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Boost Performance with the Bitcoin Relative Strength System: A Smart Alternative to buying-and-holding Crypto

Some who invested in Bitcoin in the early years have seen massive growth in the value of their investment.

But most Bitcoin participants are not buy-and-holders. They tend to make ill-timed entries and exits because of the massive volatility associated with this asset – this is why we see extremes of FOMO and fear in the Bitcoin market.

Enter the Bitcoin Relative Strength Strategy. In this post I show a Bitcoin Trading Strategy that intelligently takes positions in and out of Bitcoin and actually outperforms buying and holding while generating less than half the drawdown.

Why Consider Bitcoin?

Bitcoin’s liquidity and growth potential make it an attractive investment. In 2016, Bitcoin began seeing around 10 million transactions per month, solidifying its place as a tradable and liquid asset. The compounded annualized growth rate since 2016 is 81% where $10,000 invested in a buy-and-hold Bitcoin strategy in 2016 would have grown to $1.2 million by 2024.

But it is an extremely volatile asset with gut-wrenching ups and downs. During the time span, it has had large drawdowns, where the biggest one was a 76% loss peak-to-valley – this can make it a psychologically challenging investment to maintain.

Can we do better? The Bitcoin Relative Strength System suggests we can.

Base Case: Can Simple Trend Following Work?

Before we dive into the Relative Strength strategy, let’s look at whether a simplistic trend rule can work:

• Stay in Bitcoin if it’s in a 1-year trailing uptrend.
• Switch to cash if Bitcoin is in a 1-year trailing downtrend.

Here’s the backtested equity curve if we apply this rule from 2016 to 2024:

This simple trend system does outperform buy-and-hold. Buying-and-holding an initial $10,000 of Bitcoin would have resulted in a final value of $1.2 million whereas an initial investment of $10,000 grows to $1.4 million if we use the trend rule.

That’s a good outcome from a performance standpoint but there is still a lot of volatility. This system has a -45% drawdown and the equity curve is quite choppy. The solution? A more nuanced approach: Relative strength trading against diversified assets.

The Bitcoin Relative Strength Strategy

To enhance returns and decrease risk, the strategy incorporates Gold and the S&P500. These assets are not only uncorrelated with Bitcoin but also exhibit a structural upward bias over time. Here’s how the system works:

1. Evaluate Relative Strength Monthly: At the end of each month, calculate the recent performance of Bitcoin, Gold, and the S&P500.
2. Switch to the Strongest Performer: Move investments to the asset showing the best relative strength.
3. Risk Management: Use a stop-loss strategy to safeguard capital, shifting to a money market fund if the maximum allowable loss is breached mid-month.

Backtested Results

Backtesting this approach shows a significant result. The strategy offers higher annualized returns with just half the drawdown compared to a pure Bitcoin buy-and-hold approach. In the backtest, I used GBTC (Grayscale Bitcoin Trust) as the Bitcoin proxy because it is the first publicly traded bitcoin fund and has the longest history.

Here’s a look at the drawdown graph of the strategy superimposed over buy-and-hold Bitcoin. We can see that it is cut by more than half:

Implementing the Strategy

Evaluate the rules at end of each month and take a position in Bitcoin, Gold or S&P500. For implementation, you can use the following ETFs:

• Bitcoin: IBIT, FBTC (there are many available ETFs for Bitcoin exposure)
• Gold: GLD
• S&P500: SPY

If trading a small futures account: micro bitcoin futures (MBT), micro gold futures (MGC) and micro S&P Emini futures (MES)

Conclusion: Smarter Investing with Lower Risk

The Bitcoin Relative Strength Strategy is a compelling alternative to the popular buy-and-hold or ‘HODL’ approach, delivering better returns with significantly less risk. By combining Bitcoin, Gold, and the S&P500, investors can ride the waves of volatility while protecting their portfolio against extreme drawdowns.

Intrigued by this approach and want to dive deeper into the details? The ebook is available here – it shows you the exact rules & parameters and gives the full backtested trade history. It also goes in depth on how to implement the strategy.

Invest smarter. Reduce risk. Outperform Bitcoin.