The crypto collapse: What got you here won’t get you there: a new model for crypto investing under volatility

After stellar performance enabled by favorable market conditions, the crypto investors struggled in the last few days (starting 19th May). Why, and more importantly, how to deal with it?

Price volatility is inherent in risky assets, and especially severe for a new asset class such as cryptos. Passive investment is powerless in dealing with such violent volatility, demonstrating again that the buy-and-hold method for crypto investment may not be the best strategy. dClub will help you rethink your investment priorities and ‘how to win’ strategies. We provide sophisticated active crypto investment strategies and rigorous risk management, which requires advanced investment technology in such a fast-changing market.

Cryptos, like any risky asset, inevitably follows a boom-and-bust cycle. Such a cycle is affected by both the general market environment and asset specific conditions. For example, when the general market crashes, all risky assets tend to crash together. For example, in 2018Q4, or 2021Q1, cryptos were brought down by a crashing stock market. So it would be very important to have a good forecast of the general macro market trend.

In addition, each asset class also has its own different rhythms when the general market is calmer. The crypto crashed yesterday while the stock market barely budged. The asset specific cycle is often determined by the asset’s own market dynamics and specific conditions. After rising so high and so fast, the crypto crash was not too surprising. The trigger could be almost anything, which often becomes obvious only afterwards. Therefore, a deep understanding of crypto dynamics is also critical.

Therefore, we combine ground-breaking machine learning macro forecast models, with sophisticated asset specific trading models to direct trading. The system was originally developed for traditional assets, but it was successfully applied to cryptos. Since our macro model has been forecasting fair weather (for stock and the general market), our BTC specific trading model has been set to settings appropriate for such an environment. The system has captured the big BTC rally, but it has been telling us to sell BTC since late April.

In fact, it was not the only time the system was right. In the backtest covering the past five years, the system avoided most of BTC down market from 2018 to 2019, 2021 March crash, and took full position in BTC from May 2020, until late last month. The system has reduced the BTC test portfolio drawdown to 54% (compared to 82% for BTC), but increased the 5-year cumulative return to 2 times as much as BTC. Adding in other cryptos, such as ETH, the effect is even more dramatic.

The volatility is here to stay, but that does not mean one should abandon the crypto market, which is full of promise in the long run. We believe the best way to deal with such volatility is to actively manage crypto portfolios with rigorous risk management, using the best investment technology. That is what we would like to bring to the DeFi community in the near future.

Please stay tuned.

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