The benefits of diversification: Comparing stock market, Bitcoin, and Ethereum returns over 5 years

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Stock Market vs Cryptocurrencies: what we will cover here?

Have you ever thought about how cryptocurrencies like Bitcoin and Ethereum performed  in comparison with stocks on the last 5-years? 

In this article, we’ve chosen two groups of stocks for comparison based on the Top-5 market caps, as follows: Banks (JP Morgan, Bank of America, Wells Fargo, Royal Bank and HSBC) and the Techs (Apple, Microsoft, Alphabet, Meta and Visa).

All returns are nominal (not inflation-adjusted) and stocks’ returns were calculated considering dividends reinvestment. We’ve found that Banks’ returns are far away from their golden eras, probably due to a variety of possible reasons. Some of them are listed here for our reflection. 

On the other hand, Tech companies have shown consistently higher returns than Banks but much lower than Bitcoin and Ethereum. 

At last but not least, we’ve applied a meta-heuristic technique to perform an exercise for an optimal portfolio with a combination of our stocks and cryptocurrencies in order to achieve a good return, but with a much lower risk than going all-in on a single asset. 

First opponent: The big banks’ stocks

Money has no smell. It doesn’t matter if you are trading stocks on the stock market or cryptocurrencies on some DEX. You can be the best analyst in the world, capable of making the best analysis, to find the best company at the best time, the most profitable portfolio and the optimal percentage of allocation on each asset. You may have developed the ability to build a mathematical model with 1 trillion variables that will trade stocks and cryptocurrencies for you. All of this is pretty cool, but at the end of the day you will have to answer one simple question: “Are you making money with it?”

Banks have been here forever. They play a significant role in each economy since they have a multiplier effect. We all know that many banks are full of hidden fees and poor service, but without them, the economy is doomed. When you deposit $1 at the bank, the financial institution will be able to lend more than $1 to a third party. How much more it will depend on each central bank’s monetary policy. The interest rate will depend on each bank’s risk profile and on how risky the third party is.

Investing in banks’ stocks has been very profitable once upon a time. But can these institutions still deliver good returns?  The total current market cap of the biggest 5 banks equals $1 Trillion USD. Let’s take a closer look:

  1.  JPMorgan (JPM): 339.89B
  2. Bank of America (BAC): 269.74B
  3. Wells Fargo & Company (WFC): 166.29B
  4. Royal Bank of Canada (RY): 131.71B
  5. HSBC Holding (HSBC): 119.28B

 Instead of comparing one by one, what would we have gotten if we invested $100,000 in September of 2017 until today? To make it simple, let’s consider 20% (20,000) for each stock and dividend reinvestment. 

All data for stocks’ price and dividends paid were gathered with Yahoo! Finance. The results are shown in Figure 1: 


In this example, $100,000 USD would make it to $ 132,000. A nominal (not inflation-adjusted) 32% increase over 5 years. The annualized rate is 5,71% per year. Given that the dividends are being taken into consideration in our calculus, this is a very low rate indeed. We have some options here. Maybe (we can’t say for sure), some things could have contributed to this: 

  • 1. The banks have grown too much; 
  • 2. Lower revenue due to the extremely low-interest rate during the past years;
  • 3. Increased competition with fintechs;
  • 4. Investor’s behavior (preferences) moving away from traditional stocks to take more risk.
  • Time to move to technology stocks.

Second contender: The big techs’ stocks

Now it’s time to filter the biggest market caps of companies from Information Technology (IT) and Communication Service (CS). The profile of these companies is completely different from that of banks. Tech companies normally don’t pay many dividends. The main focus is to reinvest its profits into its own business and create top of the edge products and next generation technology. 

Compared with our banks’ list, the individual market cap of companies like Apple, Microsoft and Alphabet surpasses all of the banks combined. The total market cap for our second contender is 6.7 Trillion USD. Here is the list:

  1.  Apple (AAPL): 2.51T
  2. Microsoft Co (MSFT): 1.92T
  3. Alphabet Inc (GOOG): 1.43T
  4. Meta Platform (META): 435.54B
  5. Visa Inc (V): 415.24B

 Figure 2 shows the same $100,000 exercise:


In this example, $100,000 would make it to $262,000.  A 161% increase during the given period and a 29% annualized rate. This is a much higher return than banks, right? Maybe the world is changing. (just maybe)

Figure 3 compares both Banks’ and Techs’ stocks. Let’s see how it goes:


We have a winner: Cryptocurrency, Bitcoin and Ethereum

I’ll not dare to discuss the utility of Bitcoin and Ethereum or make any other deeper analysis about dApps, gas fees, scalability and innovation. You can find relevant information about Bitcoin here and Ethereum here. Good reading!

Cryptocurrencies are very different than stocks since the project’s don’t have a cash flow to be discounted and a possible “fair price” is hard to achieve. So let’s put this aside and just analyse all of the price charts together.

Figure 4 shows the Banks, Techs, Bitcoin and Ethereum on the same period:


Table 1 below summarizes the Figure 4 results:


Table 1 shows a comparison of investment, % of Change and Standard Deviation of returns. Bitcoin (368,84%) and Ethereum (431,12%) had much higher returns than Techs (161,48%) and Banks (31,60%). The problem is the high volatility. Bitcoin has almost 5 times more Standard Deviation of returns than the Techs, but it doesn’t deliver 5 times the profits.

We don’t know what will happen 10 years from now, we have a clear winner for the 5-year period. Bitcoin and Ethereum have generated far more return than our Banks and Techs. 

Can we combine stocks and crypto?

Even though we have a winner, we have seen that our winners (Ethereum and Bitcoin) have high standard deviations (14,15% and 11,11%). Let’s make a not-so-simple exercise this time and apply some meta-heuristic algorithms considering the following premisses:

  1.  Initial investment of $100,000;
  2. Period: 09/2017 to 09/2022;
  3. Once the allocation is set at the beginning, no more changes can be made to the portfolio until the period ends;
  4. Each category (Banks, Techs, Bitcoin and Ethereum) can have an allocation of 10% (minimum) up to 30% (maximum);
  5. The sum of all allocations must be 100% (of course…);
  6. The newly combined portfolio must have the highest return possible since it can keep a combined standard deviation higher than the Techs (3,18%) but lower than Bitcoin (11,11%).

The animation below shows the algorithm trying to find a new portfolio (blue line) given our premises. We can see that it’s possible to considerably reduce the volatility through a certain combination between assets. It’s important to show that this is only true if the past repeat itself. When it comes to investments, it’s hard to say.

If you want to find out more about how meta-heuristic algorithms can be applied to a variety of fields, make sure to check this OptQuest White Papers.

Take a look at the animation:

The result achieved (optimal portfolio) is the black chart in Figure 5. Note that the optimal portfolio lies exactly below Bitcoin and Ethereum (both with high volatility) and above Techs’ and Banks’ stocks (lower returns):


Table 2 below shows the numbers of our optimal portfolio. Why allocate 10% to Banks if they are struggling to generate returns? Simple. They do generate returns, even if it’s low returns, they pay dividends and they have a lower volatility. When you add this kind of asset, you may lose return but you may also reduce the portfolio’s volatility.



Did our cryptocurrencies win? Yes. No doubt about it.

Banks can be outdated for some investors? The market is looking for more disruptive technology projects? Yes and Yes.  

Going all-in on cryptocurrencies like Bitcoin and Ethereum it’s a good choice? Well, it depends on your objectives. I’m not the one who is going to tell you what to do with your money. But I can tell you (and also prove) that a combined portfolio can achieve good returns with a lower standard deviation.

We can conclude that disruptive technology, no matter if it comes from tech companies or cryptocurrencies, seems to be just getting started. The world today is far more dynamic than in the 70s or 80s. We rely on technology to keep evolving. 

Our main conclusion should be that it doesn’t matter who was the winner. What really matters is that you can’t put your eggs in just one basket. As more knowledge you have about stocks and crypto, the more ability you have to build a balanced portfolio and to achieve high returns with lower volatility.

Forget the winning assets and start buying good stocks at good prices and potential cryptocurrency projects.  Combine them wisely and wait. You don’t need a winner asset, but a winner portfolio. It won’t be easy, but it’s possible. Take your time.