Can POS Assets Earn You More Money Than BTC?
A statistical analysis that evaluates the market performance of 9 different POS assets vs Bitcoin in 2021.
Proof-of-stake is the new thing in the blockchain space. Due to the multiple technical perks, these blockchains are considered by many as the next generation in blockchain technology.
How do they measure against the almighty Bitcoin? Are they a better investment?
Make sure to read the whole post, as we make this honorable attempt to boil facts and data down for the answer to this million-dollar question.
As a quick summary, the notable advantages of POS blockchains are:
- Environmentally friendly
- Exponentially more secured against 51% attacks
- A presumed strengthened economic design
- Higher transaction throughput without compromising decentralization
In this analysis, we will assess 9 POS assets and how they performed in terms of price action vs Bitcoin.
Before we deep dive into the data, there is an important consideration.
Bitcoin has a deflationary economy and the network security is maintained by miners which operate on a different economic layer than the investors, whereas with POS blockchains, the investor community that owns the cryptocurrency also stakes and secures the network, thus, enabling an additional layer of income to it. This is why in order to have a correct interpretation of the market performance, we need to apply an inflation-based adjustment on the price that would take into consideration the combined value output of both price and quantity increase.
Or to put it in simple terms, with BTC you make money only if BTCs price goes up because the amount of BTC that you own does not change, whereas, with POS assets, you make money also by generating staking income which leads to an increase in your base amount. It's like being an investor and a miner at the same time, without the need to buy mining equipment. It really is a 2-in-1 package that arguably improves the investment appeal.
Because of this feature, with POS blockchains, you technically also make a profit even if the price stands still or possibly even if it decreases, as long as the price decrease is outpaced by the staking income. And because different POS blockchains have different economies and inflation rates, we will adjust each one individually and standardize the output for you to enjoy an accurate comparative analysis.
The simple math formula for normalizing the closing price with consideration to staking income is as follows:
([Base Amount] + [Base Amount x Daily Staking Income] ) * Daily Close Price = Staking Inflation Adjusted Price
Why is this important? A flaw in current data aggregation sites (in particular CoinMarketCap and Coingecko) is they do not reflect the actual staking income and its significant impact on price performance. As a matter of fact, they don't even reflect that an asset has staking income at all, thus making it hard for the average Crypto Joe to recognize, interpret and make informed investment decisions.
This lack of vital information really may end up twisting the charts and giving a false sense that some of these assets are underperforming. For instance, a high APR staking asset that has a lower price increase may end up generating more wealth than a deflationary asset that has a seemingly higher increase.
Is this the real case? Let's find out.
For this analysis, we have selected a mix of 9 POS assets divided into three categories.
The criteria for the shortlisted assets to land in the list, we set forth four criteria:
to have sufficient liquidity relative to their market cap
to be developed by established teams with a 4-year minimum history in the industry
to have a positive reputation
protocols to have had no technical or security incidents
Since we want to keep things as objective as possible in the shortlisting process, we are assuming all 9 technologies in our post are worthy and won't be discussing the technical merits of the protocols. We will rather focus on price performance and hard metrics that could give us a hint of their head-to-head performance.
Large Caps > 10B:
Ethereum 2.0 390B, 5.65% APR
PolkaDot - 33B, 13.47%
Cosmos - 10B, 9.02%
Mid Caps > 1B
Algorand - 8B, 5.5%
Vechain - 7B, 1.46%
Ziliqa - 1.2B, 13.87%
Small Caps < 1B
Skale, 400M, 9.7%
Oasis Network, 290M, 13.76%
Hydra, 140M, 82.78%
We've used Coingecko's historical data and performance data for the period of 5th Jan 2021 - 30 September 2021 for each of these assets, with additional formulas implemented to calculate:
Inflation income
Combined profit
Volatility risk
Max Running Drawdown
Average Days to Recover
Average Drawdown
Risk/Reward Ratio
The whole research took approximately 30 hours, so enjoy.
Here's a sample of data for the Hydra Chain (HYDRA) based on an averaged 82.78% APR. HYDRA is part of the Small Caps group and we are using it as an example because it has a bit more different economic design that allows a higher inflation rate (HYDRA Burns 100% of transaction fees to compensate for a higher inflation rate to stakers).
An investment of $1,000 at the beginning of Jan 2021, would have yielded $18,344 in profits as of 30 Sep 2021, of which $8,575 would be the result of the staking income. However, since Coinmarketcap and Coingecko don't reflect the staking income impact anywhere in their interface, this economic layer remains completely invisible (and widely misinterpreted).
As a quick comparison, $1,000 invested in Bitcoin at the beginning of 2021 would have yielded a $333 profit. This is because with Bitcoin the only opportunity of profit arises from price appreciation, which amounts to 33.3% for that period. There is no staking income that could boost the end result.
In fact, HYDRA could have performed worse on a head-to-head price-performance comparison and still would have outperformed Bitcoin's price appreciation when accounting for staking income - by a wide margin.
Here's a chart that visualizes the staking income and its impact on a HYDRA position opened on 5th Jan 2021.
The ratio between the staking income and the base price performance comes at a 1.79x adjustment factor. Which means that for every 100 HYDRA staked, another 79 HYDRA were received as rewards.
If we had to compare HYDRA versus Bitcoin on a head-to-head price chart, the accurate approach would be to apply the 1.79x adjustment to the price as simply said, we would hold 1.79x quantity due to the strong staking income. In this case, $18.20's price as of 30th Sep 2021, would be equivalent to $32.58 after the normalization.
Seems weird, right? $32.58 income-adjusted price as opposed to the $18.20 shown on exchanges.
Just to be sure, we aren't making a mistake, let's see once again if it all checks out.
Jan 12th price for HYDRA is $1.69.
→ $1000 invested would mean a base amount of 592 HYDRA.
The high APR Staking income would generate us a total of $8,575 solely as staking income.
At the same time, the value of the base amount grew to $10,769 (at the current price of $18.20).
→ The total combined output would be $19,344.
When we divide this amount by the base amount of 592 HYDRA, we arrive at the normalized price of $32.58 per HYDRA.
And here's the ongoing price adjustment charted on a timeline. Notice how the longer you are in a position, the stronger the price adjustment becomes.
This methodology is applicable to just about any blockchain asset that has some form of staking. If you don't adjust for the staking income, then this means you are simply reading the charts wrong and you are making decisions based on false data.
And since staking income compounds on a daily basis, the longer the chart period is, the higher the impact of your staking income will be on the final outcome.
Based on the above methodology, here is the aggregated chart with the income-adjusted prices for all of the 9 assets in our sample portfolio.
(All the data has been extracted through the same methodology and we've used Coingecko's historical data)
Here's a snapshot of the sample of the data...
And a visual chart of the performance. The following chart has all POS assets with price-performance + staking income included (each asset in a different color):
As a comparison, here's how Ethereum's APR adjusted chart looks compared to BTC
The aggregated table below shows the end result with the total profit, including staking rewards - sorted according to performance ranking.
It is interesting that 8 out of 9 POS assets in our research significantly outperformed BTC over the last nine months.
What may be the reason for a Proof-of-Stake asset to have a potential above-average market performance? Marketing-wise, the staking comes as an added value feature that deflationary assets such as BTC simply don't have. The psychological factor of knowing for certain that you will own an "X" amount more coins after a certain period of time, does tend to attract investors.
At the same time, long-term holders get the most out of it, which results in a more loyal supporter base.
And here are the individual charts for each of the 9 assets sorted according to performance vs BTC
#1 HYDRA
$1000 investment would have generated a $19,344 combined position + staking income
#2 Cosmos
$1000 invested, would have generated $5,792 combined position + staking income
#3 Oasis Network
$1000 invested, would have generated $3,653 combined position + staking income
#4 Algorand
$1000 invested, would have generated $3,444 combined position + staking income
#5 Vechain
$1000 invested, would have generated $3,035 combined position + staking income
#6 Ethereum
$1000 invested, would have generated $2,976 combined position + staking income
#7 Polkadot
$1000 invested, would have generated $2,925 combined position + staking income
#8 Skale
$1000 invested, would have generated $2,699 combined position + staking income
#9 Zilliqa
$1000 invested, would have generated $1,284 combined position + staking income
It's important to emphasize that altcoins generally tend to be more volatile. This is why we decided to take this research a step further and extract data that would show the implied risk volatility of holding each one of the 9 POS assets in comparison to BTC, again for the same period.
As a methodology for calculating the Risk/Reward factor, we divide the current combined profit by the max historic drawdown. The higher the ratio is the highest statistical upside (historically speaking). HYDRA is again in the first spot because of the stronger performance, while having comparable drawdown data with the rest of the sample. Second place is Cosmos, third place is Algorand and forth place is Ethereum, which interestingly outranks Oasis Network, despite having yielded a lower gross amount.
Perhaps one of the most important aspects is the maximum historical drawdown for the last 9 months. This shows the largest drop from the highest peak. Something which comes as a historical "worst case" scenario for the sample period.
As you can see, with Bitcoin, the maximum theoretical drawdown was 53%. This means that if you had entered the market at a perfectly bad moment, you would have experienced a -53% reduction in the value of your position.
Another key statistic is the average number of days it took for all the past drawdowns to recover (disregarding the current running drawdown which is still in a recovery phase).
You will notice BTC drops lasting slightly longer than 20 days on average, with Skale taking the longest breaks and Ethereum recovering quickest.
In the below chart we have plotted the average price impact experienced during the drops.
Statistics show us that Cosmos (taken as an example) dropped on average -24% and recovered on average in 21 days. This data can be used to get a feeling of the past behavior of the community and investor interest behind the asset's market movement.
Both charts will of course change significantly after the current drawdown is complete, which we are tracking in a separate graph as follows:
As of the moment of writing this post, the assets have been in a drawdown for quite a significant period.
Why is this information important?
Statistics are in no way a fortune teller, however, they are the next best thing that you can use to base some form of expectation on the volatility risk for a given asset. The fundamental assumption with statistics is that if it happened before, there's some probability for it to happen once again.
In addition, by knowing how staking impacts price and the gross value your position is generating, you would be less prone to emotional decisions based on head-to-head comparisons with a deflationary asset such as BTC.
You can find links to the projects that were included in this material below.
Performance Rank | Project | Community | Website |
|---|---|---|---|
1 | |||
2 | |||
3 | |||
4 | |||
5 | |||
6 | |||
7 | |||
8 | |||
9 | |||
10 |