Your Crypto Might Do Better With Good Timing Than Patience

Your Crypto Might Do Better With Good Timing Than Patience
Jonathan Hobbs, CFA

almost 2 years ago5 mins

  • Timing the crypto market – by strategically buying or selling at certain times – is difficult, and it seldom beats buying and holding.

  • But buying and selling certain crypto assets based on when they cross the 50-day moving average has had excellent results in the past.

  • Backtested results don’t guarantee the strategy will perform as well in practice – trading costs, timing of trade execution, and market conditions will impact the results.

Timing the crypto market – by strategically buying or selling at certain times – is difficult, and it seldom beats buying and holding.

But buying and selling certain crypto assets based on when they cross the 50-day moving average has had excellent results in the past.

Backtested results don’t guarantee the strategy will perform as well in practice – trading costs, timing of trade execution, and market conditions will impact the results.

Timing the crypto market – by strategically buying or selling at certain times – is difficult. And for most crypto investors, it seldom beats simply buying and holding. Take bitcoin: you would’ve needed die-hard crypto faith to buy at the $3,000 lows of December 2018, and the emotional control of a Tibetan monk to sell at last year’s $60,000 highs. Now, the bitcoin price is somewhere in between – what do you do?

Well, there might be an easier way to time the world’s most volatile asset class: where, rather than trying to predict future crypto prices, you buy or sell different investments based on a simple moving average. To explore this further, I’ve backtested a momentum strategy – and you might find the results quite interesting.

Moving averages

This strategy uses moving averages, so here’s a little background if you’re not already familiar. As the name suggests, a moving average is a “moving” average of the price over the last X number of investment periods. That means it keeps changing, but it changes slower than the actual price.

Moving averages are one of the simplest – and most effective – technical analysis tools out there. Not only do they cut out the noise of short-term price moves, but they also say a lot about the price momentum of an investment.

So, here’s the strategy

For this strategy, we’ll use the 50-day moving average (SMA). The chart below shows the price of bitcoin, alongside its 50-day SMA in blue – but you can apply this strategy to other digital assets too. The rules are:

  • Buy bitcoin (or another digital asset) with US dollars when the price crosses above the 50-day SMA at the end of the day.
  • Sell bitcoin (or another digital asset) for US dollars when the price crosses below the 50-day SMA at the end of the day.
Bitcoin price vs. 50-day SMA. Chart drawn with TradingView.
Bitcoin price vs. 50-day SMA. Chart drawn with TradingView.

Before we get to the results, I’ll first lay out some assumptions of the strategy.

First, I’ve assumed that you only buy or sell crypto when the price crosses above or below the 50-day SMA at the end of the day. Since crypto trades 24/7/365, that’s at midnight Greenwich Mean Time (GMT).

That means it could be quite tricky to buy or sell at exactly the right time, depending on where you are. In London, for example, you’d have to be awake at midnight to execute each trade. But in the interests of keeping the results consistent, I’ve assumed there’s a “bot” that executes each trade precisely when it needs to.

Second, we should factor in trading costs – these can have a drastic impact on the results. There are two kinds of costs to consider here:

  • Trading fees: the fees you pay to a crypto exchange to buy or sell a position.
  • Slippage: the adverse price impact from buying or selling a position at the “market price.”

For trading fees, I’ve assumed you’re using Binance, which charges a maximum of 0.10% per trade. Slippage is more complicated to estimate: it’s the indirect cost you pay when you try to buy or sell at a specific price, but the price you actually get makes you slightly worse off. For example, you might want to buy bitcoin for $50,000 but end up paying $50,050 on the exchange. That’s a further 0.10% loss before you’re even out the blocks.

Having executed my fair share of crypto trades, I think 0.10% slippage is a fair average for this particular test if we use a starting investment of $1,000. That puts the total fee for each trade at 0.20%, which I’ve subtracted from the returns.

Here’s how the results stack up

I backtested how the strategy would have performed from the first day of 2018 until the last day of February this year. And I’ve compared the results for bitcoin, ethereum, and ripple versus a “buy and hold” strategy over the same period.

Without further ado, here are the results (assuming a $1,000 initial investment).

Value of $1,000 dollars invested in BTC buy and hold vs. BTC 50-day SMA strategy. Price data sourced from Yahoo Finance.
Value of $1,000 dollars invested in BTC buy and hold vs. BTC 50-day SMA strategy. Price data sourced from Yahoo Finance.
Value of $1,000 dollars invested in ETH buy and hold vs. ETH 50-day SMA strategy. Price data sourced from Yahoo Finance.
Value of $1,000 dollars invested in ETH buy and hold vs. ETH 50-day SMA strategy. Price data sourced from Yahoo Finance.
Value of $1,000 dollars invested in XRP buy and hold vs. XRP 50-day SMA strategy. Price data sourced from Yahoo Finance.
Value of $1,000 dollars invested in XRP buy and hold vs. XRP 50-day SMA strategy. Price data sourced from Yahoo Finance.

In all three tests, you can see how my strategy outperformed a simple buy and hold one. With BTC and ETH, an investor would have made more money. And with XRP, an investor would have lost less money. Much of this outperformance was the result of sitting in cash through a lot of the bear market.

The table below breaks these results down further:

Comparison of 50-day SMA strategy vs. buy and hold for BTC, ETH and XRP.
Comparison of 50-day SMA strategy vs. buy and hold for BTC, ETH and XRP.

Not only did each strategy return more than its buy and hold counterpart, but it did so with less volatility. So on this occasion, timing the market did actually beat time in the market.

A word of caution

While the results look impressive, I must stress that this is just a backtest. And past performance doesn’t guarantee future results.

For one thing, increasing the trading costs would’ve drastically depleted the returns. With the 0.2% total fee used, the BTC, ETH, and XRP strategies would’ve beaten buy and hold by 222%, 143%, and 117%, respectively. Not too shabby. But if we increased the trading fee to 1% – which is unusual but can happen with larger trade sizes – those numbers drop significantly: the BTC strategy would have outperformed by 86%, ETH by 31%, and XRP by less than 1%.

For another, the results massively depend on the state of the crypto market. If prices are constantly ranging above and below the 50-day moving average, you’ll get chopped around a lot. This will not only dampen the strategy’s performance, but it’ll be extremely frustrating to follow. Not to mention the additional fees that trading more will rack up.

That said, I think the strategy holds a lot of merit if used over a long enough period of time. This way, sustained rallies above the 50-day SMA should override the chop.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG