By Gabriel Negrín
The financial markets are full of references to animals. Bull, bear, dead cat bounce, grey rhino events... you name it. And today’s emerging crypto market does not escape this.
However, there is one more animal to enter into the equation: The Monkey— actually, primates in general.
Many of us are familiar with WallStreetBets and their campaign called 'Apes Saving Apes', with which they donated 388K to the Dian Fossey Gorilla Fund.
In the crypto market, many have used their earnings for this kind of donation. Others have bought Bored Apes NFTs.
We have also seen how many people when betting on a token without considering any risk say they aped into it. A select few people have done well with this strategy - the vast majority have not done so for themselves.
Now, with all this in mind, could a literal monkey beat the market?
The statistics say yes.
Random Walk: The Start of It All
All of this starts with Princeton University professor Burton Malkiel who was known for conducting various experiments in his classes. However, everything changed in 1973.
In '73, Malkiel published "A Random Walk Down Wall Street." The book would become a bestseller in a short period.
So important was this book that part of the title is used today to explain certain unexplainable things about the market.
A random walk is a term used to describe market movements that do not follow a logical or known pattern. The term is also often used disparagingly to refer to fortune tellers in the market.
In the book, Malkiel takes the term to its most extreme expression.
A blindfolded monkey could pick up a financial newspaper, throw darts at it to pick stocks and it would do just as well as stocks picked by an expert.
Well... even if it's extreme, there may be something there.
Robert Arnott, CEO of Research Affiliates, had a thought that upset more than one. According to Arnott, Murkiel was wrong — the monkey would do a lot better than the vast majority of experts.
Shocking, right?
Well, not so much...
Monkey Picks v. Financial Experts: Who Wins?
Several experiments of this type have been carried out. Many have placed monkeys to pick stocks from a pool of 1000 stocks. Others have narrowed it down to stocks from the S&P500. Then there are those who gave even fewer choices — just keeping the top 100 companies in the S&P500.
The monkeys had to choose between 10 to 30 stocks from this pool and...
They won. And they beat the pros 98% of the time.
Such was the case with Lusha, a Russian monkey. Lusha was given 30 options to choose from blindly, and she picked 8. The portfolio created by Lusha outperformed 94% of Russian investment banks.
Now, don't think that monkeys have some kind of metaphysical connection with the market to discover the best stocks. There is a very simple reason for this.
The Beauty of Randomness
Imagine conducting this experiment today. The options are narrowed down to the 100 largest companies in the S&P500.
Of these 100 companies, it would take more capital to move into the top 10. What happens when that same capital goes to those below the top 10? These would report almost astronomical gains.
What happens if this picking process is randomized? Well, there would be a greater chance of choosing stocks that have not yet received large injections of money.
Thus, there is a greater chance of being ahead of the pack.
Can a Blindfolded Monkey Beat Bitcoin?
Now let's get into the monkey business.
What happens if we do the blindfolded monkey experiment with crypto? Can we even beat bitcoin?
Well, lucky for you, I conducted the experiment by myself... only without throwing darts... or having any monkey at home.
To make up for it, I asked Google Assistant to randomly choose a number from 1 to 100. I repeated this process 10 times.
Google picked the following numbers for me in the following order: 8, 51, 23, 71, 69, 81, 83, 66, 22, and 76.
After I had my numbers, I took a trip back in time with the Archive's Wayback Machine. Here, I took the opportunity to see the CoinMarketCap top 100 in October 2020.
Let's see what my picks were.
- Chainlink (LINK) was number 8.
- 0x protocol (ZRX) was number 51.
- Wrapped BTC (WBTC) was number 23.
- Sushi (SUSHI) was number 71.
- Arweave (AR) was number 69.
- Enjin Coin (ENJ) was number 81.
- Terra (LUNA) was number 83.
- ABBC Coin (ABBC) was number 66.
- NEM (XEM) was number 22.
- CyberVein (CVT) was number 76.
Simulation Time: Random Picks vs Bitcoin
Had I invested $1,000 in Bitcoin back then, I would have around $6,296 today.
Can my random picks beat that?
Let's see.
Had I invested $100 into each of the previous coins, my portfolio would be worth $17,510.40 at the time of writing. That is an ROI of 1,710% — 17.5X my money.
Only ABBC and CVT went south — one losing 60.18% of its value and the other losing and 91.80% of its value.
However, we had two outliers — two almost tail-looking events. One was Arweave, which had a 1,127.33% return on investment. The second one was Terra (LUNA). One year ago, LUNA was sub $0.40 — today it is worth almost $43. $100 invested in LUNA back then would be worth around 13K at the time of writing.
Now, when you compare that to the $6,296 bitcoin would have made, it seems like the winner is quite clear. Right?
Well, not quite...
The Reason Why You Shouldn't Listen to Me
Look, I didn't buy any of these tokens back then. This is just a what-if.
Looking in retrospect, it seems like LUNA was an obvious buy. But I didn't buy any. And if I bought it, I most probably would have sold it after 10X.
In this case, this simulation favored this hypothetical scenario. But this could have gone terribly wrong. Also, the experiment would have occurred in a highly bullish year — who knows how it would have turned out in a bearish period.
This only means one thing: you should not randomize your investments. You should do your research and once you have come up with a project that you understand and feel confident about, invest what you can afford to invest.
The reason LUNA went from being number 83 to number 12 is that it is a great project. It is not random at all.
It makes no sense for me to tell you "if you had bought X amount of X token, you would be a millionaire!". It doesn't matter because you didn't and there was no way to know.
But, that can change.
You can get a token that does the same thing in a year, clearly. You just have to do your own research.
That project that will bring you great returns is out there.
Go find it.
Just don't ape all your money away.
