+117% in 21 days: a Practical Trading Experiment With Cryptocurrencies [#1]

Outperforming BTC and ETH by simply following the calendar: 8 different tokens, proactive portfolio management and sensible timing amidst 3 of the most important blockchain-related events of 2017.

1. Cryptocurrencies: a Brief Context for Investors

Where did this come from?

Groundbreaking new technology seems to come out of nowhere, but is usually the culmination of decades of research and development by anonymous people distributed around the globe. It happened with personal computers in 1975, the Internet in 1993, and Bitcoin/blockchain in the last few years.

Fundamentally, Bitcoin is a breakthrough in computer science, built upon 20 years of research into digital currencies and 40 years in cryptography, by thousands of scholars and makers around the world. Since its launch, in 2009, Bitcoin experienced crashes and comebacks, going all the way down to $173 and back up to recent all-time highs of +U$2800.

Dozens of exchanges surged in many countries, offering liquidity for traders to convert between fiat currencies and cryptocurrencies (beyond BTC, as we’ll see). Major financial institutions began exploring the blockchain technology underpinning Bitcoin to build private distributed ledgers aimed at internal uses.

And then the programmable Ethereum blockchain launched, endured its own crises, onboarded major corporate support, and saw its native token, the ETH, spike 20X in value this year.

Other coins beyond Bitcoin?

Ethereum’s rapid growth has to do with its allowance for new tokens, with their own issuance models and governances, to be deployed easily on top of existing infrastructure, according to a set of standards (Golem [GNT], Augur [REP] and Gnosis [GNO] are some examples). 

Before Ethereum, though, there was already a decent amount of tokens that either forked Bitcoin’s codebase and tweaked it a little (Dogecoin and Litecoin, for example), or that innovated on specific features and launched their own blockchains (ZCash, Dash, Monero, and so on).

As of today, there’s 800+ cryptotokens being traded on exchanges worldwide, summing up more than U$4 billion in daily volume and U$70 billion in combined market cap.

Combined market cap for all cryptocurrencies listed on Coinmarketcap.com, from June’16 to June’17.

Excluding potential scams, these are digital assets with inherent utility (ether is used to pay for transaction costs within Ethereum’s distributed virtual machine, for example), liquidity, and volatile pricing. 

Some even argue they represent a new class of assets - bitcoin having near zero correlation to other studied asset classes, neither moving in tandem with any of them nor in the opposite direction. However, we won’t go deep here into theoretical/regulatory discussions; emergent funding mechanisms allowed by blockchains, or else. This article focus on trading opportunities, and examines the tokenisation phenomenon sheerly through a financial point of view.

For now, it suffices to note that, despite high volatilities, holding cryptoassets might counterintuitively decrease the overall risk of a given portfolio. “If you had swapped 1% of equity (so stock positions in your portfolio) into bitcoin in late 2014, the overall risk of you portfolio would decrease and its absolute returns would increase” - says Chris Burniske, analyst at ARK Investment Management, on an interview with Laura Shin for Forbes. That’s not to say it yields better returns for the amount of risk taken, and that its volatility has decreased consistently over the last few years, forecasts claiming it will match that of fiat currencies by 2019.

Another advantage of cryptoassets from an investor’s perspective is the time-to-liquidity. While it can take 10 years for equity to become liquid in an exit, in the case of venture capital, for example, tokens can be sold within 10 minutes or so, and prices float freely in a global 24/7 market. 

This conjunction of features allows for multiple trading strategies, from long-term buy-and-hold to intraday frenesi. What we set out to do in the following experiment is closer to the latter. We aimed at testing the hypothesis: can a simple but proactive portfolio management strategy outperform ETH and BTC in under a month?

2. The experiment: a portfolio of 8 tokens, following 3 events, during 21 days

We set up an experiment based on the assumption that cryptotokens are still largely susceptible to violent fluctuation during times of high public attention. 

The setup

New York hosted 3 major events in May’17: Ethereal Summit, on May 19th (focused on the cultural implications of decentralisation and, specifically, Ethereum), Consensus 2017, on May 22–24th (the self-proclaimed largest conference in the blockchain industry) and Token Summit, on May 25th (focused on emergent tokenised economic models).

Consensus 2017 was the third edition of the event, while Ethereal and Token Summit were inaugural. Photos by Laura Shin, Philippe Dewost and Trustnodes.

We went through the agendas of all three events and listed speakers closely tied to a certain token or project - the idea was to maximize the chance of being susceptible to price increases driven by announcements and general media exposure. 

Summing up daily volume for each listed token gave us proportional weights for each (% volume, in the chart below). These weights were adjusted manually to reflect positions in our portfolio, according to information gathered from public sources: we knew SingularDTV would unveil its 11-module launch plan on the Ethereal Summit, thus we increased its share. We imagined Sia, through its founder’s scheduled panels, would be exposed as it probably hasn’t been since its launch 2 years ago. On the unexpected side of things, we had no idea ZCash would announce a partnership with JP Morgan, skyrocketing the price of its native asset (ZEC). We also expected more from Golem (GNT), whose founder indeed appeared among important figures in the space. In general, these adjustments were arbitrary and subjective.

Tokens not traded either on Poloniex or Shapeshift were excluded in order to streamline operations. Still, two listed tokens were arbitrarily left out of the experiment: STEEM and ICN. Finally, it was impossible not to bet on ETH itself: two of the three events in question were very much Ethereum-driven. We chose ETH as our safe bluechip. The list is below, with the 8 picks highlighted in green.

Highlighted in green are our picks. Volumes were measured in BTC, as of early May. Proportions can be visualised below.

ETH’s price had already shown high sensibility to press announcements. The disclosure of a corporate alliance to onboard enterprise partners was one of the factors pushing the asset from U$15 to U$50 during March. 

This time, 3 relevant events were about to happen in a row, less than a few miles from each other, bringing together part of a still selective group of people that doesn’t physically meet as frequently as one would think, given the distributed nature of things. 

The action

The market fuzz indeed began. The term “Bitcoin” entered Google’s Top 5 Searches list between the 21st and 27th of May, and Ethereum rose to the 18th place. From Forbes to Futurism to the Financial Times, most major business and technology media outlets gave some coverage to the busy week in blockchain.

The original idea of this experiment was to sell all tokens for dollars on the 26th, after 3 weeks and the end of all events. However, witnessing a rather disappointing speech by the SingularDTV team onstage at the Ethereal Summit (May 19th) prompted us to flexibilize the approach. We sold all our SNGLs on that very same day, which proved to be a very accurate decision (prices wouldn’t get close to this day’s high until the end of the experiment).

Historic correlation of search volume for “Bitcoin”, on Google, and BTC’s price. By SecondNad

The majority of our portfolio was sold on the 23rd (see chart below), right in the middle of the Consensus event. Surges in prices between the 17th and 21th had lighted a warning: the market was pricing expectations very early, and we felt it was prudent to anticipate likely violent corrections.

VentureBeat’s laconic headline for the week.

REP and GNT, whose founders would be speaking on the 25th at the Token Summit, were held a bit longer in the hopes these appearances would yield positive results (we could’ve liquidated better 1–2 days earlier, but it’d be worse later).

The performance of our assets in BTC and in U$ is showcased in the chart below (in the case of tokens without a direct trading pair with U$, prices were measured according to BTC/U$ pair prices). Source data is here, having been retrieved from Coinmarketcap.com between 15pm and 16pm every day. The current appreciation at the moment of sale for each token, counting from the beginning of the experiment, is highlighted/labeled on the right:

On the right, appreciation at the time of sale is highlighted for each token. Notice anything different in the lines during the 3 events?

SiaCoin (SC) was the most volatile of our tokens, reaching a peak close to 500% on top of its original value. ZCash (ZEC) surpassed +150% on the 24th of May, same day as Ether (ETH) and Golem (GNT) achieved their highs within the given 21-days window (we sold ZEC, ETH and GNT one day earlier, on the 23rd). BTC also went up pretty aggressively, gaining 50%+ at the end of the analysed period and pushing our in-U$ token appreciation measurements upwards. Still,

the portfolio outperformed both BTC and ETH at the end of the 3-week window, besides behaving more stably (even though ETH’s peak appreciation outperformed ours, before the end of the period):

Labels correspond to appreciation at the end of 3-week window. Source: Coinmarketcap

For the sake of simplicity, transaction fees were left out of the calculation, just as the appreciation of the U$ dollar against the Brazilian Real (R$), our initial currency in the experiment (at the end of the window, U$ was up 2,35% against R$, having pushed as far as 7% days earlier).

3. Further Considerations:

It is worth noting: cryptoassets can be useful without being valuable as investments. Some are even intentionally designed to discourage speculative activity (for example, via constant high inflation). We work with the technology underpinning some of the abovementioned tokens, and trade for two reasons: (1) making money to fund our own development efforts; (2) learning about the behaviour of the people that make up this market.

We intend to make public more short-term, proactively managed, lean trading experiments. Methodologies will vary, though always remaining transparent. The idea here is that stimulating aspirant investors to learn about these cryptoassets is a way of bootstraping capital injection and fostering the development of underlying infrastructure. Doing this while profiting is any enthusiast’s dream.

Last, but not least, a necessary disclaimer: I was heavily advised to advise any reader not to take this article as investment advice. Please, be advised.