Lending and native exchange tokens outperformed all other token classes in 2019. A playing field for alpha hunters.

Blockchain markets have become diverse. The research platform Messari lists more than 15 qualitative token classifications. Yet still, most crypto investors focus on the two most well-known types of tokens: Currency tokens like Bitcoin and smart contract tokens like Ethereum. But looking at Return on Investment (ROI), there are better alternatives.

In 2019, especially cryptocurrency lending tokens and native exchange tokens outperformed the overall crypto market, according to data provided by Messari. Both token classes generated ROIs of more than 70% measured against the USD.

Lending tokens: 75% ROI in 2019

Lending tokens are used by Decentralized Finance (DeFi) platforms and enable users to lend and borrow money without using a bank or another third party. Lenders deposit cryptocurrencies or other crypto assets in a blockchain wallet and borrowers can then borrow these assets in exchange for interest payments. Smart contracts automate both the interest as well as the principal repayment.

Looking at Messari’s data, lending tokens were the best performing token class in 2019 with an average ROI of 75%. The best-performing lending tokens were Maker, Nexo, Ripio Credit Network, Aave, and Cred.

Decentralized lending is still a relatively small sector with only eight tokens in the Messari library. But the rise in token values suggests increasing use of DeFi lending services, making lending tokens one of the hottest sectors for growth investors. 

Centralized exchange tokens: 70% ROI in 2019

Exchange tokens are native to cryptocurrency exchanges and are typically used to pay trading fees or other exchange services, such as custody or administration fees. Binance, for example, uses its Binance Coin (BNB) to fuel its entire ecosystem and even to pay its own staff. 

Over the last year, exchange tokens had an average ROI of 70%, which is also due to the outstanding performance of BNB in 2019.

This category, however, only includes centralized exchange tokens. Decentralized exchange tokens have been down more than 40% compared to the US dollar. 

Lessons for investors: diversification and active portfolio management

There are three lessons to be learned for crypto investors:

Firstly, the crypto universe is bigger than just Ethereum and Bitcoin – and it’s worth to look at altcoins and diversify. In January 2020, the best performing altcoin returned more than 200%, compared with Bitcoin’s 40% ROI. 

Secondly, none of the sectors had a better average 2019 ROI than Bitcoin, meaning an investment into the entire lending token class would have resulted in worse returns than a stand-alone Bitcoin investment. Thus, to generate the highest ROI, investors have to research each singe project to identify the best opportunities, instead of broadly investing in one token class. 

Thirdly, crypto markets develop fast. What’s hot today can be a flop tomorrow.  Exchange tokens had a stellar ROI throughout 2019, but looking at the 90-days average, their performance has been less impressive. The same goes for lending tokens, which only achieved an average 90-day ROI of 15%. Thus, investors need to keep their eyes on the market and actively manage their portfolios. Cryptocurrency is not a buy and hold asset class.