There has been a lot of debate about whether digital assets and blockchain technology are sustainable investments. Rather than add more noise to that specific discussion, let's take a look at the likely 2017 annual crypto returns compared to their traditional finance counterparts.
The returns below are based on my personal experience, other’s actual returns, or data I’ve been able to gather through online research and/or professional conversation.
Traditional infrastructure investments seek ~7-12% annual returns. They are attractive to investors because they involve hard assets with strong downside risk protection. In crypto, the equivalent investment would be in mining digital assets.
Crypto mining investors are able to invest in real world assets (land, buildings, computing hardware, etc) and achieve some level of downside risk protection. The 2017 annualized returns from crypto mining were ~150-200% (depending on your initial & ongoing expenses) if you were to sell the digital assets into fiat almost immediately upon receiving them. If you were to hold the digital asset and benefit from the price appreciation throughout the year, the annualized returns were as much as 500% or 1,000% depending on which digital asset you mined.
The S&P 500 returns for 2017 (dividends reinvested) drove 21% annualized returns. If you broaden the sample size outside the US & into other developed markets, the highest returns were for Hong Kong’s Hang Seng Index at 36%.
The crypto markets have yet to determine a standard index measurement which makes this comparison harder than the rest. However, all indications are that the digital asset market drove significantly higher returns. The top 7 cryptocurrencies (by “market cap”) realized more than 1,000% returns, including Ripple’s ~29,000% return. If you broaden the crypto index to the top 15 assets, the returns are still well over 500% for 2017.
Active, managed strategy
Traditional active hedge fund managers created annualized returns of 8.5% according to the Hedge Fund Research organization. Equities hedge funds came in at ~13% as well, which was the best returns in the last 4 years for either strategy. While the average returns weren’t great, some of the big winners were Whale Rock Capital (36%) and Light Street Capital (38%).
Obviously these numbers are small compared to the meteoric (and likely once-in-a-lifetime) returns of digital assets last year. The 24 crypto hedge funds tracked by Wall Street Journal yielded ~3,000% annualized returns in 2017. Additionally, some of the best performing crypto hedge funds reported returns of 10,000%+ in the 12 month period.
While the sustainability debate rages on for digital assets, one thing is certain: the current crypto returns are rarely realized in traditional finance. I anticipate top talent from Wall Street and Silicon Valley will continue to race into the crypto markets in search of this outsized performance.
What a time to be alive.
** THE RUNDOWN **
Morgan Creek tokenizes Anexio’s equity: Morgan Creek Blockchain Capital has tokenized the equity of Inc 500 company, Anexio Technology Services. In other words, the company’s paper shares are now security tokens. Anexio plans to raise $40 million by selling the tokens to accredited investors. Read more.
An explainer on security tokens: What is a security token? In a Q&A with Harbor’s CEO Josh Stein, Fortune delves into tokenized securities, compliance, and just how big of a business this could be. “With tokenization technology, you could create leveraged longs and leveraged shorts. I can go long Manhattan, I can go short Brooklyn,” Stein said. Read more.
PayPal Alum: How blockchain will change investing: PayPal co-founder David Sacks says first thing people will trade are real estate tokens. He thinks it’s possible to unlock a huge amount of value by letting people buy and sell chunks of real estate with tokens—each token would correspond to ownership in a piece of property. Read more.
Alibaba founder Jack Ma says Bitcoin is a bubble: ...But he added that blockchain is not. "Blockchain is now a hot word. First, blockchain is not a bubble, but Bitcoin is a bubble. Bitcoin is just a tiny application of blockchain," Ma said. "Blockchain is not a huge gold mine. At least inside Alibaba, blockchain must be a solution that addresses the privacy and security issues in the digital era." Read more.
Norway Central Bank considers developing digital currency: Norway’s central bank, Norges Bank, is considering developing its own digital currency as a supplement to cash to “ensure confidence in money and the monetary system.” Read more.
Malta partners with blockchain startup: The Transport Minister of Malta has announced a partnership with U.K.-based middleware blockchain startup Omnitude to improve the Maltese Public Transport Service. Read more.