Solurana InsightsThe crypto graveyard and the bias hiding in hedge-fund returns
Thousands of cryptocurrencies launched in the 2017 boom; most are worthless now, and you never hear about them. That blind spot inflates every track record you read.
- Survivorship bias: winners stay visible and keep reporting while losers close and vanish, so the reported average reflects only the survivors.
- Hedge-fund indices are the textbook case — failed funds drop out of the database, flattering the headline return versus what investors actually earned.
- Backfill bias compounds it: a fund's strong early numbers are filled in retroactively, giving the index a history no investor ever lived through.
- Together they can lift a reported index return by a few points a year (survivorship alone ~1–3%); before trusting any average, ask what is missing from it.
In 2017, riding the crypto boom, more than 900 new cryptocurrencies launched through initial coin offerings. By the following year, roughly half had already failed (some before they raised a cent, many after), and independent trackers were cataloguing more than a thousand "dead coins." Today the survivors get the headlines: Bitcoin's returns, Ethereum's rise. The hundreds that went to zero are simply gone, unmentioned and uncounted.
That asymmetry, where winners stay visible and losers vanish, is survivorship bias, and it is one of the data traps the curriculum returns to. Hedge funds are the textbook case.
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What survivorship bias does to a track record
Picture an index of hedge-fund returns. Funds that do well stay open and keep reporting. Funds that blow up close down and stop reporting, and many databases quietly drop them. So the index is built almost entirely from the survivors. The funds that lost everything have vanished from the record, and the reported average looks far healthier than the experience of an investor who actually held a spread of them, winners and losers alike.
It is the crypto graveyard in miniature. Count only the coins still trading and the asset class looks like a money machine; count the ones in the ground and the picture changes completely.
Backfill bias makes it worse
A close cousin compounds the problem. Backfill bias occurs when a fund is added to a database only after a strong early run, and its good early numbers are filled in retroactively, so the index inherits a history no investor ever actually lived through. The funds that stumbled out of the gate are never added at all.
Together they can lift a reported hedge-fund index return by a few percentage points a year (survivorship alone is typically put at 1–3%) over what investors really earned.
The same trap, everywhere
The curriculum singles out hedge-fund index returns precisely because these biases inflate them, and a careful analyst is expected to discount the headline number accordingly. The deeper skill generalizes far past hedge funds — to the crypto index, the "average startup return," the back-tested strategy that only ever saw the stocks that survived to the end of the sample.
Before you trust an average, ask what is missing from it. The funds that died left no row in the table, and that absence is what flatters the number.
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Sources: Cryptonews — 46% of 2017 ICOs flopped, 13% semi-failed · Cointelegraph — study: ~80% of 2017 ICOs were scams