strong accuracy based on the test. The t-test will give us a p-value
that we use to conclude if we could reject the null hypothesis with the alternative
hypothesis. The p-value is the chance of getting a test statistic of that magnitude or larger
– assuming the null hypothesis to be true. The p-value is not the chance of the null
hypothesis being right but a measure of evidence against the null hypothesis. Below is an
example of a hypothesis test:
Null hypothesis: The Token Fund and a random portfolio have similar returns.
Alternative hypothesis: A random portfolio has better returns than the Token Fund.
The samples we use is the monthly returns of the random portfolios we generate, since it
is a 100,000 sample it is large enough to use t-test. We use this sample to compare with
the monthly return list of the Token Fund.
After doing the t-test, we get a p-value of 0.02010822 which is less than (1-95%) = 0.05

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 So we can reject the null hypothesis and conclude the alternative hypothesis is true with a
95% confidence interval. If the p-value is larger than 0.05, we will say there is so
significant evidence to reject the null hypothesis with a 95% confidence interval.

Statistical Analysis
In this part we will build several randomized portfolios of different type with the 6
cryptocurrencies above, which means, you just close your eyes and randomly put your money in
and buy some proportion of each of the selected coins and see if your random 'portfolio' can beat
the Token Fund portfolio. We will use the t-test since we have a large sample and a confidence
interval of 95% to show if there is enough evidence that our randomized portfolio can beat the
Token Fund. I will first list the monthly price and return table of the variables we use.

Table 1: Token Fund Price and returns

Token 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Fund
Monthly 10 12.39 35.79 41.72 33.9 47.78 38.85 49.9 57.98 118.33 144.22 104.16 77.81
price ($)
Monthly N/A 24% 189% 16.6% -18.7% -41% -18.7% 28.4% 16.2% 104% 21.9% -27.8% -25.1%
return
Modified N/A 17.1% 146% 11.4% -20.4% 30.5% -20.3% 20.7% 11.1% 80% 15.6% -30.2% 26.8%
monthly
return

Table 2: Bitcoin Price and returns

Bitcoin 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Monthly 937.52 1250.15 2443.64 2608.72 2754.86 4334.68 3682.84 5526.64 8253.69 13925.8 11359.4 9813.07 8668.12
price ($)
Monthly N/A 33.3% 95.5% 6.8% 5.6% 5.7% -15% 50% 49.3% 68.7% -18.4% -13.6% -11.7%
return

Table 3: Ethereum Price and returns

Ethereum 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Monthly 53.11 50.03 190.05 323.7 224.7 325.6 282.48 298.33 474.91 694.15 1058.78 840.51 526.44
price ($)
Monthly N/A -5.8% 280% 70% -30.6% 45.0% -13.2% 5.6% 60.0% 46.2% 52.5% -20.6% -37.4%
return

Table 4: Ripple Price and returns

Ripple 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Monthly 0.011 0.031 0.296 0.311 0.192 0.219 0.176 0.207 0.245 1.040 1.360 0.954 0.641
price ($)
Monthly N/A 198.4% 843% 5.1% -38.3% 14.0% -19.7% 17.6% 18.4% 325% 30.8% -29.8% -32.8%
return

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Table 5: Litecoin Price and returns
Litecoin 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Monthly 4.08 14.97 34.45 44.49 44.41 50.19 47.62 55.96 77.97 275.98 179.99 209.42 159.63
price ($)
Monthly N/A 267% 130% 29.1% -0.18% 13.0% -5.1% 17.5% 39.3% 254% -34.8% 16.4% -24.8%
return

Table 6: Monero Price and returns

Bitcoin 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Monthly 21.1 19.56 45.38 48.03 45.58 86.29 89.5 88.4 160.03 337.06 317.4 272.79 209.16
price ($)
Monthly N/A -7% 132% 5.8% -5.1% 89.3% 3.7% -1.2% 81% 110.6% -5.8% -13.7% 23.6%
return

Table 7: Dash Price and returns

Bitcoin 3/24/17 4/24/17 5/24/17 6/24/17 7/24/17 8/24/17 9/24/17 10/24/17 11/24/17 12/24/17 1/24/18 2/24/18 3/24/18
Monthly 97.27 72.2 144.63 182.62 204.02 315.37 331.85 293.2 566.63 1184.69 775.11 595.01 424.61
price ($)
Monthly N/A -25.8% 100.3% 26.3% 11.7% 54.6% 5.2% -11.6% 93.3% 109% -34.6% -23.2% -28.6%
return

Portfolio 1: Token Fund vs. Randomized portfolio of (Bitcoin, Ethereum, Litecoin, Ripple,
Monero, Dash)
We first start with a portfolio that contains all the 6 cryptocurrencies above. For convenience, we
will state ‘Null hypothesis’ as ‘H0’, and ‘Alternative hypothesis’ as ‘Ha’.
Random portfolio components: Bitcoin, Ethereum, Litecoin, Ripple, Monero, Dash;
H0: This random portfolio has similar return with the Token Fund;
Ha: This random portfolio has better return than the Token Fund;
The P-value of t-test is 0.02010822 < 0.05. It rejects the null hypothesis with 95% confidence
interval. We conclude that there is evidence that a randomized portfolio of the 6 cryptocurrencies
(Bitcoin, Ethereum, Litecoin, Ripple, Monero, Dash) could beat the Token Fund portfolio in
return with 95% confidence interval.

Portfolio 2: Token Fund vs. Randomized portfolio of (Bitcoin, Ethereum, Litecoin)

Many Chinese investors, can only invest in Bitcoin, Ethereum and Litecoin in early 2017, since
those are the only three traded cryptocurrencies in the main Chinese exchanges such as
huobi.com and okcoin.com, we want to see how they performed.
Random Portfolio Components: Bitcoin, Ethereum, Litecoin
H0: This random Chinese investors’ portfolio has similar return with the Token Fund

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Ha: This random Chinese investors’ portfolio has better return than the Token Fund
The P-value = 0.01919566 < 0.05. It rejects the null hypothesis with 95% confidence interval.
We conclude that there is enough evidence that the randomized portfolio (Bitcoin, Ethereum,
Litecoin) could beat the professional Token Fund portfolio with 95% confidence interval. Thus,
if a Chinese investor put their money randomly in Bitcoin, Ethereum and Litecoin during
3/24/2017 to 3/24/2018, they may beat the return of Token Fund investors!

Portfolio 3: Token Fund vs. Randomized portfolio of (Bitcoin, Ethereum)

Since Coinbase only listed Bitcoin and Ethereum in early 2017 and those were the only coins
that Coinbase users could buy on 3/24/2017, we will try if we can beat the Token fund with a
random portfolio of Bitcoin and Ethereum only.
Random Portfolio Components: Bitcoin, Ethereum
H0: This random Coinbase portfolio has similar return with the Token Fund
Ha: This random Coinbase portfolio has better return than the Token Fund
P-value = 0.05352916 > 0.05. It is very close but CANNOT reject the null hypothesis with 95%
confidence interval. So we conclude that there is no enough evidence that a Coinbase user's
random portfolio (Bitcoin and Ethereum) can beat the Token Fund during that time range.

Portfolio 4: Bitcoin vs. Randomized portfolio of ‘Altcoins’ (Ethereum, Litecoin, Ripple,

Monero, Dash)
In the final portfolio, we will try something interesting. Many experts say that investing in a
bunch of 'Altcoins' (cryptocurrencies other than Bitcoin) is time wasting and would not even
have better return than investing in Bitcoin only. So in the last test, we will compare Bitcoin with
a random portfolio of the other 5 coins (Altcoins). We assume Altcoin investors have a random
portfolio for convenience since rarely any investors could tell the technology behind the
Altcoins. Also, though there are thousands of Altcoins, we just use the listed 5 top coins
(Ethereum, Ripple, Litecoin, Dash, Monero) as representative.
Random Portfolio Components: Ethereum, Ripple, Litecoin, Dash, Monero
H0: This random Altcoin portfolio have similar return with Bitcoin
Ha: This random Altcoin portfolio have better return than Bitcoin

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The P-value is 0.1073248 > 0.05. It CANNOT reject the null hypothesis with 95% confidence
interval. We conclude there is no enough evidence that the return of the random portfolio of
Altcoin representatives (Ethereum, Ripple, Litecoin, Dash, Monero) can beat the return Bitcoin
in the time range. Thus, it is a better choice for investors to just investing in Bitcoin, rather than
investing in various kinds of Altcoins.

Conclusion
Based on the test results above, we can come to a conclusion to our topic.
1. A randomized portfolio of the 6 cryptocurrencies (Bitcoin, Ethereum, Litecoin, Ripple,
Monero and Dash) CAN beat the return of the Token Fund.
2. A randomized portfolio of Chinese investors (Bitcoin, Ethereum, Litecoin) CAN beat the
return of the Token Fund.
3. A randomized portfolio of Coinbase users (Bitcoin, Ethereum) CANNOT beat the return of
the Token Fund.
4. A randomized portfolio of Altcoins (Ethereum, ripple, litecoin, dash, monero) CANNOT beat
the return of Bitcoin.
As we could see, some but not all randomized portfolios are able to beat the Token Fund’s
return. Although passive buy-and-hold investors without knowledge of Cryptocurrencies are
likely to have better return than professional hedge fund manager, we cannot completely deny
the value of cryptocurrency hedge fund like the Token Fund. Also, by the last result, investing in
Bitcoin tends to be more profitable than Altcoins.

My recommendation for new and rational investors is to put money in Bitcoin or Token Fund;
for investors that pursue higher return or more professional, it could be a better way to invest
Altcoins but I will recommend them to add Bitcoin to the portfolio. Moreover, what I would like
to restate is that we could not use the previous statistics to estimate the future since the
cryptocurrency market is changing rapidly and could be totally different in the near future. In
the future, when we have more statistics of other cryptocurrency hedge funds and a longer term
of investment history data, we will be able to make the tests more accurate. Last but not least,
cryptocurrency is still in the early stage with lots of uncertainty; although it looks like a rising
trend, new investors should always keep in mind that there may be risk of losing all of the moeny.

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Reference
Original dataset: https://www.kaggle.com/akababa/cryptocurrencies
Coinbase cryptocurrency lists: coinbase.com
Kraken cryptocurrency lists: kraken.com
Cryptocurrency information: coinmarketcap.com
Token Fund data: thetoken.io
Statistics definition: https://www.lexjansen.com/phuse/2006/ss/SS02.pdf
Statistics definition: https://www.researchgate.net/post/how_to_interpret_P_values