Delphi Digital data shows that holding BTC or ETH is more profitable than investing into DeFi and weighted average crypto market caps.
Index and exchange-traded fund (ETF), have been a popular form of investing for the past 20 years. They offer passive exposure to stocks, as opposed to individual stocks that can increase risk.
This trend has been extended to crypto since 2018. Products such as the Bitwise 10 Large Cap Crypto Index(BITX) track the total return on Bitcoin (BTC), Ether, Cardano (ADA), Bitcoin Cash/BCH), Litecoin/LTC), Solana [SOL], Chainlink (LINK], Polygon (MATIC), Stellar/XLM and Uniswap/UNI (UNI)
Access to multiple top projects via one weighted average index market cap sounds great. But do these products offer better returns in terms of profit or protection against volatility than top-ranking cryptocurrency?
Crypto baskets versus hodling
Delphi Digital compared the Bitwise 10’s performance to Bitcoin’s after the December 2018 market bottom. The results showed that BTC investing was more profitable than BITX, even though it was less volatile.
The report states that “indexes are not meant to outperform individual assets. They’re meant be lower-risk portfolios compared with holding an individual asset.” So it shouldn’t surprise to see BTC outperform BITX purely on a cost basis.
Investors had less risk with the index as it sold off in May, but that difference was not significant as Bitwise’s maximum drawdown was 50% and BTC’s 53%.
The benefits of investing in an Index over Bitcoin aren’t that great due to the volatility of the crypto market, frequent large drawdowns, and other factors that can have a greater impact on altcoins.
Delphi Digital said:
“Crypto indexes are still in development. It is difficult for a new asset class such as crypto to choose assets, allocate them, and rebalance their thresholds. As the industry matures, more efficient indices will be created and gain traction.
DeFi baskets also perform better than Ethereum.
In 2021, Decentralized finance (DeFi), which is a combination of decentralized exchanges such as Uniswap and SushiSwap and lending platforms like Compound (COMP), was one of the most popular crypto sectors.
The DeFi Pulse Index (DPI) aims to tap into this rapid growth and the DPI token has allocations to 14 of the top DeFi tokens, including UNI, SUSHI, AAVE, COMP, Maker (MKR), Synthetic (SNX) and Yearn.finance (YFI).
Comparing the performance of DPI and Ether over the past year, Ether outperformed DPI in terms of profitability, volatility, and profitability. This is evident by the 57% drawdown on Ether, compared to 65% for DPI.
Delphi Digital says this is an “imperfect comparision” because “the risk and volatility associated with DeFi tokens is higher than Ether’s.” However, it highlights the fact that crypto-based baskets do not offer the same benefits as indices.
Delphi Digital said:
“You could have just HODL-ed Ethereum for a superior return profile and risk-return ratio.”
Bitcoin and Ether are currently two of the lowest-risk crypto plays, compared to crypto index funds which offer greater exposure to more assets.