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Bitcoin: Introducing a "Different Approach" of Investing

by Patrick Oberhaensli, on May 14, 2019 4:23:00 PM

Often active investing in Bitcoin focuses on the classic managed futures approach.  However, in this article we will explore a very different approach of anticipating the Bitcoin value.  Although it was not known before the "2018" crash, in the last few years Bitcoin had a substantial maximum drawdown in the region of 80 to 85%. In order to estimate the possible level of maximum drawdown beforehand, one could/should have looked to other (very) risky assets with 2 similar key price characteristics:

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  • “Exponential” moves upward (followed by downfalls)
  • Multi-directional moves that can be sharp and are often difficult to explain

Such “smart” comparisons typically offer new insights as well.

Comparing US Oil and Bitcoin

A great example of a similar type of risky asset is US Oil, although it is not the only one that could be considered. Oil, in the form of a long-only futures exposure, has a long-term maximum drawdown in the 90 to 95% range.

Futures have a short(er) term expiration and therefore need to be rolled (replaced by) from one future to the next one.  Depending on the form of the future curve and one's position, futures rolling can cost either in contango (costs if you’re long) or in backwardation (brings you money if you’re long). Future rolling can explain parts of drawdowns.

Moreover, 2008 saw a very rapid upward-move, it had started in 2007.  The acceleration continued towards the end and was followed by an even more rapid and deeper downward move. Afterwards, oil moved in a range for a number of years before falling even further in 2014 and 2015. But now in 2019, oil has a sharp upward move of more than 33% as per beginning of May.

Actually, the purpose is not to look for any causality between the movements of Bitcoin and US oil but to “detect” useful market behavioural insights that are not (necessarily) time congruent, meaning from another time period. This leads to a first key point in the analysis: the parallel in Bitcoin’s even faster upward-move at the end of 2017 and the oil one in mid-2008: in both cases, the distance of the price (the fastest moving average as it is made of just one price) to the 50 weeks simple moving average became clearly bigger and bigger. It is therefore reasonable to expect, by means of analogy at the behavioural level, that the following downward-move – if very quick – was likely to be sharp or very sharp. That means that a long position should have been cut well before the end of the downward-move.

But at what level? For Bitcoin it is around 14’500 USD or 25% below the peak.  This was also the point at which oil reached, by a downward move of the price, the 50 weeks simple moving average. After that, one would have anticipated a further downward-move, meaning a short position could have been considered as well. Also, very similar to  oil after its crash, Bitcoin has been moving in a range, having come down from the peaks at levels – expressed in percentage – (the 80 to 85% drawdown size). Therefore the “next” move is to be observed carefully.

Implementing Strategic Positions

The latest price range could potentially have been exploited with simple technical analysis techniques meaning when the lower side of the range is reached one would go long. Looking at what happened to oil and its downside break-out of the range, the action would be different: one needs to be particularly prudent here.  When the range is left on the downside, we would take no-position or a small short position to start. This would be followed by disciplined action, that is increasing the short position, in case of that break-out becoming marked.  We would take no position when one would not be allowed to or could not go short.

One would implement a larger long-position in case of a clear break-out to the upside.  This happened for Bitcoin in early April 2019, a break-out on the up-side (not the down-side) and it is very significant, in no comparison to what we could have be expected from the trading range duration (the trading range did not last that long, only a few months). Also from the week of the 6th of May 2019 on, a really steep up-move in the price can be observed – at least until today (the 14th of May 2019).

Applying Leverage

It should also be noted that position sizing, instead of being long or short at 100% exposure, is of help if a proper market signal intensity is considered as well. But one does need to take into account precisely the total costs related to dealing with Bitcoin when willing to apply such an approach that requires (quite) more transactions. Moreover, should leverage be envisaged in that context – meaning one is very confident of the quality of the “prediction” – a lot care is essential: Bitcoin can exhibit moves of multiple percentage points within hours.

Another analogy with oil is very important to take into account: oil went down by the end of 2018 and Bitcoin did as well go in the same direction, exactly when equities had a stress moment. Bitcoin is not necessarily uncorrelated or negatively correlated with equities when it has a meaningful drawdown.


As a conclusion we may say that in order to evaluate the (price) behaviour of Bitcoin, it is worth to look beyond its own price action, especially because it is a young market without a collateral value to look at. Therefore, it is necessary to identify some key elements that allow to make reasonable comparisons, especially when it comes to rapid and large moves.

On our side we are specialised on our own risk-based strategies (that are very different from trend-following) and have developed a corresponding ecosystem of Long/Short strategies.

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  • This content is not intended to be a solicitation nor an offer
  • The preparation of the information provided herein is done with a high level of care. Nevertheless, errors are possible
Topic:Active TradingInvestment StrategyCrude OilBitcoin
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