Measuring performance honestly: benchmarks, risk adjustment and the numbers people avoid
Almost everyone in crypto believes they are doing well. Very few have compared themselves to simply having bought Bitcoin and done nothing, which is the comparison that matters.
A return without a benchmark is not information
Up sixty percent this year sounds excellent. If Bitcoin rose one hundred and twenty percent over the same period, you underperformed the simplest possible strategy while taking more risk, spending more time and paying more fees.
The benchmark question is not academic. It determines whether your activity has value. If a portfolio consistently trails buying and holding the majors, the correct professional conclusion is to hold the majors, and that is a genuinely good outcome to reach.
Two ways to calculate a return, and they disagree
If you deposit and withdraw over the period, a simple start to end percentage is wrong, and the direction of the error depends on when you added money.
- Money weighted return measures what actually happened to your money, including the effect of when you added it. This is your real financial outcome and it is the number that matters for your wealth.
- Time weighted return strips out the timing of deposits and measures the performance of the decisions themselves. This is the number that tells you whether your selection was good.
- Why the gap is informative: if your money weighted return is much worse than your time weighted return, you have been adding money after rallies and holding back during declines. That is an extremely common pattern and it is fixable once you can see it.
Risk adjusted, because return alone hides everything
Two portfolios both returned forty percent. One drifted steadily upward. The other tripled, collapsed eighty percent, and recovered. These are not the same result, and the second is not repeatable.
The costs that quietly consume returns
- Trading fees. Small individually and substantial in aggregate for an active approach. Add them up for the year as a single number; it is usually larger than expected.
- Spread and slippage. Rarely counted and often exceeding the visible fee, particularly on smaller assets.
- Gas and bridging costs. A real drag for anyone active on chain.
- Tax. Frequent trading in most jurisdictions converts unrealised gains into taxable events. The after tax return is the only one you actually keep.
- Your time. Not a monetary cost and a real one. Twenty hours a week to underperform holding is a poor outcome even when the return is positive.
The annual question
Once a year, compute your after fee, after tax return against the benchmark, with your maximum drawdown alongside it. Then ask whether the activity earned its keep.
For a meaningful proportion of people the honest answer is no, and acting on it, by simplifying to a core holding with a small active portion, is the most profitable decision they will make. Reaching that conclusion from evidence is a professional outcome, not a defeat.
BEFORE YOU MOVE ON
Common questions
What should I benchmark my crypto portfolio against?
Bitcoin, or a Bitcoin and Ethereum split for a diversified portfolio. If you cannot beat simply holding the majors over a full cycle after fees, tax and risk, holding them is the better strategy.
What is the difference between time weighted and money weighted returns?
Time weighted measures the quality of your decisions by stripping out deposit timing. Money weighted measures what actually happened to your money. A large gap usually means you added after rallies and held back during declines.
What is the most useful risk metric for crypto?
Maximum drawdown, and return divided by maximum drawdown. Forty percent gained against a twenty percent drawdown is a completely different achievement from the same return against a seventy percent one.
Risk warning: crypto is highly volatile and largely unregulated. You can lose everything you put in. Nothing here is financial, investment or tax advice.