the money table ($1 per day strategy)
Sometimes it's important to see the big picture. Step back and admire the forest not the trees. With cryptocurrencies, as discussed elsewhere, we have an interesting opportunity to do this, as their entire history is transparent, mathematical, and distributed across the world. This fact holds nowhere more true than when looking at wealth preservation.
The tables below are a pretty good tool regarding this big picture. We are not saying that investments in crypto will always be profitable, and as stated of course this isn't investment advice. But these charts should help you understand what it means to get behind the cryptocurrency trend.
Simple question. What would my investment look like, if I conservatively invested $1 per day in a cryptocurrency? How would my returns look each year, and which years contributed most to my value? We will discuss the figures below, but following is a complete answer to this question:
the money table ($1 per day strategy) explained
Let's walk through each column step by step, first in the per year side, shaded green:
- $ average price. This reflects the average price you would have paid for 1 coin (for 1 bitcoin, for example), if you had invested $1 each day. As the price trends upward, $ cost averaging becomes all the more important if you start earlier, rather than later. With Bitcoin, notice how your average price is only 17 cents if you started this strategy in 2010.
- Coins bought. This reflects how many coins you could have bought each year, based on your $ average price. As the price trends upward, it is true that you will buy less coins each year. However, in Bitcoin, for example, notice that in 2015 you could have bought 1.4 coins at $1 per day, whereas in 2013 the $ average price was higher, so you would have only been able to purchase 0.7 coins in that year under this strategy.
- Coin value. Multiply the coins bought in a year by the market price of the coin today, and you see the coin value today, for those coins you could have purchased in that year. As the price trends upward, clear to see how it pays to get in earlier.
- Compound return. Don't give up on understanding this figure. As discussed in detail in the compound return section, this is one of the most important figures in finance and economics. Remember, this is not the gross return, or total return. For example, if bitcoin was trading at $7 thousand, and you purchased 1 BTC at $10, you would have made a 70,000% total return on this particular investment. That is a fantastic return by any metric, but not the one you need to understand to compare it to other investments. This is where compound return comes in. Compound return is basically an annualized figure. But even if you understand that, know that it's not a simple average. Let us calculate this for you. Just know that if you purchased coins in that year (row) and held those coins until today, the compound returns displayed are for your buying activity ($1 per day) in that year only. These are powerful figures. You can use them to compare cryptoassets to other investments, such as government bond yields or stock dividends.
Now, let's look at the differences in what the columns tell us on the cumulative side, shaded blue. On this side, it is easier to understand if you start at the last row of the table. Notice how all figures in this row are the same as the "per year" figures. That is because with cumulative figures, we need to work backwards in a sense, and then add up all the subsequent years. On the green shaded side, we were only looking at figures across one year; on this side, however, as we move up the table, you will notice that each row reflects figures from that year, and all subsequent years beneath it. It is as if you had started the investment strategy in that year (row), and continued that strategy until today:
- $ average price. This has the same meaning as above; but again, it will include the average price for all years after the year you are looking at. For example, if you started purchasing Bitcoin on 1 January 2012, the cumulative $ average price shown in row 2012 reflects purchases made in 2012, 2013, 2014, and so on, until today.
- Coins bought. Same concept as before. Using the same example, the "coins bought" displayed in 2012 would reflect how many coins you would have purchased, if you invested $1 per day in 2012, 2013, 2014, and so on, until today.
- Coin value. Same concept. With Bitcoin, look at row 2010, coin value. This is the total value of all your coins, if you had purchased $1 worth of bitcoin, from August 2010, when Bitcoin first commanded a price on the market, and continued this every day, until today. This first row (2010 in Bitcoin's case) is consequently the "best" you could have done using this strategy, since there is an extremely, extraordinarily high probability that bitcoin will never again trade for under $1.
- Compound return. Same concept as before. As with other figures in this cumulative section, notice that the compound return takes into account every day and every year that comes after whichever year (row) you are looking at. Bitcoin and other cryptocurrencies are very volatile, so you may notice that in the most recent years of the Money Table (the last row or last couple rows), the compound return could in fact be better than if you had held (hodled in Bitcoin speak) since the very beginning. This may sound confusing, but it is true. This is because compound return takes time decay into account. Again, don't worry how to calculate this, but know that it is a highly valuable metric. Again, you can use these (cumulative) compound return figures to compare cryptoassets to other investments, such as government bond yields or stock dividends.
A further note about compound returns. Compound returns can be quite erratic in such volatile markets (such as Bitcoin and cryptocurrency) in the first few days, if you try to annualize them. Imagine a 30% swing in 3 days, and then trying to annualize this figure. For this reason, both columns regarding compound returns in these tables calculate compound returns beyond a 90 day holding period. By ignoring these short term % swings, the overall compound return figures are more reliable for the most recent year. So note that the most recent quarter (3 months, 90 days) of the coin's compound return history from today is always ignored. This will only effect the last row of this table. In other words, the compound return only starts calculating once you have purchased and held Bitcoin (or other crypto) for more than 90 days.