Lesson 4 | Portfolio Optimization – Relative Performance Analysis

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Onto the lesson!

Let’s start this lesson with what looks like a paradox. It’s proved possible, recently, to get 2x your holdings in BTC with a tiny 6% move without any leverage, options, 3x coins, etc.

To explain, suppose that your whole goal in cryptos is to acquire as much as possible of either BTC or ETH. Then you could just use TradingView and load up this chart.

That shows you the value of ETH in terms of BTC. If it’s going up, that means ETH is earning relative to BTC. If down, the reverse. That’s why this is called relative analysis.

I’ve also got a white line in there. That’s the 160 simple moving average (called just the moving average on TradingView). It would have told you to buy ETH when it was trading at .03278 BTC and then sell out when it was worth .06678 BTC.

Now those trading days correspond to when BTC was worth roughly $59k (entry) and $55.3k (exit). So, while over that entire period BTC lost about 6.2% in terms of US dollars, you more than 2x your holdings of BTC.

That’s nearly the equivalent of a 15x leveraged inverse bet on BTC, and you get all that without the risk of liquidation, options expiration, or average daily rebalancing nonsense (that happens with 2x and 3x coins).

How is that possible?

Well, you would have entered ETH (from BTC) April 1st and exited ETH (to BTC) on October 7th. Here’s what those entry and exit points look like relative to US dollars.

Basically, the reason you gained so much is that ETH massively outperformed BTC during that summer crash of 2021 and then BTC gained a lot relative to ETH when it bounced back. This strategy gives you the upside to both movements.

If you aren’t doing this kind of analysis on your crypto holdings, you are losing enormous potential returns. Notably, it is automatically incorporated in the Crypto Rider subscription’s output of cryptos. The one difference is that we don’t do it just on 2 coins, but on all the top coins we follow.

That explains why, in part, my portfolio ended up with so much LUNA at one point, and also why I have so massively outperformed BTC during my investment history (by better than 10x over the last 2 quarters of 2021).

Let’s look a bit more at how that extended analysis works.

Extending The Idea

Obviously, if this idea can be done with BTC and ETH, it can be done with other coins too. Here’s LUNA-BTC. Obviously, it’s been smarter to own LUNA for a long time.

Here’s Solana’s chart, which interestingly shows that at no point over the past year was it preferable to hold BTC over SOL.

And here’s Avalanche’s chart over the same period–also mostly a good idea to own AVAX.

So, you get the idea. Imagine doing that with 10 coins that you really like–this assumes you’re pretty good at this, incidentally–and you are going to allocate your portfolio to those top 10 holdings on a relative basis.

You could think of your portfolio as having 10 slots to fill–each with BTC or an alternative coin. If BTC is doing pretty well, you might end up owning a lot of BTC. Say like the following example.

BTC-ETH – Selected: BTC
BTC-BNB – Selected: BTC
BTC-SOL – Selected: BTC
BTC-LUNA – Selected: LUNA
BTC-AVAX – Selected: BTC
BTC-DOT – Selected: BTC
BTC-ADA – Selected: BTC
BTC-MATIC – Selected: MATIC
BTC-DOGE – Selected: BTC
BTC-ATOM – Selected: ATOM

In that portfolio, you’d have 70% BTC and 10% each LUNA, MATIC and ATOM. If BTC were doing poorly, you might end up with a portfolio that has no BTC at all (as I’ve had for more than a year now).

You’d switch between coins whenever your indicators said to switch (above or below the SMA 160, for example).

Of course, I have a better algo than the SMA 160 for this, but I think you can tell from the charts that it’s not a terrible indicator.

Concluding Thoughts

The notable downside to any form of relative analysis is highlighted if we return to the opening example. In that case, both BTC and ETH lost value relative to the US dollar over that summer period in 2021–ETH just lost less value.

If your only goal is to acquire more cryptocurrency value long term, then you can just trade top coins in terms of each other and ignore dips and crashes.

If your goal is to acquire more cryptocurrency value relative to the US dollar, then you’ll need to use something like the bubble trading strategy developed in the main 15 lessons of TheArtofTheBubble.com. The Three Stage Algorithm, the output of which Crypto Riders get access to, accounts for both the absolute level of currencies (relative to the US dollar) and their relative level of value in terms of BTC.

This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.

That’s it for this week. Remember to join us on Discord if you haven’t already.

Happy Trading!!

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