FOMO, or the “fear of missing out”, seems to have an outsized impact on crypto returns vs. other more established asset classes (for those unsure of that statement, observe market regimes from 2013, 2017, 2021, among others). This phenomenon makes sense given the nascency of digital assets, the potential for the technological advances they represent, and the perceived opportunities for short-term gains by investors. We believe a healthy dose of FOMO for crypto is actually a good thing when making asset allocation decisions, but it also must be guided by a key consideration: crypto investors should fear missing out on the big up days in particular. Below we seek to illustrate the astonishing impact missing crypto’s biggest days can have on wealth creation, the difficulty in knowing exactly when these individual days will come, and a disciplined approach to removing all the guesswork.

Big Ups

Just how much are investors’ returns impacted by sitting on the sidelines during crypto’s biggest up days? We analyze the trailing 5-year period of Bitcoin’s (BTC) returns to get a sense. Figure 1 below indicates how missing the n-number of crypto’s largest positive performance days impacted annualized performance over the period:

Figure 1: Annualized Bitcoin Performance When Missing N-Number of Best Return Days (April 1st, 2018 – March 31st, 2023)

Missing only BTC’s single best day drops annualized performance by nearly 5%, while the return becomes negative after missing just the 11 largest days over the same period. Moreover, risk-adjusted returns (Sharpe ratio) are particularly affected, as Bitcoin’s volatility is no longer being compensated with as strong of a return. Overall, missing out on just a small handful of these days had a massive negative impact.

When Are The Big Days Coming?

Wouldn’t it be great if we knew every time these big days were coming, and we could position ourselves accordingly? While we believe strongly in the power of active management in the digital asset class over sustained periods of time, volumes of investment research have made evident the incredible difficulty of knowing exactly when single days of extraordinary market performance are coming. Figure 2 below shows the size and timing of the 30 best and worst performance days for BTC over the same 5-year period:

Figure 2: Bitcoin’s 30 Best and Worst Performance Days (April 1st, 2018 – March 31st, 2023)

What are the important takeaways?

1. Outsized return days—both positive and negative—are spread across the entire time period. Only the most highly skilled managers capture even a portion of this information in their investment strategies.

2. Periods of outsized positive performance are often preceded by times of stress. Just like with traditional assets, high-volatility periods can make even the most disciplined investors sell out of the market at the most inopportune times. Choppy markets weigh heavily on investor psychology, leading many investors to take emotionally charged actions for their portfolio when the best course of action is often to do nothing.

A systematic, long-term approach to crypto investment can remove the noise and emotion from decision making that can lead to missing the big up days that ultimately drive wealth creation in the asset class.

Commit. Diversify. Systematize. Repeat.

We’ve illustrated the perils of being uninvested during top performance days and discussed how psychological susceptibility to challenging market conditions makes staying invested difficult, but what can be done about it? At Truvius we encourage the following investment framework for making the big up days count:Make a strategic allocation to a soundly constructed, systematically managed investment strategy and hold/add to the portfolio over time in a disciplined manner. Let’s break this idea down: 

1.  Make a strategic allocation to…

• Rather than a tactical or short-term trading approach focused on specific individual assets, a strategic allocation to various segments of the overall digital asset market focuses on broader longer-term themes and portfolio-level objectives.

2. A soundly constructed, systematically managed investment strategy and…

• Given the inherent volatility of this burgeoning asset class, a durable, diversified, and systematic investment strategy may prove critical to enhancing long-term return and portfolio control.

3. Hold/add to the portfolio over time in a disciplined manner

• Lastly, staying allocated to the strategy, and potentially adding systematically to it, may increase the likelihood of getting intended exposure to the asset class at the right times.

Conclusion

Instead of immediately condemning FOMO as a motivator for crypto investment, investors may be best off channeling the “fear” specifically towards missing out on the very best days to be invested. At Truvius, we feel strongly that the superior way to harness these returns is through a thoughtfully-constructed investment process that provides a clearer understanding of portfolio risks.

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Data and Disclaimer

Data is sourced from Santiment, Messari, and Token Terminal. This Truvius Quantamentals commentary has been prepared by Truvius (the “Company”) solely for informational purposes and should not be construed as legal, business, tax, regulatory, accounting, investment or other advice. The information contained herein does not purport to be all-inclusive or to contain all of the information a reader or prospective or existing investor may desire. In all cases, readers and interested parties should conduct their own investigation and analysis of the Company, its products, and the data set forth in this information. The Company makes no representation or warranty as to the accuracy or completeness of this information or its construction and shall not have any liability for any representations (expressed or implied) regarding data or information contained in, or for any omissions from, this information. This Information includes certain statements, backtested data, and estimates provided by the Company with respect to the historical performance of the Company, its products, and other asset classes described above. Such statements, backtested data, estimates, and projections reflect various assumptions by management, which assumptions may or may not be correct. No representations are made as to the accuracy of such statements, backtested data, estimates or projections. Inevitably, some assumptions will not materialize, and unanticipated events and circumstances may affect the ultimate financial results of the Company and its hypothetical products. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks, and the assumptions underlying the projections or expected performance of products may be inaccurate in any material respect. The Company's and its products’ actual future results may differ materially from those suggested by both simulated historical and forward-looking statements, depending on various factors including those described in this material or any other written or oral communications transmitted by the Company. Neither the U.S. Securities and Exchange Commission nor any U.S. state or non-U.S. securities commission has reviewed or passed upon the accuracy or adequacy of this this Truvius Quantamentals commentary. Any representation to the contrary is unlawful.