Revisiting Trend-following and Mean-reversion Strategies in Bitcoin – QuantPedia

Revisiting Pattern-following and Imply-reversion Methods in Bitcoin

Over the previous few years, important shifts within the monetary panorama have reshaped the dynamics of worldwide markets, together with the cryptocurrency sector. Occasions corresponding to the continued warfare in Ukraine, rising inflation charges, the delicate touchdown state of affairs within the US financial system, and the current Bitcoin halving have all profoundly impacted market sentiment and value actions. Given these developments, we determined to revisit and reassess buying and selling methods, particularly Pattern-following and Imply-reversion in Bitcoin revealed in 2022, which utilized information from November 2015 to February 2022. This new research explores how these methods would have carried out from November 2015 to August 2024, taking current adjustments under consideration. The research additionally examines market adjustments between February 2022 and August 2024, highlighting developments since earlier analysis. Moreover, it evaluates the affect of seasonality on Bitcoin’s value motion, just like our earlier article – The Seasonality of Bitcoin. By analyzing these elements, we goal to offer deeper insights into the evolving habits of the world’s main cryptocurrency and information buyers by means of the complexities of right now’s market surroundings.

In-sample evaluation

All analyses are based mostly on the actual every day BTC information from the Gemini Information web page. This information represents the open costs of the BTC at 0:00 from October 9, 2015, to August 20, 2024, with the primary noticed day being November 11, 2015. We apply the MIN and MAX technique to this information. The MAX technique is based on trend-following sample, the place an asset with the very best current worth tends to proceed rising within the subsequent few days. The MIN technique relies on the mean-reversion idea, which posits that returns will have a tendency to maneuver again towards a mean degree over time, even when they’re considerably low, they’ll finally revert again to that common degree.

Equally to the unique article, on each noticed day (t) we calculate the utmost (MAX) and the minimal (MIN) value of the BTC over earlier 10, 20, 30, 40 and 50 days:

The place BTCt is the value on day t and x is the lookback interval.

Within the subsequent step, we discover the habits of the BTC costs once they attain the utmost or minimal over the given interval. Not like the unique article, this time we don’t deal with the habits under the utmost or above the minimal. For calculations, we use the method:  

The place rt,x is the return of the BTC on day t through the x-days interval.

In line with Desk 1, each methods stay alive and efficient, particularly for 10-days intervals. For the MAX technique proven in Panel A, it seems stronger than MIN technique in Panel B, contemplating greater returns and decrease drawdown, altough each methods are environment friendly for buying and selling.

Shopping for at MIN exhibits slower development with extra flat segments within the curve in comparison with shopping for at MAX, but additionally ends in extra extreme drawdowns, as confirmed by the values in Desk 1. 

General, the efficiency of each methods is barely much less efficient in comparison with the unique analysis. Nonetheless, they’re nonetheless related and simplest when shopping for the BTC on the most or minimal value during the last 10-days, based mostly on the outcomes of the analysis. 

Within the earlier research, we achieved one of the best outcomes with a mix of the MIN and MAX methods – shopping for the BTC when it reached each the minimal and most throughout the final 10-days interval. Primarily based on this, we determined to recreate the technique for an extended time interval. 

With this method, we are able to nonetheless obtain excessive returns (the MIN+MAX technique is near its all-time excessive watermark) with decrease drawdowns than simply shopping for and holding the underlying BTC market.

Out-of-sample evaluation

Subsequently, we utilized these methods solely to days that weren’t included within the authentic analysis, particularly from February 4, 2022, to August 20, 2024. Throughout this era, the value of Bitcoin skilled a profound decline, which makes an ideal stress check for the out-of-sample evaluation.

The previous two and half years have been difficult for this in style cryptocurrency because of ongoing warfare in Ukraine, rising inflation charges or the delicate touchdown state of affairs within the US financial system, all of which have had sturdy influence on monetary panorama. Moreover, April 19, 2024, marked the Bitcoin halving, which additionally affected the value.

Regardless of the decline within the BTC value, the MAX technique stays alive and properly. Shopping for the BTC when it reaches a 10-days most seems to be much less efficient than shopping for at a 20-days most, nonetheless, continues to be worthwhile, in addition to all different intervals. However, the second leg of the MIN+MAX technique – shopping for on the minimal has not carried out properly. During the last 2.5 years, this technique has suffered because of a decline within the BTC value, yielding low and even destructive returns. Will the shopping for short-term stress on the BTC minimal proceed to disappoint sooner or later? This can be a query that’s exhausting to reply. Nonetheless, based mostly on the out-of-sample check, we might in all probability put extra religion into the MAX technique (shopping for new short-term highs), which retained its effectiveness even through the demanding previous 2.5 years.

The seasonality

For the reason that seasonality impact within the Bitcoin is related, as mentioned within the article The Seasonality of Bitcoin, we’re curious to see if every day seasonality impacts the MIN/MAX methods. For every day of the week from October 9, 2015, to August 20, 2024, we use modified formulation that embody particular days of the week:

Utilizing this technique, we initially generated 7 graphs for the MAX technique after which 7 graphs for the MIN technique. The graphs within the first row correspond to calculations with time t = Monday, the second row with time t = Tuesday, and so forth. 

The seasonality in MAX technique

Primarily based on the graphs above, we are able to declare that the strongest days for holding the BTC when it reaches the utmost are Wednesday and Sunday, the place, as soon as once more, the 10-day most is exhibiting one of the best outcomes. We initially hypothesized the presence of a weekend impact, the place Friday, Saturday, Sunday, and Monday would exhibit higher efficiency. Whereas the rising curve for t = Sunday signifies the presence of this impact, different weekend days don’t assist this speculation. Moreover, the rising curve for Wednesday doesn’t relate to the weekend impact in any respect, suggesting that the sturdy efficiency on these two days (Wednesday & Sunday) could also be simply coincidental. Subsequently, our research seasonality research for the MAX impact/technique is inconclusive.

The seasonality within the MIN technique

Shopping for the BTC on the minimal value is probably the most worthwhile on Tuesday and Saturday, with one of the best outcomes as soon as once more proven for the 10-days minimal. We’re of the opinion that seasonality impact shouldn’t be current, even within the MIN technique. Furthermore, the extremely performing days aren’t consecutive, so this incidence might be only a random coincidence as properly.

Conclusion

Regardless of some higher-performing days, our analysis didn’t discover any important every day seasonality impact within the MIN/MAX methods for the Bitcoin. The out-of-sample returns present that the MIN technique shouldn’t be performing in addition to it did within the in-sample evaluation. Nonetheless, the MAX technique stays very efficient. If we hypothesize that cryptocurrencies will develop in future, it might be affordable to think about making use of a trend-following rule to the BTC. In line with the outcomes of this analysis, it’s potential to realize the majority of the BTC efficiency with out experiencing extreme drawdowns. Whether or not utilizing a ten, 20, 30, 40 or 50-days most, the MAX technique seems to be good selection for the systematic buying and selling technique.

Creator: Sona Beluska, Junior Quant Analyst, Quantpedia

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