AOTB Series | Lesson 16
Hello Bubble Riders!
This is a brief write up of the Crypto Maxi strategy. It’s the free version, which explains the basic idea in terms of BTC an ETH, though the premium version uses a much broader selection of alternative coins.
The heart of a crypto maxi strategy is that it measures success not in terms of dollars (primarily) but in the accumulation of a benchmark token–which has to be BTC at this point.
This was the focus of the AureliusDAO and two developments have returned my attention to the topic. First, we may have a legal path forward with that project–even (especially) for unaccredited investors. Second, I was asked by Discord members to elaborate on trading during a crypto winter.
They get dail read outs that look like the following. That “Beating BTC column” is what they can use to execute the crypto maxi strategy. Without subscribing, probably you’ll be better served with a LSMA 160 on TradingView. But for this analysis, I wanted to review what the subscribers could be doing if they just traded one box there–the “Beating BTC” box for ETH.
The idea is to buy ETH when that’s green, and sell into BTC when it’s red. If you were using the LSMA 160 strategy (which is not as good as the subscriber’s strategy, but is still good), you need to go to TradingView and pick ETH in terms of BTC.
When the closing price is above the line buy into ETH. Otherwise sell into BTC.
For this lesson, let’s just look at how well the “follow the box” strategy would have worked for subscribers. I’ve backtested beginning January 1 of 2018, right at the beginning of the massive decline (especially for ETH), but a little after the sell-off began for BTC.
The reason for that date selection is that it build in a margin of safety for our analysis. BTC tends to outperform everything during a crypto winter, and it certainly did so historically beginning in the 2018 crash.
If the crypto maxi strategy works, then, it will have succeeded in conditions that are not conducive to the strategy. To recall a point from Lesson 4, once the bull run starts, smaller coins (and stocks) massively outperform. ETH outperforms in a bull run, so let’s start with a crash to ensure we have something viable here.
I was honestly surprised how well this strategy performed. I think going forward, and this is what we’ll do for the AureliusDAO, we’ll have 5 coins rather than just 2 coins, at any given point, but that process will amplify this one.
I’m going to begin with a strange chart (and if you need a refresher on the crypto maxi approach, read this). Remember that you are trying to get as much of a benchmark coin (BTC) as possible, while ignoring gains or losses in US dollars.
The following chart shows how your portfolio would look if you just bought $100k worth of BTC on January 1, 2018 and how it would look if instead you followed the Crypto Maxi Strategy.
What you’ll notice is that (obviously) just HODL-ing BTC doesn’t add more BTC. That’s why the HODL position (green line) is flat at the bottom.
The cryptomaxi strategy, however, massively outperforms. It does tend to drift rather close to the original BTC amount through about September of 2019. But after that point it starts gaining on the HODL position and never looks back.
Remember, the strategy is just asking: should I invest in
BTC or ETH?
If the signal for ETH is green, beating BTC, then it holds ETH. Otherwise, it’s just holding BTC. In essence, this means that the strategy uses gains in ETH to accumulate more BTC. Probably Jack Dorsey and Michael Saylor would appreciate that (they’re notabl BTC maxies).
But here’s a more interesting chart. It expresses the divergence between the two, so that you get a better sense of how much, in terms of percentage points, this strategy outperforms just HODL-ing BTC.
The basic trajectory here is like the last one, but you’ll notice that at present the strategy has gaind 5x as much BTC as it would have had otherwise, and this is starting from one of the places possible (right at the beginning of a crash).
Now, we do still use dollars, so it makes sense to peak at how this strategy performs in terms of fiat–even though that is absolutely not the point. Here you go.
Obviously, for a strategy that is continuously invested in cryptos, it bounces around a lot in terms of fiat. But, it still took $100k, invested at the height of a market bubble and turned that into a 10x return.
The HODL strategy, by contrast, only managed to add 94% over that period. The reason for that divergence is that BTC has clearly more than doubled over that period of time, hence the 5x accumulation of BTC + BTC’s price appreciation = 10x return despite beginning your investment at the top of a bubble.
What does this show?
Well, it shows that the crypto maxi strategy works. It works even in the worst conditions. Even if you just use the LSMA point outlined here, you’ll better your returns. And the signal the paid subscribers clearly do better.
What I want to address in the next one of these is how you can combine this strategy–which typically only requires readjustment every 3 weeks–with dollar cost averaging and crash cost averaging to maximize your returns.
Finally, we’ll look at a few points about “risk mitigation” to even out some of that portfolio volatility.
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.
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