Is Past Performance indicative of Future Results?

Do you want to invest in the best-performing coins? The question seems straightforward, and the answer might appear obvious. However, most of the time, this is different from what investors are really asking. What they're actually wondering is, "Should I continue investing in the coins that have been performing best?"?

This question comes up for several reasons:?

1. If you've already invested in a coin that's outperforming others, why would you consider selling it??
2. If you still need to invest in the top-performing coin, why shouldn't you jump in now and benefit from its impressive performance??

We know that momentum is a popular investment strategy, and the Fear of Missing Out (FOMO) is a powerful force that's hard to resist. However, it's important to consider whether past performance truly indicates future results and if chasing the current best performers is always the wisest strategy.?

Invested or not, the question of whether to invest in a champion is the topic of our CMM this week. Our analysis looks at the top 100 coins by market capitalization and how their rank develops over time. A champion is a coin that is improving its ranking in all market conditions.?

What happens in the top 100???

The top 100 coins, in terms of market cap, provide a large set of investable cryptocurrencies. In this list of 100 names, we find the leaders who are well-established in the hierarchy, the challengers who are redefining the list, and the laggards who are dropping down the list.??

Over time, the names making this list change. In the last ten years, 270 different coins have been at least once in it.?

Today, only six coins that formed the top 100 ten years ago, are still part of it today: Bitcoin (BTC), XRP, Dogecoin (DOGE), Litecoin (LTC), Monero (XMR), and Bitcoin Cash (BCH). Regarding the other 94 coins, two of them are in the top 200 today, namely Dash (DASH) and SuperVerse (SUPER). All the others have been relegated to the bottom of the table or are no longer listed among the 2.2 mio coins currently listed on coinmarketcap.com.?

Figure 1: Top 10 cryptocurrencies by market capitalization on 6 July 2014?

In July 2014, the top three coins were Bitcoin (BTC), Litecoin (LTC), and Next (NXT). Currently, these three coins are ranked number 1, 21, and 8362, respectively.?

#1 - Investing in the top 3 champions is not indicative of future success.?

Let's go back to the top 100. About a third of the coins improve or maintain their positions in the hierarchy over a six-month period. This proportion tends to increase over time, as the figure below illustrates. It signals that the top 100 is consolidating over time as the life expectancy of these coins increases.?

Figure 2: Proportion of coins in the top 100 improving or maintaining their rank over six months?

Figure 2 shows the dynamic of the top 100 every 6 months. For instance, the latest observation of the chart signals that between January 24 and July 24, 37% of the coins of the top 100 (of January 24) have improved their position. As a result, 63% have dropped down the ranking.?

Overall, the chart shows an upward trend, signaling that more coins in the top 100 stay in the top 100 as their ranking improves. In the last 10 years, on average, 21% of coins have left the top 100 every six months, while only 9% have left it in the last six months.?

#2 – The likelihood of a coin to stay in the top 100 and to improve its ranking has improved over time.?

It also means that the number of new coins entering the top 100 is declining overtime. Is there less innovation today or is it a sign of market getting more mature??

Interestingly, in January 2015 and January 2018, the proportion of coins whose ranking improved declined substantially to 8% and 10%, respectively. These two events happened when the market bottomed out, a time when the top 100 coins were reshuffled as the challengers replaced the old leaders.?

The last cycle, which bottomed out in November 2022, does not look like the previous cycles; the opposite happened. The proportion of top 100 coins improving their ranking increased to an all-time high of 44%, meaning the usual reshuffling did not happen, as the old leaders continued to dominate.?

#3 – This cycle differs from the preceding ones as the top 100 was not renewed?

In comparison to previous cycles, we notice a lack of a new narrative in this one. DeFi, Metaverse, NFTs to name only a few, were the new concepts that shaped our imagination in the previous cycles. The main catalyst behind the current cycle is the launch of BTC spot ETFs in the US, which is essentially an institutional and regulatory endorsement of existing coins, but not an innovation.?

Looking at the data in detail, decile after decile, we observe increasing stability. In the first decile, the top 10, the proportion of coins maintaining or improving their ranking over a six-month period has hovered around 60%- 70% in the last two years since the market bottomed out, as the dark blue line illustrates in Figure 3.?

Figure 3: Proportion of coins improving or maintaining their rank over six months, per decile (for decile 1 to 5)?

This figure is difficult to read, but we observe a general upward trend for all the first 5 deciles, i.e., up to the top 50. This dynamic confirms that the best-performing coins of the last two years continue to perform well.?

#4 – The top 50 coins have done remarkably well in this cycle.?

Most of the reshuffling in the top 100 is happening in "the bottom 50", i.e. the coins ranked between 50 and 100. Figure 4 compares how the ranking has evolved over time in the top 50 and the bottom 50.?

Until 2022, the top 50 and the bottom 50 behaved similarly, with some more stability in the top 50. Since then, their trajectories have diverged. While the top 50 has consolidated, the bottom 50 is where coins are challenging the incumbents.??

Figure 4: Proportion of coins improving or maintaining their rank over six months, in the top and the bottom 50?

The situation is inverted for the rest of the top 100, from the 50th position to the 100th, as the majority of coins in each decile tend to worsen their ranking.?

#5 – The bottom 50 coins are renewing fast, while the top 50 coins are consolidating their positions?

If the altcoin rally finally materializes as it used to in previous cycles, it is probably from this pool that the top 50 of tomorrow, the forthcoming best-performing coins, will come from and replace part of the existing top 50. We see that this is where competition is harsh and where the hierarchy is the most dynamic.?

Is Past Performance indicative of Future Results??

According to the data presented here, the top 50 coins have performed better in the last two years than they have in the past, and it would have been appropriate to invest in them. On the other hand, the bottom 50 performed relatively poorly, as new coins challenged them.?

This cycle differs from the other one as the old and well-established leaders in the top 50 have remained there. The usual reshuffling didn't take place, which is uncommon.?

Over time, we observe that there is a tendency for well established coins to remain in the top position. Coins established in the top 10 are more likely to remain in the top 10 than to leave it, providing them a clear advantage.?

Learn from history, experience the present, and prepare for the future as some features of history may repeat, but this may not always be the case. Keep in mind that, according to history, only six coins that made the top 100 coins ten years ago are still part of it.?

1. Investing in the top 3 champions is not indicative of future success.?
2. The likelihood of a coin to stay in the top 100 and to improve its ranking has improved over time.?
3. This cycle differs from the preceding ones as the top 100 were not renewed?
4. The top 50 coins have done remarkably well in this cycle.?
5. The bottom 50 coins are renewing fast, while the top 50 coins are consolidating their positions.?